E-commerce businesses around the globe, listen up! Major changes are coming to EU VAT in the middle of 2021. On 1 July, to be exact.
The new rules will transform how you do business in the European Union. So it’s better to thoroughly understand them ahead of time and get ready.
Essentially, the EU tax rules for B2C e-commerce sellers — and the marketplaces they use — will undergo a three-part overhaul. The policy package includes the following changes:
- A new VAT One-Stop Shop (OSS) for physical goods. Yay, simplification for EU businesses!
- Ending the VAT exemption for “low-value imports” (anything less than €150!) with a new Import One-Stop Shop (IOSS) return system. Well, a bit annoying for non-EU businesses, to be honest!
- Online marketplaces must collect and pay VAT on behalf of their sellers. WHOA!
This article will explain why the EU is making these changes, what each change entails, and how it will affect your e-commerce business, no matter where your business is based. And of course, we’ll keep it up-to-date in case anything changes.
Why is the EU changing the VAT rules for e-commerce?
The reasons for the new policy package come down to two things: modernization and justice!
Essentially, the EU is changing VAT rules to make tax compliance easier for businesses like yours, to encourage fair cross-border trade within the region for businesses like yours, and to clamp down on VAT fraud — from businesses we’re guessing are not like yours! 😉
The EU loses massive amounts of money per year because online sales that slip through the tax system. In fact, 2019’s VAT Gap Report estimates that €137.5 billion was missed in 2017 alone. So…we can see their point!
But in this effort to collect more value-added tax from online businesses, the EU is sincerely trying to make the process smooth and simple for you.
1. The EU VAT OSS expands to other goods and services
The EU VAT One-Stop Shop is a streamlined tax registration and return system that came out in 2015. It was originally designed for digital goods, or what the Commission calls TBE services (telecommunications, broadcasting and electronic services).
It’s been really successful in helping online businesses comply with VAT, so the EU is expanding it to other types of goods and services. Yep, making it bigger, so that it’s no longer mini — as of 1 July 2021, it’s just the ‘One-Stop Shop’ (OSS).
The one-stop nature comes from the fact that businesses register for VAT in just one EU member state, rather than in multiple. Local businesses obviously register in their home country, but non-EU businesses can choose any member state to act as their VAT host. Then all pan-EU sales will be included in a single OSS tax return.
The Union scheme, which applies to EU businesses, will extend to include the supplies of all types of B2C services, intra-EU online sales of goods and ‘specific domestic supplies’ sold through digital marketplaces.
It seems distance sales will start following the destination principle; that is, you always apply the tax rate of the customer’s country. For example, if you’re selling to someone in France, the transaction is subject to the 20% French VAT. For EU businesses, the current distance selling thresholds will no longer apply.
The non-EU scheme will only be extended to services for now. Those businesses selling physical goods should instead pay attention to the next change on this list…
2. New EU VAT scheme for imported goods: the IOSS
This VAT change affects imported goods, so it mostly pertains to businesses that are based outside of the European Union.
The EU is introducing a whole new scheme for imports called Import OSS (IOSS) for physical goods up to €150 in value. Non-EU businesses will have the choice to register for this scheme, or stick to a more traditional route of using customs. Either way, VAT comes into play on those sales.
The first part of this change is that lower cost imports are no longer exempt from VAT.
Currently, goods imported from non-EU countries with a value lower than €22 are VAT-exempt. This leaves EU businesses at a disadvantage, since the cost of their products will always be higher for a local consumer. That’s not exactly fair for the home team!
So, from 1 July 2021, this exemption will be off the books to ensure a level-playing fieldfor all.
That means non-EU businesses need to know the cost of their products is going up in Europe, from the shopper’s point of view. And as the business owner, you need to choose whether to register in the IOSS option or not.
Within the IOSS, here’s your process. Charge and collect VAT at the point of sale on products below €150, when you’re selling to EU customers. The tax rate will be the customer’s local rate. Then, each month, you must declare and remit the total EU VAT you collected in an online tax return.
The benefit? Your products will be treated with “VAT exemption” upon arrival, meaning they’ll move through customers really fast and get to your customer sooner. No hold ups!
If you don’t want to participate in the Import OSS (IOSS), your process will still be simplified a bit. As of 1 July, for any goods you sell into the EU worth less than €150, the ‘customs declarant’ (i.e. the postal worker, delivery service, customs agent) will collect VAT from the buyer and then pay it forward to the government. That means your customer will have to pay a fee to accept their package, which doesn’t usually make for the best buyer experience.
To learn more about IOSS and OSS, read our in-depth explanation about the One-Stop Shop rules for e-commerce.
Overall, the Commission estimates that this change alone will increase VAT revenues by €7 billion annually!
3. Marketplaces might be responsible for EU VAT
Now here’s the big one. The European Commission says exactly this:
“Businesses operating electronic interfaces such as marketplaces or platforms will, in certain situations, be deemed for VAT purposes to be the supplier of goods sold to customers in the EU by companies using the marketplace or platform. Consequently, they will have to collect and pay the VAT on these sales.”
The gist is that sites like Amazon and Ebay will take on the responsibility for EU VAT compliance. If you sell on a marketplace or platform, be sure to read our in-depth explanaton of how these new EU VAT e-commerce marketplace rules might affect your business.
This will also help the fight against VAT fraud, since consolidating thousands of independent merchants into one marketplace makes it easier for European governments to check.
What to do until 1 July 2021
Continue complying with EU VAT rules as is. If you need help complying with that, or simply want more time to focus on what you love (and not on taxes), then give Quaderno a free trial for 7 days.
We’ll automatically calculate EU VAT, GST and US Sales Tax on all of your liable sales. Plus we’ll give you instant tax reports that make filing returns a cinch, alert you when you need to register for tax in a new country, and send beautiful invoices in multiple languages or currencies. Why not give it a try?
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.