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You might have read about the new EU VAT e-commerce policy package that came into play in July, 2021. The package has three major components. As a super quick overview, the new rules largely affect transactions that involve:
- Physical goods
- Products lower than €150 in value
- Imports of the above
- Online marketplaces that sell your products to EU customers
This article will explain everything you need to know about that last little bullet point, which is actually a HUGE DEAL if your business is located outside of the EU.
We’ll take you through the lifecycle of a single transaction to demonstrate exactly what the online services are responsible for and how your business is involved. Along the way, we’ll point out critical things you should stay aware of when selling via digital marketplaces to EU customers.
Let’s get started!
As of July 1, online marketplaces will be responsible for collecting and remitting EU VAT on certain transactions that are completed on the platform.
These are sales made by non-EU businesses who either:
- Store inventory in an EU country and sell across borders to a customer in another member state. Hereby known as “cross-border sales.”
- Import goods with a total value under €150 to a customer in the EU. Hereby known as “import sales.”
What counts as an online marketplace?
So glad you asked! The policy actually refers to online marketplaces as “electronic interfaces.” And the EU’s definition for this is intentionally broad, so it can capture as many platforms in its tax-collecting net as possible.
Here’s the official definition from the VAT directive’s explanatory notes:
Electronic interface (EI) – should be understood as a broad concept which allows two independent systems or a system and the end user to communicate with the help of a device or programme. An electronic interface could encompass a website, portal, gateway, marketplace, application program interface (API), etc.
This includes the big players like Amazon and eBay, but could also include smaller e-commerce sites that serve specific regions or niche markets.
Note: The elastic definition of EI means it will likely evolve and could apply to new digital marketplaces at any time. Keep this in mind as you sell on various platforms!
How does this change the structure of the sale?
Okay, a couple more new terms coming up! These will help you understand exactly how the European Union views both your role and the EI’s role in the transaction, and how it assigns VAT liability.
For these sales, your business will now be considered the “underlying supplier,” i.e. the originator.
For these sales, electronic interfaces that close the sale* will now be considered the “deemed supplier.” They’re basically seen as the middlemen.
*However, certain online services that might assist you in making sales, such as payment processors or product listing sites that merely redirect to your business (or to an EI), are not included. These third-party services have no responsibility to collect or remit taxes, but they do have some reporting obligations. (We’ll cover that later!)
So, with this deemed supplier model, the course of the retail transaction is now split into two — the first half is from you to the online platform (B2B), and the second half is from the platform to the end customer (B2C).
How e-commerce marketplaces manage EU VAT at each step
Now that we have the basics down, let’s get into what happens before, during, and after a sale is made. You’ll see exactly what the EIs are responsible for and how your business might be involved.
As part of this new policy package, electronic interfaces can also register for the newly extended One-Stop Shop registration and filing schemes. These are the normal One-Stop Shop (OSS) for intra-EU cross-border sales, and the Import One-Stop Shop (IOSS) for import sales. Your business
1. Collect and verify your business data and product information
Compliance with EU VAT hinges on accurate information about your business and descriptions of your products.
To start, and for each sale, the EI will need to collect:
- The established “headquarters” of your business
- The tax registration number of your business
- Description and value of goods sold
- The ‘ship from’ location (based on information available up to the point of check-out)
- The ‘ship to’ location (also based on information available up to the point of check-out)
Legally, the burden of proof for this stuff is on the EI, which means these platforms will probably come to you to make sure they have everything right.
In fact, the EU advises them to! The explanatory notes state that the deemed supplier should make “commercially reasonable and diligent efforts to collect all the necessary information from the underlying supplier so that it can fulfil its VAT obligations.”
Suggestions include (but are not limited to):
- Communication with you to stress the importance of the information for the correct collection of VAT, with appropriate guidance and FAQ or support teams.
- Setting up processes to verify information and product classification provided by your business.
The notes go on to say, “If the underlying supplier persistently fails to provide the necessary
information, the deemed supplier (electronic interface) should take appropriate action.” We think that means you could get kicked off the platform!
2. Identify the intrinsic value of products
This is only for import sales. In these transactions, the deemed supplier must determine the “intrinsic value” of the goods you’re selling and confirm the total order remains below the threshold of €150.
The value calculation must happen at the point of sale. Delivery fees and insurance are not included in the value, as they’re supplemental costs.
Note: The explanatory notes recommend that the EI record this intrinsic value on a commercial document right at the point of sale, as a kind of timestamp for the price. Make sure your platforms follow this advice! If exchange rates fluctuate by the time your package actually arrives as customs, then your package is safe. There’s no risk of it being confused for “above €150” and then doubly taxed.
3. Calculate VAT upon checkout
Based on the information collected in steps 1 and 2, the deemed supplier must now calculate the correct amount of tax and add it to the transaction. The EI will use the local VAT rate of the customer’s country, the so-called destination rate.
Thanks to the OSS and IOSS schemes, the VAT is collected directly at point of sale.
*For now, this part is complicated for import sales where the deemed supplier is not using the IOSS. In these cases, VAT is not charged until the goods arrive in the destination country. And this is murky territory… According to Article 201, each member state can decide who then is responsible for paying the import VAT: is it the end customer, the deemed supplier, or even YOU?
Note: If you’re importing low value goods to the EU, definitely confirm whether your platforms are registering in the IOSS scheme or not. If not, this could result in major inconvenience for your customer or your business.
4. Invoicing (a.k.a. sending tax-compliant receipts)
Due to the split course of the retail transaction, each half must have its own invoice. Invoicing requirements differ depending on the type of sale.
For cross-border sales
From you to the platform, the transaction is B2B and there’s no VAT involved. The EI may choose to use the “self-billing” option, an EU trick where the platform (or customer) handle the invoice themselves.
Then, from the platform to the end customer, the deemed supplier will send a B2C invoice to the buyer.
Note: If you store goods in the EU, you’ll want to clarify with your e-commerce platforms about whether they’ll do self-billing or if you should issue invoices to them!
For import sales
From you to the platform (B2B), the EU has no specific invoicing requirements. You can invoice as you normally would.
From the platform to the end customer (B2C), there are no invoice requirements if IOSS is used. The EU does recommend sending a commercial receipt, though, to prove that VAT is covered just in case.
Note: Double check with the platforms using IOSS that they are indeed sending these commercial receipts. That ensures a better customer experience upon delivery!
5. Keep records for 10 years
The EU has some steep demands when it comes to tax records. Businesses, and now these deemed suppliers, must keep tax-compliant invoices and other transaction information on record for ten whole years.
Here’s a list of the information that EIs need to retain about your business, sales, and customers:
- The country where your customer is located
- Type of services or the description and quantity of goods sold
- Date of the sale
- Taxable amount indicating the currency used
- Any subsequent increase or reduction of the taxable amount
- VAT rate applied
- The amount of VAT payable indicating the currency used
- Date and amount of payments received
- Where an invoice is issued and the information contained on the invoice
- The information used to determine the customer’s location; the information used to determine the original location of the goods and where they’re delivered
- Any proof of possible returns of goods, including the taxable amount and the VAT rate applied
The above information could change depending on the tax scheme used. But just be aware that the platform will have this data in their systems for a decade!
As for VAT returns, the deemed supplier is responsible for that, too. Phew!
All that said...
You are still liable for VAT on all sales made off these e-commerce marketplaces! So unfortunately you can’t completely check out of the whole process. To learn more about how to handle those transactions according to the new rules, head over to OSS or IOSS? EU VAT One-Stop Shop rules for e-commerce.
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.