Read this if your company does business in the EU.
Major changes are coming to the EU VAT laws on the online supply of goods and services. The rules, which apply as from July 1, 2021, will affect U.S.-based businesses selling or facilitating sales to private individuals in EU member states. With just over a month remaining before the rules become effective, such businesses should begin immediately to prepare for their new VAT registration and collection responsibilities.
What are the new EU VAT rules?
The EU VAT rules applicable to cross-border B2C e-commerce activities are undergoing a major “refresh”—or modernization—as from July 1, 2021 (postponed six months from the originally planned effective date of January 1, 2021). From July, updated VAT rules will apply to online sales (including online marketplaces) to EU private consumers and to the import of low value goods. (The European Commission published explanatory notes on the rules on September 20, 2020, which include clarifications, FAQs and examples.)
The objectives of the new EU VAT rules are to: (i) simplify compliance obligations for vendors that potentially have to comply with the VAT rules in the 27 EU member states; (ii) increase VAT revenue for the individual member states by bringing more transactions within the scope of the EU VAT net; and (iii) reduce VAT fraud.
Any business making or facilitating online sales or deliveries of goods to consumers in the EU will likely be impacted in some way by the changes.
The EU VAT law changes are as follows:
Intra-EU sales to consumers
All B2C sales of goods will be taxed in the country of destination, meaning that sellers will need to collect VAT in the EU member state to which the goods are shipped.
The existing thresholds for distance sales in the EU will be abolished and replaced by an EU-wide registration threshold of €10,000 (approximately $12,000). This is an important change and potentially could create considerable EU VAT registration and reporting obligations for U.S.-based businesses selling goods from warehouses located in the EU if not proactively addressed.
To reduce the administrative burden and simplify VAT reporting, a new reporting system, called the One-Stop Shop (OSS) will be expanded to include the distance sale of goods. U.S. businesses can register for the OSS scheme in the EU member state of dispatch and can report and remit the VAT due via a pan-EU VAT return instead of having to VAT register in each EU member state.
Sales via online marketplaces
In certain circumstances, businesses that operate an online marketplace, known as an “electronic interface” in the EU) or that facilitate the sale of third-party goods through an online marketplace will be considered the “deemed supplier” of the goods sold to EU customers and will be required to collect and pay VAT on such sales. As a result, businesses that sell via online marketplaces (e.g., Amazon, eBay, etc.) will not be required to account for VAT on such sales.
Imports of low value goods
The VAT exemption for “low-value imports,” i.e., goods coming from outside the EU that do not exceed a value of €22 (approximately $26) will be abolished. Instead, the sale of low-value goods not exceeding €150 (approximately $180) to consumers in the EU through the business’ own website will be subject to VAT at the applicable rate in the destination country. The VAT due on low value goods can either be collected at the point of sale by the seller or collected from the consumer before the goods are released by the customer broker/delivery service. Where the seller opts to collect VAT at the point of sale, it can VAT register under the new Import One-Stop Shop (IOSS) system to account for and remit the VAT due.
VAT registration under the IOSS has several benefits, including:
- Transparency to consumers: The customer will not be faced with any unexpected VAT costs since the total amount paid for the goods is VAT-inclusive;
- Reduced compliance burden: Sellers can use a single IOSS registration to report and pay the VAT due on all sales covered by IOSS. Otherwise, if the seller acts as the importer (e.g., sells goods under delivered duty paid terms), it may need to register for VAT in multiple EU member states;
- Quick customs clearance: IOSS is designed to enable goods to be cleared through customs quickly as no VAT is due at the time of importation, thus facilitating the speedy delivery of goods; and
- Flexible logistics: IOSS simplifies logistics since goods can be imported into the EU in any EU member state. If IOSS is not used, goods can only be imported and cleared for customs in the destination EU member state, which may result in delays and additional costs.
How will the changes impact nonresident sellers?
As noted above, the EU rule changes will significantly affect U.S.-based businesses selling or facilitating the sale of goods and services online to consumers located in the EU. With just over a month left before the rules become effective, any U.S.-based business that may be impacted should take immediate steps to:
- Understand the EU rules and how they will apply;
- Assess the impact of the rules on supply chains;
- Consider the impact on pricing due to different VAT rates applying in different jurisdictions;
- Identify any adjustments that can be made (where possible) to mitigate the impact of the rules;
- Be prepared to comply with new VAT obligations, including additional registrations, charging and collecting VAT, filing tax and/or information returns, etc.;
- Update and adapt accounting and billing systems and master data records to identify when VAT should be applied and the appropriate rates in multiple jurisdictions; and
- Cancel existing EU VAT registrations for distance sales that may be replaced by the OSS registration.
Failure to comply with the rules could result in the imposition of interest and penalties on the historic VAT liability. In addition to the EU VAT consequences, business selling goods that are imported into these jurisdictions must also take into account any customs implications because any compliance deficiencies could result in imported goods being delayed in customs, causing customers to be frustrated by shipping delays.
For questions about your specific situation, please contact the International Tax team. We’re here to help.
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