The New EU VAT Policy – Everything You Need to Know
Ecommerce is on the rise, and it’s taking over. Every single day, more and more companies make the switch to go fully digital and be a part of the online world as technology continues to impact us all.
It’s how we buy our goods, it’s how we find information, and it’s how we communicate with one another. But it’s also how we maintain long-distance relationships whether it’s through business or with loved ones. This has especially been proven time and time again throughout the Covid-19 pandemic.
With this in mind, it’s essential to discuss the new EU VAT policy for eCommerce which would have come into effect on January 1st, 2021. However, due to the covid-19 pandemic, this date has been pushed back, and basically thrown a spanner in the works. For this reason, the European Commission has therefore decided to postpone the implementation until July 1, 2021, but it remains to be seen whether that will actually be the final date.
So, what exactly is EU VAT? What is the new EU VAT policy? And why are these new rules being introduced? Read on to find out the answers to these important questions, as we discuss all of this and more.
What is EU VAT?
VAT or value-added tax in the European Union can be difficult to get your head around. Add Brexit into the mix and things can start to become seriously complex. EU VAT applies to all goods and services that are bought and sold for use or consumption within the EU. Anything sold outside the EU will typically be exempt from EU VAT. It’s important to understand that imports into the EU are subject to EU VAT in order to keep the system fair for EU producers.
EU VAT is calculated based on the sale of an item or service. The taxable person is entitled to then deduct all the tax already paid at the preceding stage, to prevent double taxation. Registered VAT traders are given a number which they need to show when creating and invoices.
This cost is generally borne by the end consumer but regularly collected by the seller. Under the current EU VAT rules, suppliers or sellers may be required to register in various member states in order to collect EU VAT at several rates on their services or sales.
So, What’s Changed With the New EU VAT Policy?
The new rules are going to transform how companies do business within the European Union, so it’s important to understand them ahead of time and prepare yourself.
Essentially, the EU tax rules for B2C eCommerce sellers (and the marketplaces they utilize), are going to undergo a three-part overhaul that includes the following changes:
- First, there is going to be a new EU VAT Mini One-Stop-Shop, or MOSS. This is great as it will simplify processes for EU businesses when dealing with physical goods.
- The second change that will occur is that there will be an end to the VAT exemption for ‘’low-value imports’’ for anything less than €150 as there will be a new Import One-Stop-Shop (IOSS) return system.
- Third, online marketplaces must collect and pay VAT on behalf of their sellers. Specifically, 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.’’
Why Is There a New EU VAT Policy?
There are many reasons for the new EU VAT policy, however, the main comes down to two reasons: modernization, and justice.
Change doesn’t necessarily have to be a bad thing. In fact, the new EU VAT policy aims to make tax compliance easier for eCommerce sellers and businesses everywhere. It aims to encourage fair cross-border trade within the region and to clamp down on VAT fraud.
The European Union loses huge amounts of cash every single year due to the fact that online sales from eCommerce sellers slip through the tax system. In fact, this is proven in the 2019 VAT Gap Report that estimated around a whopping €137.5 billion were missed in 2017 alone. When you think about this, you can see why a change is definitely required.
Whilst the New EU VAT policy is there to stop fraud from eCommerce sellers, it also exists to try to make the process smooth, fair, and simple for eCommerce sellers within and outside the EU. By combating EU VAT fraud, the new changes are also going to facilitate cross-border trade and international eCommerce, and ensure fair competition for EU businesses.
Who Is Affected by the New EU VAT Policy?
For non-EU members importing and exporting goods from or to EU countries, things are going to seem strange at first. As a business, you’ll need to factor in the new EU VAT rules in relation to your pricing strategy. Failing to do so could leave you at a loss when trading with an EU country. There are also changes to trade documents and import/export regulations that you’ll need to be aware of so that you can continue to operate without legal consequences.
Impacts and Main Changes On Cross-Border Ecommerce
The flag-ship reform will enable some sellers to report all their pan-EU sales via a single VAT return instead of having to deal with multiple VAT registrations across the EU. This simplified process aims to boost cross-border trade and reduce compliance regulations.
Business can expect the following changes:
- The threshold amount per EU country is now going to be set at 10,000 EUR for all countries as a sum amount.
- The import VAT on goods below 22 Euros will be adjusted to zero. That means for all orders VAT will need to be paid. (For import duties this remains still only applicable for over 150 EUR).
- Platforms and marketplaces will become responsible for the VAT payment. Basically, the VAT is then kept upon the sale and then no longer import VAT will need to be paid in the country where the consumer lives.
For dropshippers with goods coming out of the EU (the UK included), such as China or the UK, they can do the following;
- For shipments, up to the value of 150 Euros, the supplier can use the import One Stop Shop, i-OSS. Rather than import EU VAT, the supplier will pay the VAT in one EU country making the process more streamlined.
- For custom officers, logistic and postal companies that cannot use this i-OSS system, they will have to estimate the shipment value and collect the VAT from the consumer.
- Will expect to see an increase in EU warehouses and a significant drop in direct shipping.
However, we do see uncertainties and undefined details:
As the new EU VAT rules are approaching, there are still many uncertainties relating to the EU and eCommerce. How will supplies and logistics adapt to the changes and will this prove a beneficial move? How will integration and the new system work and will there be a need for further investment, time, and resources? What will be the declare value, sales value or cost value?
These questions will all be answered in due time. For now, however, you should make sure your business is ready to welcome and adapt to all of the upcoming changes.