On July 1, 2021, new EU tax regulations will come into play when the European Union (EU) Value-Added Tax (VAT) eCommerce package takes effect. The changes are a major overhaul of current tax rules, designed to simplify processes and administration for merchants. They will impact virtually every business-to-consumer (B2C) business involved in cross-border eCommerce trade (often referred to as “distance sellers”) with the EU.
EU merchants crossing a new EU-wide threshold of €10,000.00 will need to register in all EU countries where they make taxable business-to-consumer sales. But, they can choose to do so via the newly-created One Stop Shop (OSS) system in their own country. This allows eCommerce merchants to file a single VAT return for the whole of the EU and make just one tax payment distributed across countries where they make sales.
We’ve highlighted some of the key changes below. As always, we recommend consulting with a tax professional to ensure your business is following regulations and best practices.
Who will be impacted?
The EU VAT eCommerce package impacts EU merchants above an EU-wide threshold of €10,000.00, and non-EU merchants importing goods to the EU.
Merchants have the option to use the One Stop Shop (OSS) filing system to submit a single VAT return for all of the EU, or separately file a VAT return for every EU country that they ship to.
The VAT rate differs from country to country, ranging from 17% in Luxembourg to 27% in Hungary (see the full list of rates), so merchants will want to charge the VAT rate of the buyer’s shipping country for orders within the EU. This includes orders shipped from a fulfillment center in the EU to a location in the EU.
How it works now:
The current distance selling scheme allows businesses to avoid registering for VAT purposes in a country where they make B2C taxable supplies, as long as the total amount of these supplies does not exceed the distance selling threshold in a given year. Businesses apply their local tax rate to those sales as if the sold goods never left their country. Once the threshold is crossed in a given country, they need to register, file VAT returns, and charge the local tax rate from the country of registration for B2C sales.
Let’s consider a German company that sells physical goods to private customers in Romania. Until the German business reaches the yearly threshold of Romanian sales of €25,305.00, their sales are taxable in Germany, with a standard German VAT rate of 19%.
Once the threshold is crossed, starting from €25,306.00, the Romanian sales are taxable in Romania; they need to register there and charge the Romanian standard VAT rate of 19%.
How it will work after changes take effect:
On July 1, distance selling thresholds for particular countries will be abolished, and a new EU-wide threshold of €10,000.00 will be introduced. Once it’s crossed, a business will still need to register in countries where they make taxable B2C supplies, but they can choose to do so via the newly-created One-Stop-Shop system in their own country.
This will allow eCommerce merchants to file a single VAT return for the whole of the EU and remit just one tax payment distributed amongst countries where they make supplies. In a way, this system will be an extension of the current mini One Stop Shop (MOSS) scheme, available for digital service providers.
So the German physical goods seller, making B2C taxable supplies to Romanian, Czech, and Polish private customers, would not need to register in those three countries. Once they cross the EU-wide threshold, they’ll register for OSS in Germany, file one return, and make one tax payment (instead of three). However, their domestic German B2C sales will still need to be reported on their local tax return, and a local VAT will need to be paid.
What about sellers outside of the EU?
The VAT exemption for the importation of goods of a value not exceeding €22.00 will be removed. As a result, all goods imported to the EU will be subject to VAT. Non-EU sellers face a nil registration threshold, meaning they need to register with their first B2C sale.
To simplify VAT compliance for non-EU sellers, the Import One Stop Shop (IOSS) will be created. IOSS will allow single return filing for merchants who opt to apply VAT at the point of sale on consignments below €150.00. If a business decides not to register for the IOSS, VAT will be paid by the customer upon importing goods in the EU. Consignments valued above €150.00 will be subject to VAT upon import.
IOSS will also impact customs clearance, with the potential to process imported goods faster. With some shipping providers, if the VAT was charged at the point of sale, then the seller can indicate the IOSS number in the Commercial Invoice data to the shipping provider for customs declaration.