Something that Covid-19 successfully delayed was the introduction of the new ecommerce rules imposed by EU, moving their proposed implementation date from January 2021 to July 2021. Yet, with July 1 fast approaching, all ecommerce sellers (inside and outside of EU) selling to EU customers will need to get on the front foot and prepare your ecommerce operations to meet the new EU reforms.
Sidenote, if you haven’t already, here’s the link to understand how Brexit VAT reforms will affect your ecommerce business
How The Current EU VAT Works
First of all, the value added tax (VAT) is a consumption tax that must be collected and declared on every sale of physical or digital products.
So, if you selling online video-courses, you are going to have to charge VAT, collect it and submit to the government. If you are selling mobile phone cases online? You are going to charge VAT, collect it and submit to the government.
Now, if you sell your products worldwide or in multiple states in the EU, your questions could be:
- Do I need to pay VAT?
- Where do I pay VAT?
- How do I pay the VAT?
- Am I losing money?
To answer these questions, it’s better to segment your ecommerce brand profile
Type 1: I’m An Ecommerce Brand Located Inside EU Selling To EU Customers
If you are an EU business selling within the EU to any member state, you must pay VAT in the customer’s country only if you exceed the distance selling threshold otherwise, you can collect VAT based on your local rate and submit to your own country.
Let’s break this down. Each EU member state has its own distant selling threshold, which is a maximum number of sales you can have in that specific country in order to have the benefit of paying VAT in the country of origin rather than the seller’s destination.
Let’s take a case study for demonstration:
Germany has a distant selling threshold of 100,000 euros within the EU. This means that if a French company sells goods worth 99,999 euros in Germany during the year, it can declare and pay VAT in France instead of Germany and pay the French VAT rate.
This type of system generates differences between what is owned and what is paid and is quite complex arising when the sales exceed the distance selling threshold.
For example, if the French company sells 110,000 euros worth of goods in Germany, it will need to pay VAT in the country of destination (in this case, Germany) for the difference (110,000 – 100,000 = 10,000 euros) and register for VAT number in both Germany and France. Now this brings about a question of scalability of your ecommerce’s operations, should you run a successful ecommerce business with sales exceeding the annual distance selling thresholds for all EU states, you don’t want to register for 20+ VAT numbers, do you?
Then, who pays the VAT? Any business should collect at the point of sales and then submit to the government on a quarterly basis. Your customers pay for the VAT that you charge them, your business must collect and submit only.
What if you use the wrong rate? That’s when you lose money since you still need to file your VAT return for that sale!
Now, be careful. It doesn’t only apply to EU member states. If your business is located overseas and you are selling in the EU, you have to charge, collect and submit the VAT too.
So repeat with me: charge, collect and submit.
Type 2: I’m Selling or Shipping From A Fulfillment Centre Outside EU to EU
If you are selling through any B2C model (DTC, marketplace etc), VAT must be paid regardless of where you are. This means you need to apply for a VAT number in any of the EU member states. When shipping from outside the EU into the EU, the rule of the distance selling threshold doesn’t apply to you. You will always need to charge VAT based on the country of destination rate.
Generally, procedures are quite long but I can tell you that Italy can issue VAT numbers in about 7 days (when it comes to money, we become very efficient!) compared to countries like France and Germany where it may take more than a month.
Remember: the VAT rate you charge is dependent on the EU state you are selling in and must file the returns to the government quarterly. There may be products that are VAT exempt and therefore, we suggest you to cross check with your designated chartered accountant / consultant. Rates may vary and we generally talk about:
- Standard VAT rates: a percentage of sales that is never lower than 15%
- Reduced VAT rates: a percentage of sales that can be below 15% and generally applies to special products such as food and beverages
- Zero VAT rates: in this case, there is no VAT to apply but this doesn’t mean that your product is exempted! You should still file the VAT returns for those products, you will not be required to pay any rate since it’s zero VAT.
- VAT exempt: it means you don’t have to apply any VAT but either declare on the quarterly returns.
What About The EORI number?
If you wish to trade with the EU or within EU, you must have an EORI number (Economic Operators Registration and Identification number) so you could clear your goods when importing/exporting and not only the VAT number.
– If you are an EU business, you should register for your EORI in the country where your business is established;
– If you are a non-EU business, you should register in one of the member states, (i.e where your fulfilment centre is located or simply pick an english speaking country if you have concerns)
If you are a UK business or holding stocks in the UK but selling into the EU, after January 2021, you would need to register for a UK EORI number AND an EU EORI number for import/export.
If you are shipping with forwarders for example, you must include EORI on your declaration otherwise goods will not be cleared at the border and you may incur in additional fees such as demurrage or return fee!
EORI and VAT should be included in B2C declarations too when shipping with express couriers.
If you are shipping from Hong Kong B2C to a customer in Spain, you could set the final customer as importer of records by using the incoterm DAP (DDU) and have him pay for VAT at import.
