Tax Reform in Europe: What is the Effect of the European VAT E-commerce Package?
July 1st, 2021 – a monumental date in the calendar of European taxation. This reflects the day that major VAT reforms take effect within the European Union, shaking up the obligations for e-commerce sellers and marketplaces alike. It is being dubbed by many as the ‘European E-commerce Package’, and the key areas of change can be categorized into the following topics:
- Introduction of One-Stop Shop (OSS)/Import One-Stop Shop (IOSS) returns
- Withdrawal of Distance Selling Thresholds
- Online marketplaces (OMP) recognized as a deemed supplier – VAT collection responsibility
- Abolishment of Low-Value Consignment Relief (LVCR) for imports entering the European Union
OSS – Introduction and Practical Use
The necessity for the introduction of OSS is heavily linked to the withdrawal of the Distance Selling Thresholds. Under existing standard VAT regulations, VAT is chargeable per the EU destination country, until the Distance Selling Threshold is met in another EU country. From July 1st, the Distance Selling Thresholds will be removed, and VAT will be chargeable per the customer’s country.
It would be uneconomical from an administrative and compliance-cost perspective to expect a seller to register for VAT in each EU country they sell to, in line with the new place of supply rules. This is where the single OSS registration and return comes into play. Please note that a seller must still hold a VAT number in every country where they hold stock and file VAT returns accordingly.
Sellers will register for OSS via their established country’s individual OSS portal, according to their circumstances. When it comes to filing, the OSS return will indicate the net value of supplies to each EU country with the applicable VAT charged and collected. Once the OSS return is filed and paid, the receiving tax authority will be responsible for passing on the VAT owed in each EU country to the relevant authorities of each country.
It is important to note that there is an exemption for EU businesses with annual cross-border B2C sales of less than EUR 10,000. Businesses that fall within this category can charge VAT as per their domestic VAT rate and declare accordingly on their domestic VAT return, should they wish.
OSS – Eligibility
The OSS concept is fairly simple, but it can get slightly more confusing when looking into who needs to register and why. We asked Melanie Shabangu, Tax Director and Partner at AVASK to explain the different scenarios about who needs to register for OSS:
Melanie explained: “The easiest way to understand a seller’s position with regards to OSS is to first look at the place where their business is established.
“If the seller is an EU entity that makes distance sales of goods throughout the EU (over the €10k threshold), OSS will be used to declare these sales. As an EU entity, the registration for OSS and subsequent OSS filings must be made in the home country of the EU entity.
“Conversely, if the seller is a non-EU entity, we should first analyze their revenue streams. If the non-EU entity makes all its sales in Europe via an OMP (online marketplace), there is no requirement for the seller to register for OSS. This is due to the new rules that make the OMP the deemed supplier – responsible for collecting VAT from the end customer and remitting this to the relevant tax authorities. In this instance, the seller will be making a zero-rated sale to Amazon domestically in the country of fulfillment. Amazon then makes the sale to the end customer.”
Melanie continued: “For example, a US seller using the PAN-EU program, makes a sale on Amazon, fulfilled from Poland and delivered to Germany. The seller declares the sale to Amazon on their Polish VAT return with 0% VAT charged. Amazon will declare the sale made to the German customer on their OSS return appropriately.
“On the other hand, if a non-EU entity has EU distance sales without the facilitation of an OMP, website sales, for example, an OSS registration will be essential to declare the EU distance sales. The non-EU entity must choose an OSS country of identification to register and file OSS through. The country of identification must be one that the seller dispatches goods from.”
Classification of an OMP/EI
The terms “OMP” or “EI” are being frequently used as you have probably gathered from this article, but what is actually meant by an OMP/EI and draws them into VAT collection responsibilities as a deemed supplier? The below excerpts are taken directly from the European Commission:
When Will You be a Deemed Supplier?
