Did you hear about the new EU VAT rules for online shopping?
When you sell things online, you have to follow a lot of rules, regulations, legal restrictions, tax laws, and other rules so that your business stays on the right side of the law. But many entrepreneurs have trouble with the more complicated rules that are being put in place because they don’t have the legal knowledge to break down all the rules and obligations they have to follow.
This is totally understandable, because when new rules are put in place, even people who are good at this kind of thing often need to take a long, hard look at everything before they can figure out what has changed. It’s especially hard because changes can happen quickly in modern eCommerce, and a business needs to change quickly so it doesn’t lose money or get sued. So, today we will look at the new rules about EU VAT and eCommerce.
Most people who are interested in eCommerce know that the European Commission has plans to change how VAT is paid for eCommerce starting on January 1, 2021. Today, we’ll talk more about the changes that will happen this summer and go over some of the details that entrepreneurs should know about.
What is VAT?
What does VAT mean?
What comes first? Let’s start by explaining a little bit about what VAT is, since our readers have different levels of knowledge about taxes. VAT is a value-added tax, which is essentially a consumption tax based on the value of goods and services. This means that sellers include it in the price of their goods, collecting it from buyers and giving it to tax authorities. Sellers also pay the administrative costs that come with these processes.
The budget gets a lot of money from VAT. Statistics from 2021 show, for example, that in England, VAT brought in £134 billion to the budget in 2019 and 2020, which was about 1/6 of all income from receipts.
On the map below, you can see the standard VAT rates for the EU.
When selling goods B2C (which stands for “business-to-consumer,” which means “sale of goods and services to the end consumer”), which includes drop-shipping, the VAT rates that will be used depend on where the goods are delivered.
How will the eCommerce EU VAT initiatives affect business?
Tax authorities in EU countries try to make sure that all entrepreneurs pay their taxes correctly, on time, and in the full amount required by tax law.
The eCommerce market is growing quickly, which means that tax laws need to change to keep up. If they don’t, huge amounts of money will be lost because tax payments aren’t received in full, which used to happen when marketplaces didn’t require sellers to follow tax laws, such as registering for VAT. The state lost money because of this, and the rules of fair competition were not followed. This meant that sellers who registered for VAT had to charge 20% more than sellers who weren’t registered.
Even though steps have been taken to make sure taxes are done right, member states of the European Union lose billions of euros in VAT due to tax fraud and systems that aren’t set up well enough to collect taxes.
In this way, the European Commission has planned to change the way VAT is paid online starting January 1, 2021, in three ways:
Launch of OSS (One-Stop-Shop) based on the success of launching a Mini One-Stop-Shop.
Getting rid of special rules for importing goods worth up to €22 and making it easier for people to report and pay VAT on imports.
Putting more pressure on marketplaces to make sure that fraudulent sellers pay VAT.
But on May 8, 2020, the European Commission proposed that the new EU VAT rules for eCommerce be put on hold for six months because of the Covid-19 pandemic and the steps taken to protect against it.
Let’s look more closely at what the EU plans to do to update and make VAT easier for cross-border eCommerce. This is an important part of the work on the EU’s strategy for a “Digital Single Market.” Also, new rules are meant to stop fraud with VAT.
Whether you work in eCommerce, as a customs agent, or provide logistics services, the new VAT rules will affect your business.
What are the eCommerce EU VAT innovations
Let’s go over each of the directions that will change because of the changes.
Expanding the scope of existing MOSS to One-Stop-Shop for the remote sale of goods from third countries sellers
In 2015, a Mini One Stop Shop (MOSS) system was put in place to make it easier for businesses in the EU to report and pay VAT on the sale of telecommunications, broadcasting, and electronic services to end users.
From 2021, in accordance with the new eCommerce EU VAT rules, the scope of MOSS will be expanded to One-Stop-Shop (OSS) so that sellers could fulfill their obligations to collect and pay VAT in one of the EU countries by submitting a single EU VAT returns via digital online portal OSS, rather than filing declarations separately in each jurisdiction.
Today sellers collect VAT from the buyer at the place of goods delivery and are required to register VAT when the distance selling threshold is exceeded. At the same time that this rule is getting rid of, an OSS system will be put in place that will allow EU countries to send in a sales report. The most important things about OSS are:
Businesses that sell goods and services across borders within the EU have to follow rules for handling VAT that are more modern and easier to understand.
Easier access to other eCommerce markets.
The costs of running the VAT system went down by 2,3 billion euros per year.
The idea is to make it easier for sellers in the EU to do business across borders by making it easier for them to pay VAT.
Simplification of reporting and fight against unfair competition in the import of goods.
When we talk about fighting unfair competition, we have to say that the current VAT exemption for goods from third countries coming into the EU that don’t cost more than 22 euros will be taken away. This exclusion led to widespread fraud by sellers from third countries, who purposely underpriced goods so they wouldn’t have to pay VAT on the goods’ imports. This gave them an advantage over sellers who followed the law.
If the current VAT exemption for small shipments of goods from third-country suppliers for B2C deliveries, such as drop-shipping, is taken away, all imports of goods, no matter how much they are worth, will have to pay VAT.
Sellers will have to sign up with an EU member state’s IOSS. They will be given a unique IOSS number that will be printed on all packages sent to the EU. During the process of clearing goods through customs, VAT will be reported correctly, which will make the process go quickly. IOSS will be used instead for shipments under €150 from sellers in third countries. It’s important to note that IOSS won’t be needed. If a logistics middleman is not registered with IOSS, it is easier for them to report and pay VAT for sellers in a country of destination.
Marketplace control over compliance with tax legislation in the field of VAT and responsibility for collecting and paying VAT for marketplaces.
Today, online business owners who use marketplaces have to figure out their VAT and pay it on their own. As part of the new VAT rules for cross-border eCommerce, digital trading platforms may have to act as tax agents in some cases. This means that they will have to collect VAT from buyers and pay it.
Along with the new VAT for cross-border eCommerce reform, marketplaces will be held more accountable for sellers who don’t follow tax laws. Marketplaces will have to keep a close eye on the transactions of sellers so that tax authorities in the buyer’s country can check that VAT is being handled correctly.
Information about transactions will have to be kept in an electronic format for at least 10 years after they happen. Also, unless it can be proven otherwise, the marketplace will have to pay VAT if a seller changes information that is needed to figure out VAT.