EU VAT CHANGES 2021
The European Union is in a transition towards newer, more streamlined VAT regulations. Along with these reforms are rules that have shifted due to Brexit (or UK’s departure from the European Union) last January 1st.
Coincidentally, the pandemic hit in 2020 and many of us found ourselves selling and purchasing items online more than ever. Naturally then, the number of people who will be affected by these changes will be massive.
These new rules for EU VAT, which were several years in the making, will come into force on 1 July 2021. They were originally scheduled to take place in January 2021 but delays happened because governments were busy fighting the coronavirus.
As the pandemic rages on, there are uncertainties on implementation and scheduling. Regardless, they are inevitable and thus all parties concerned should make the necessary adjustments.
VAT Registration & Compliance for E-commerce Sellers
What are the goals of these VAT reforms?
The modifications in VAT rules aim to:
- simplify and modernize the rules of taxation between EU borders
The new rules facilitate easier cross-border trade between EU countries. In alignment, these countries will also simplify their VAT rules.
- close the fraud gap/combat VAT fraud
Reports from the previous years showed that the EU failed to collect billions of Euros because of VAT fraud. And because e-commerce is growing exponentially, this amount will steadily increase unless the system is modified.
- ensure fair competition between businesses
Under the old system, all items under €22 are free of tax and import duties. And since most of these e-commerce goods come from China, local EU businesses found it hard to compete with these prices.
The reforms are expected to even the playing field for all e-commerce businesses whether based inside or outside of the EU.
The OSS Scheme
The main change is that the EU will set in place a ONE-STOP-SHOP VAT scheme for e-commerce businesses. There will be one system collecting all online merchants’ information to claim the VAT.
The OSS is the expanded version of the Mini One-Stop-Shop system but now covers a wider range of transactions. This broader scheme should simplify VAT compliance for all e-commerce sellers.
The system includes an IOSS (Import One-Stop-Shop) section where non-EU suppliers and sellers can sign up. The IOSS system goes live on 1 July 2021 and each EU member state will have a portal.
With OSS digitalization, the whole process is recorded from start to finish, including purchases and sales. This ensures supplier chain transparency as all elements of the transaction—including the supplier, the seller, the shipping entity, and the end consumer—is revealed and recorded.
The new rules will also have an impact on the dropshipping marketplace because most dropshippers offer ‘free shipping’ (or basically do not charge their customers shipping fees). Shipping costs are now to be declared on invoices, and dropshippers might just opt to declare shipping fees because it is costlier to subject the entire sales price to VAT.
The three (3) main modifications brought by the new EU VAT rules are:
- The distance selling threshold (DST) will be abolished with the introduction of the OSS system.
In place of each EU country’s DST is a pan-EU €10,000 threshold.
If you are an EU-based merchant and you stay within this threshold, you will need to charge customers VAT on cross-border sales. If you do go over this amount, you are still required to be VAT registered in the country where your customers are (and consequently charge the correct VAT).
On the other hand, this new threshold does not apply to non-EU sellers. However, they must still charge VAT where their end consumers purchased their products.
Read posts
The July 2021 EU VAT OSS (One-Stop-Shop)
UK VAT Registration and BREXIT VAT Changes 2021
- The low-value consignment relief (LCVR) is cancelled
The new rules cancel the exemption of importation VAT for items below €22 (apart from shipping costs). The reason is LCVR gave an unfair advantage to non-EU e-commerce sellers.
It also provided an avenue for fraudulent transactions to abound, causing VAT revenue losses for administrations.
The new policy closes the loophole on sellers and buyers declaring fake prices to stay under the €22 threshold, allowing EU businesses to compete fairly in the market.
As the exemption is now €0, non-EU e-commerce merchants are now required to be VAT registered. They will also have to charge VAT at rates where their products are consumed up to €150. For products valued above €150, importation tax will apply.
This is where the IOSS system becomes useful in the registration and quarterly reporting of all pan-EU transactions. Non-EU sellers can register to any EU member state and they will only need to generate one report for all pan-EU transactions.
If a non-EU seller chooses not to register at the IOSS, importation duties will apply to all their products once they reach EU customs. The packages will go on hold until the VAT is paid by the seller. If the seller chooses to pass on the cost to the customer to avoid losses, the customer might refuse to pay the higher price and the package will remain undelivered. This results in a very lengthy customs clearance process (as it gives the postal service and courier providers a harder time) and poor customer experience.
Experts predict that purchase costs will go up for non-registered sellers because they will be deemed a risk by suppliers.
- E-commerce platforms like Amazon and eBay are now more accountable for gathering seller information
The reforms in EU VAT law puts more responsibility on selling platforms since these huge marketplaces have more ability to capture information because of the volume of transactions.
Amazon and eBay, in particular, have been very strict the past few years in obtaining information from merchants. Company information such as name, location, and VAT number has been asked of them for records purposes. And the marketplaces will be even stricter as the new rules are implemented.
Aliexpress, a dropshipping platform, has already adjusted to Brexit VAT changes. They have started charging VAT to their dropshippers who in turn collect VAT from their customers.
Basically, the impact on dropshipping will be that EU sellers (who get their supply from China) might look for non-EU warehouses to avoid paying VAT.
Munshian Ltd Knows VAT
The VAT changes are here and more are coming. It’s not right to get sidetracked from your daily business operations just so you can navigate your way through Brexit and VAT changes. Even tax authorities across Europe recommend getting help from knowledgeable tax advisors.
Munshian Ltd is the name to remember. We are tax professionals dedicated to helping you shape your business in the EU uninterrupted. We make sure your company is properly VAT registered, and your finances are up to date and compliant with VAT rules.
Since there are areas of implementation that are still unclear, it is part of our job to know as information unfolds. Rest assured, you’ll never be left behind with Munshian Ltd by your side.
For more information and clarification on EU and Brexit VAT changes, get in touch with us and we will accommodate your questions.