If you are shipping from Hong Kong B2B into your fulfillment center in Germany, you will need to set yourself as the importer of records. If you are importing to store goods in the German warehouse and then sell them through your website, you should be the importer of records and therefore, have the EORI and VAT number in Germany. If you don’t have an EORI or VAT number in Germany, you will not be able to clear the goods and import into the warehouse.
You could still use a third party IOR such as your warehouse to import but you will still need the VAT number to be registered in Germany in order to sell the goods locally. By the way, Floship offers IOR support in the EU warehouse!
What Changes From July 2021?
Frankly speaking, the current process is quite complicated and requires a lot of efforts to file VAT returns quarterly, especially for companies who exceed the distance selling threshold or are shipping from outside the EU.
The goal of these July 1 reforms is to simplify the process and make sure the correct VAT is paid to the member state where the demand takes place (where your customer is based) but also avoid future fraud and make the EU market more competitive.
Compared to former set up, two new ways of filing VAT have been introduced:
- The OSS, which stands for one-stop-shop
- The IOSS, which stands for import-one-stop-shop
As per EU definition, the OSS is an electronic portal which simplifies up to 95% of VAT obligations for online sellers and electronic interfaces throughout the EU, as it allows them to:
- Register for VAT electronically in a single Member State for all intra-EU distance sales of goods and for business-to-consumer supplies of services;
- Declare and pay VAT due on all supplies of goods and services in a single electronic quarterly return;
- Work with the tax administration of their own Member State and in their own language, even if their sales are cross-border.
Instead, the IOSS allows suppliers an electronic interfaces selling imported goods to buyers in the EU to collect, declare and pay the VAT to the tax authorities, instead of making the buyer pay the VAT at the moment the goods are imported into the EU as it was previously the case (for products over 22 EUR).
When to use OSS or IOSS
The OSS can be seen as an electronic document to fill out where you can choose the country to which you want to declare VAT on a quarterly basis and it will allow companies to enter a single declaration for all distance selling. Then, the tax authorities will redistribute VAT to each declared country. In a few words, VAT will always be applied at the country of destination but you won’t need to register for VAT in each state, just the state you decide to establish your VAT (or for example, where you have your fulfilment center). Based on where your business is located, within or outside the EU you can apply for the Union or Non Union scheme and pay VAT according through the OSS.
Question is, which transactions are supported by Union or Non Union Scheme?
The IOSS instead, can be used for imported goods below €150 where the seller can charge VAT at the check out and avoid any import VAT since it has already been collected from customers at the point of sales. In order to declare the amount of VAT collected at the check out and below €150, you will need to file the VAT return on a monthly basis through the IOSS system. This setup will simplify the import process and to easily collect and pay VAT.
If you are a non-EU based company, you will need to appoint an intermediary in the EU in order to file the IOSS.
If you are an EU based company, you will not need to appoint an intermediary in the EU in order to file the IOSS, you can simply register on the platform. More information can be found here.
If you want to know more about the VAT rates by country to be prepared, you can check on the European Commission website.
Remember that, if you are established outside the EU, you will still need to register for at least one VAT number in a member state, an EORI number and appoint an intermediate to use the IOSS in order to file the VAT returns.
Key Takeaways From EU July 2021 Reforms
So, from Jul 1, here are the key points to consider and changes that will be implemented:
- There won’t be anymore VAT threshold.
The value added tax will need to be paid in full. Currently, the VAT exemption for small items imported is set at 22 euros. It means if you sell today a phone case at 20 euros, there is no VAT to be paid. From July 2021, there will be. For example, from July 2021, if a parcel has been declared with value 10 euro in Italy, you will need to pay the VAT at 22%. If your parcel is worth 2 euros, you will need to pay VAT on 2 euros;
- The low value relief for duties will be set at 150 Euros per order.
This means that, if an order has 2 packages of 150 euro each, the declared value will be considered equal to 300 Euros where the duties will be applied, and the entire VAT will have to be paid as per point #1. Duties are applicable from goods worth more than 150 euros and VAT will always be paid. Also, for orders below the declared value of 150 euros you can use the IOSS system;
- Distance selling thresholds will be removed. What does this mean?
Do you remember the German example above? Well, if you sell 99,999 euros worth of goods, you are not going to pay French VAT rate but always the German one. Introducing the OSS simplifies the collection and payment of VAT based on the destination country of your customers without considering any distance selling threshold;
- OSS and IOSS
It is true that the advantage given by the distant selling threshold will be abolished, but in return the EU will introduce a new way of declaring VAT through the one-stop-shop (OSS) or import-one-stop-shop (IOSS);
- Marketplaces recognised as deemed sellers.
Currently, the brand owners are responsible for collection and submission of VAT when their products are sold through a marketplace. However, starting July 2021, the marketplace will be responsible for charging, collecting and submitting the VAT when the order value is below 150 euros and also, when the seller is not based in the EU. The definition is not only for Marketplaces but it’s extended to “Electronic Interfaces”. More information can be found here.
Don’t forget to consult a tax advisor / specialist to make sure your business meets all the requirements. This post shouldn’t be considered as the only source of truth.