You are considered a deemed supplier if you facilitate:
- Distance sales of goods imported to the EU with a value not exceeding EUR 150; and/or
- Supplies of goods to customers in the EU, irrespective of their value, when the underlying supplier/seller is not established in the EU (both domestic supplies and distance sales within the EU are covered).
When Will You Not be a Deemed Supplier?
The electronic interface (EI) facilitating the sale will not become a deemed supplier, for the following transactions:
- Goods in consignments whose value is exceeding EUR 150 imported into the EU, irrespective of where the actual supplier/seller is established;
- Goods supplied to customers in the EU, irrespective of their value, in case the underlying supplier/seller is established in the EU.
What Does the “Deemed Supplier” Mean in Practice?
The result of the above-described deemed supplier model is that the electronic interface is treated for VAT purposes as if it is the actual supplier of the goods and will be liable to account for VAT on these sales. In other words, the electronic interface facilitating the sale is considered to have received and supplied the goods.
Abolishment of LVCR for Imports to the EU
If you were to import to the EU today, there is “low-value consignment relief” available. For imports valued under EUR 22, they can enter the EU without the payment of import VAT.
This relief system has been criticized, as it leaves EU-based sellers dispatching goods within the EU at a price disadvantage, due to the requirement to collect VAT. The system is also open to abuse with sellers deliberately under-declaring the value of their consignments to avoid the import VAT charge. Those critics will be glad to see that the relief system is being totally abolished from July 1st.
In its place, a new threshold of EUR 150 is being introduced. For imports into the EU with a consignment value under EUR 150, there will be no import VAT charge, providing IOSS is utilized. Instead, the VAT charge will move to the point of sale. The seller will charge VAT to the customer on the consignment sale at the delivery country’s VAT rate. This brings us nicely to the IOSS return.
IOSS – Registration and Practical Use
The IOSS return is being introduced to declare consignment sales described above, where imports are made into the EU with a consignment value of under EUR 150. We again asked Melanie Shabangu to explain IOSS and the different scenarios where a seller would need to register:
Melanie explained: “Like OSS, the IOSS scheme requires just one IOSS identification country. The IOSS return will be filed in this country and will declare sales under EUR 150 arriving throughout Europe. The IOSS return will follow the same format as the OSS return, identifying supply values in accordance with the delivery country, leaving the tax authority receiving the IOSS return responsible for allocating VAT payments to each EU competent authority.
“The above description of the IOSS scheme fits a seller making consignment sales under EUR 150 without the use of an OMP (e.g. website sales). Where the seller is a non-EU entity and an OMP facilitates the sale, marketplace responsibility comes into play. The marketplace will be responsible for the collection of VAT and the marketplace will declare this on their own IOSS return.
Melanie concluded: “For example, if a US seller sells on amazon.de but stores all stock in a US warehouse. An order comes in on amazon.de (under EUR 150) from a customer located in Germany. The order is fulfilled from the US and sold to Amazon at this point, making the seller’s reporting obligations in the EU obsolete. With Amazon now the deemed supplier, the VAT collection and reporting obligations now lie with Amazon.”
Imports with a Consignment Value Exceeding EUR 150
The prior content on IOSS discusses imports with a consignment value under EUR 150. IOSS can only be used for sales falling under this value.
When a seller imports goods into the EU with a consignment value exceeding EUR 150, existing rules will apply, surrounding the payment of import tariffs and the exposure to output VAT in the delivery country.
Import tariffs will be payable depending on the shipping intercoms. If the seller of the goods is detailed as the Importer of Record (IOR) for the consignment, the seller will be required to collect VAT on the sale and remit this to the delivery country as per the delivery country’s VAT rate via VAT return. If the seller is not registered for VAT in the delivery country, the obligation is triggered as a result of the sale.
On the other hand, if the customer is detailed as the importer of record, there are no output VAT requirements for the seller.
Import VAT Reclaim
Rules surrounding import VAT reclaims remain the same and the reclaim of import VAT must be made on the domestic VAT return of the country of import, as is standard practice now.