Substantial changes coming to VAT rules on e-commerce transactions
As from 1 July 2021, new VAT rules for cross-border B2C e-commerce transactions will apply in the EU that will affect all businesses in the supply chain that are engaged in such transactions. While businesses likely will have to adapt their systems and processes to comply with the new VAT obligations, there may be benefits from new opportunities.
The EU VAT e-commerce package—originally slated to become effective on 1 January 2021, but delayed for six months due to the COVID-19 pandemic—makes changes to the VAT treatment of the supply of goods and services to a nontaxable person in an EU member state by a supplier in another member state, certain supplies made through an online marketplace and the import of low value goods to a nontaxable person in an EU member state. The new rules aim to: (i) ensure that all supplies of goods are taxed in the member state of the consumer (i.e., the place of destination); (ii) simplify compliance obligations for vendors that potentially have to comply with the VAT rules in the 27 EU member states; (iii) increase VAT revenue for the individual member states by bringing more transactions within the scope of the EU VAT net; and (iv) reduce VAT fraud. Under the new rules, sellers supplying goods to end consumers in EU member states likely will not have to register for VAT purposes in every member state in which a supply is made. Instead a seller will be able to register, collect and file VAT returns in a single member state through the One-Stop-Shop (OSS) or the Import-One-Stop-Shop (IOSS) portals.
From MOSS to OSS
To simplify VAT compliance for online businesses, such as online sellers, online marketplaces and electronic interfaces, the MOSS (Mini One Stop Shop) scheme, currently available only for telecommunications, broadcasting and electronically supplied (TBE) services, will be expanded to apply to distance sales of goods, cross-border supplies of B2C services, “deemed supplies” made by electronic interfaces facilitating the supply of distance sales of goods within the EU and certain domestic supplies. EU suppliers will be able to register under the OSS in the member state in which they are established, and non-EU suppliers will be able to choose the member state in which to register in the case of services and register in the EU member state of dispatch in case of EU distance sales. In both cases, suppliers will be permitted to account for, collect, declare and remit VAT due through a single VAT return for all eligible supplies to consumers in other member states. The IOSS scheme has been introduced for suppliers selling imported goods to consumers in the EU.
EU distance sales
Intra-Community distance sales of goods are supplies of goods that are dispatched or transported from one member state to another member state by or on behalf of the supplier to a non-VAT-taxable person or to a person who is treated as a nontaxable person. Distance sales of goods imported from third countries are supplies of goods from a third country made by or on behalf of the supplier to a non-VAT-taxable person or a person treated as such (it should be noted that goods stored in a warehouse in the EU do not qualify as distance sales of imported goods).
The existing EU distance sales rules require a business to pay VAT on its intra-EU online sales in the country from which the goods are shipped until the annual taxable turnover of the business exceeds the threshold set by the country where the customers are located; these thresholds range from EUR 35,000 up to around EUR 100,000 (or the equivalent in EUR), depending on the member state. Once the relevant threshold is exceeded, the business must register for VAT purposes in the country, begin charging VAT at the applicable rate and remit the VAT collected to the local tax authorities. This will change on 1 July. The individual member state thresholds will be abolished and replaced by an EU-wide annual threshold of EUR 10,000, VAT will be charged in the member state where the consumer is located and online suppliers will be able to opt to register for VAT in a single member state.
Under the new rules, if the EUR 10,000 threshold is exceeded, the supply will be deemed to take place in the member state to which the goods are dispatched or transported. To mitigate the VAT compliance burden, an online supplier will be able to elect to file a quarterly OSS return in addition to its domestic VAT return. Supplies falling below the EUR 10,000 threshold will remain subject to the domestic VAT legislation of the member state of dispatch, although the supplier will still be allowed to opt for the distance selling regime and register for the OSS. Even though non-EU suppliers cannot benefit from the EUR 10,000 threshold, non-EU suppliers engaged in intra-Community distance sales will be able to opt for the OSS regime by registering in a member state (for B2C services) or in the member state from which the goods are dispatched (in case of EU distance sales) to enable them to account for VAT due in different member states by filing a single VAT return.
In addition to the above, as from 1 July, the VAT exemption for low value imported goods (i.e., goods valued up to EUR 22) will be abolished, with the result that VAT will become due on each importation into the EU regardless of the value of the goods. Therefore, the IOSS scheme will be introduced for distance sales of imported goods from non-EU countries with an intrinsic value not exceeding EUR 150. For these sales, the supplier may register for the IOSS or appoint an intermediary to register for the IOSS on its behalf. If the supplier provides the information for customs clearance, including its IOSS VAT identification number, no VAT will be charged by customs at import. A supplier that elects to register for the IOSS can file the IOSS return in its own member state or, in the case of a non-EU supplier, in a member state of its choice. It should be noted that most non-EU suppliers will be required to appoint an EU intermediary to be able to use the IOSS, in which case IOSS returns will be filed in the member state of the intermediary.
Postal operators, courier companies and customs agents dealing with import VAT for consumers will not be required to account for VAT where the IOSS is used. To simplify the VAT reporting obligations for postal operators and couriers that operate as customs declarants, a special scheme can be used, subject to the condition that the goods are imported into the EU member state of destination and do not exceed a value of EUR 150. In this case, VAT can be reported by filing a single monthly VAT return; otherwise, the general rules will apply, and VAT will be levied directly at time of importation and a customs clearance fee will usually be charged by postal operators.
Online platforms play an important role in connecting suppliers with potential buyers. Where such platforms facilitate sales within the EU and/or supplies of goods that have to be imported into the EU, there will be a new fiction (“deemed supplier” status) under which the online platform will be deemed to have acquired the goods and to have subsequently supplied the goods to the final consumer. As a result, the platform will be liable for VAT on the B2C supply. This liability for VAT can be triggered in two situations:
- The distance sales of goods in consignment that do not have a value exceeding EUR 150 and that are imported into the EU and supplied to an EU nontaxable customer, regardless of where the underlying supplier is established.
- The supply of goods within the EU by a non-EU established seller to EU nontaxable customers, irrespective of the value of the goods.
The platform will be required to report and remit VAT in the member state of destination of the goods. The platform can register under the OSS or the IOSS, the latter for goods valued under EUR 150.
Additionally, platforms facilitating B2C supplies of goods or services will be subject to new record-keeping obligations, irrespective of whether the deemed supplier rule is applicable. These records will have to be retained for 10 years and contain sufficient detail on the supplier and the nature of the goods or services.
Implementation of the EU VAT ecommerce package will have benefits for online suppliers:
- It should simplify the VAT compliance obligations of online sellers and marketplaces, in that there will only be one monetary threshold for distance sales.
- The expansion of the MOSS to the new OSS for B2C supplies and distance sales, as well as certain supplies facilitated by online marketplaces, will enable suppliers to register for VAT under the OSS or IOSS and report VAT for pan-EU sales in one place, i.e., only a single VAT return will need to be filed and only one VAT payment will need to be made, regardless of the number of member states to which supplies are made.
With less than a week left before the new EU VAT rules apply, it is important that businesses engaged in B2C e-commerce transactions be aware of and understand their new VAT compliance risks and opportunities. Affected businesses should carefully review their supply chains and processes to ensure they know VAT registration obligations/options and that their internal systems are able to apply the VAT rates applicable in the 27 EU member states. The European Commission released an explanatory guide to the VAT e-commerce rules that contains detailed descriptions and examples of the new rules. Since the Commission’s notes are not legally binding or exhaustive and member states may implement or interpret rules differently, it is always recommended that a business consult its local tax advisor.