Customers returning goods they have purchased online or in a shop are part of the costs of doing business as a retailer. Goods may be returned, for example, because they were damaged or defective, the wrong goods were delivered, etc., and as a result, the consumer may have a right to a credit or refund, price reduction, repair or replacement of the goods, or a right to cancel the sale. But what are the VAT consequences in such cases for the seller? When goods are returned for a full or partial credit or refund, the supplier must adjust the VAT on the transaction by replacing the invoice or issuing a credit, as appropriate. In addition to the time and expense of dealing with the returned goods, the supplier should be aware of any potential VAT obligations arising on the return of the goods and that it may be possible to reclaim VAT.
This article looks at three relevant situations in the Netherlands: domestic sales within the country, sales from the Netherlands to other EU member states and sales to Dutch consumers from outside the EU.
A business selling and delivering goods to private consumers in the Netherlands from a Dutch warehouse must account for Dutch VAT. If the customer returns the goods, the business can reclaim the VAT paid on the transaction. The return can be processed in the VAT return for the period in which return takes place by including the negative amount, unless the VAT liability and the right to a VAT refund fall within the same period, in which case it is not necessary to process the sale and return in the VAT return. It should be noted that if goods are returned, but the sale is not cancelled (e.g., because the product is defective or the incorrect goods were delivered and the seller still has to deliver a functioning or correct product), the seller is not entitled to a VAT refund.
Sales from the Netherlands to private consumers in EU member states
In the case of an “EU distance sale,” i.e., when an EU business sells goods to a private consumer in another EU member state and transports or dispatches the goods or is otherwise involved in the transport (e.g., the entrepreneur puts the transporter and the consumer in contact), VAT is due at the rate applicable in the country where the consumer is resident. However, this place of supply rule does not apply to an entrepreneur with a single establishment in the EU (and no establishment outside the EU) and turnover not exceeding EUR 10,000 in EU distance sales and/or the provision of telecommunications, broadcasting and electronic services to private consumers in member states other than the supplier’s member state. In this case, VAT is due in the country of departure of the goods. Notably, if the EUR 10,000 threshold is exceeded, VAT is also due in the consumer’s country in the following calendar year, so it is important to determine whether the threshold was exceeded in the previous year.
A business has two options when declaring EU distance sales: use the One Stop Shop (OSS) or local VAT registration. The VAT consequences—and the availability of a VAT refund on returned goods—differ, depending on the option chosen:
- Declaration in the OSS: Using the OSS avoids having to register for VAT in each EU member state in which an entrepreneur is making supplies because businesses making EU distance sales can declare the VAT due in a single quarterly VAT return filed in their home country (the OSS return contains details of supplies made by the taxable person to customers in each member state of consumption).
A return of goods is considered an adjustment in the OSS so the supplier must include the adjustment in the next VAT return. If the VAT due on the delivery and the returned goods falls in the same tax period, it should not be necessary to process both in the OSS declaration. If a product is returned, but the supplier still must deliver the goods, a correction should not be necessary because the sale was not cancelled.
- Local VAT registration: If an entrepreneur uses local VAT registration to declare VAT on EU distance sales, the VAT law of the relevant EU member state applies. Because each EU member state is required to refund VAT, the supplier should be entitled to a refund on returned goods provided all substantive and procedural requirements are met.
Transfer of own goods and shipping/handling costs
Businesses that bring their own goods from one EU member state to another member state normally must declare the movement in the country of departure and the country of arrival. If the distance selling scheme applies, the transfer does not have to be declared.
Three options are possible if a consumer wants to return goods: the goods are shipped back to the supplier’s country, they remain in the consumer’s country or they are shipped to a storage facility in a third country. In our opinion, it is not necessary to declare a transfer of own goods if the goods are returned to the country from which they were sent; otherwise, a declaration will be required unless an exception applies (e.g., where the supplier sells the goods directly to another private consumer in the same country as the original consumer).
A question that often arises in the context of returned goods is the VAT consequences where the supplier charges shipping and/or handling costs on the returned goods. This constitutes a separate supply of a service for VAT purposes, for which the supplier will have to determine the place of supply, which depends on the nature of the service and, in the case of shipping costs, where the transport takes place. If the supplier has to pay VAT on these services in an EU member state other than where it is established, it can make the declaration via the OSS—local VAT registration is not necessary.
Sales from goods outside the EU
When a private consumer purchases goods online that are in the EU at the time of sale, there are no customs formalities and VAT is included in the final price the consumer pays at checkout. However, where consumers order goods online from outside the EU, a customs declaration will be required and there may be customs duties (for goods valued above EUR 150), handling fees and import VAT. The VAT treatment of these sales and any returns of goods depends on whether the Import One Stop Shop (I-OSS) is used.
If the I-OSS is used, the consumer pays the supplier the VAT due on the supply of the goods at the VAT rate applicable in the consumer’s country. In this case, an exemption from import VAT applies so neither the seller nor the consumer has to pay import VAT.
As is the case under the OSS, under the IOSS scheme, a business is required to file only one VAT return.
Returns of goods are considered corrections, which are processed in the next VAT return. If the VAT liability on the original supply and the VAT refund based on the return of the goods fall in the same period, the supplier should not have to declare either transaction. Likewise, if goods are returned, but the sale is not cancelled (i.e., because the seller still has an obligation to deliver a functioning or correct product), an adjustment is not necessary.
In our opinion, the fact that the goods are returned does not invalidate the import exemption—the exemption is applicable regardless of whether the goods remain in the EU.
If the IOSS is not used, the goods may be imported in the name of the private consumer or the supplier, with the former being more common:
- Import in the name of the private consumer: If the goods are imported in the name of the consumer, the consumer pays import VAT in the country where the goods are released for free circulation. This is always the country of destination for goods with a value of up to EUR 150 because these goods may not be released into free circulation in an EU member state other than that of destination if the IOSS is not applied. The entrepreneur's supply is not subject to VAT in the EU.
In this case, it may be possible for the consumer to recover import VAT if the goods are exported to a country outside the EU. If the goods remain in the EU, import VAT cannot be recovered. The supplier may have to reimburse the consumer for non-recoverable import VAT, so this issue is relevant to both the supplier and the consumer.
- Import in the name of the supplier: If the goods are imported in the supplier’s name, the supplier will pay import VAT, which will be deductible since the import is made in connection with the supply to the consumer. For VAT purposes, the supply is taxed in the country of the consumer. If the consumer returns the goods, VAT on the supply is recoverable, with the process depending on the VAT rules in the EU member state where the VAT was due.
Transfer of own goods and VAT on shipping/handling costs
Where goods supplied from outside the EU are returned, the supplier should be aware that it may have to declare a transfer of own goods (if the IOSS is used or the goods have a value of more than EUR 150 and have been released for free circulation in an EU member state other than that of the consumer) and VAT is charged on shipping and/or handling costs.
Services relating to goods that have not yet been imported or the export of goods are zero-rated. But even if a zero rate applies, an EU member state may still have an obligation to declare the service, so it is important to ascertain whether the supplier has any declaration obligations.
The VAT position of a supplier with respect to returned goods depends in large part on
the specific situation, which may differ from one EU member state to another. It is important that suppliers do not miss opportunities to reclaim VAT.
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