The impact of eCommerce on trade and industry is undeniable. While it hasn’t taken over traditional retail, over 2.14 billion people worldwide will buy goods and services online this year. The drastic shifts in consumer trends, bolstered even further by the pandemic, have led international governing bodies to adapt to the changes. And leading the way is the European Union with the introduction of the revised EU VAT eCommerce Package.
The upcoming EU VAT eCommerce package streamlines the taxation process across EU member states. The main goal of the reform is to reduce red tape, minimize instances of VAT fraud, and improve cross-border trade. This article explains the EU VAT eCommerce package, the upcoming changes, and the best ways to adapt to the reform.
What is the EU VAT eCommerce Package?
The reforms on the EU VAT have been underway since 2019. These changes in taxation affect telecommunication, broadcasting, and electronic companies. But, by July of this year, reforms will extend to B2C eCommerce sellers and marketplaces.
The 27 member states of the European Union drafted the EU VAT eCommerce package to tackle the complicated taxation process across different member jurisdictions. The new terms end the low-value import VAT taxation and introduce a new VAT filing system for all B2C transactions. These changes will streamline the process and minimizing VAT fraud:
“The European Commission aims at simplifying VAT obligations for companies carrying out cross-border sales of goods or services (mainly online) to final consumers and to ensure that VAT on such supplies is paid correctly to the Member State in which the supply takes place, in line with the principle of taxation in the Member State of destination” reads a part of the EU announcements found on their website.
What is Changing from the Current VAT Guidelines?
Introduction of the OSS
Two years ago, the European Union introduced the Mini One Stop Shops or MOSS – a system designed to enable eCommerce operations to declare and pay VAT for business-to-consumer transactions. At the time, MOSS only impacted telecommunication, broadcasting, and electronic processes.
With the EU VAT eCommerce Package, improvements on the MOSS allow more businesses to use the system. This development of MOSS to OSS, One Stop Shops, means that online sellers catering to customers across borders with the EU can use OSS to report their inter-EU sales. It is also a vast improvement from the current process that requires eCommerce businesses to register in each country that passes the distance threshold.
It is important to note that this system is open for Non-EU sellers doing business with members of the Union. The OSS would provide sales by EU country, VAT % used, and VAT due in such cases. The amount then gets paid to the home country’s tax office.
End to €22 import VAT exemption
At present, EU and Non-EU eCommerce retailers can ship products directly to consumers within the European Union VAT-free so long as the parcel value is less than €22. It has been a significant roadblock for many online businesses since filing for VAT is complex and different across various countries. Additionally, it has been a great source of VAT fraud, with sellers undervaluing their imports.
With the EU VAT eCommerce Package, transactions of up to €150 are no longer subject to VAT. Consignments above €150 are due to pay VAT at the point of sale. This reform was supposed to take effect on January 1, 2021. However, delays caused by Brexit moved the implementation to July 2021 – together with the introduction of the new VAT filing system – the OSS.
Marketplaces Deemed as Supplier
The EU VAT eCommerce Package also entails the transfer of the responsibilities of the “supplier” to facilitating marketplaces. These marketplaces become liable for collecting, reporting, and remitting collected VAT payments from the buyer to the third-party seller’s home country.
It is crucial to define a marketplace to understand this provision of the reform truly. According to the EU:
“A marketplace is considered to facilitate a sale when it participates in any of the following:
- Controls the terms and conditions of the sale;
- Authorizes the charge to the customer in respect of the payment for the supply; and/ or
- Orders or delivers the goods.
However, the marketplace is not considered to facilitate the sale if it only provides one of the following services in relation to the sale:
- Payment processing;
- Listing or advertising the goods;
- Redirecting customers to other marketplaces where the goods are offered without any further involvement in the sale.”
Each transaction between the seller and buyer gets split into two stages based on the EY VAT eCommerce Package stipulations. First, the seller must sell the product to the marketplace under the guide of a B2B VAT exempt transaction on a credit basis. The marketplace would then sell the product to the buyer charging the consumer with the VAT rate of their country of residence.
Through this change in the EU VAT guidelines, eCommerce operations can forgo their VAT registration in various EU countries. They can do this provided they don’t use the registration for other business purposes.
Who Will Be Affected by the EU VAT eCommerce Package Reform?
The reform would affect all key players in the eCommerce supply chain. It will include the online seller, buyer, and marketplaces.
Overall, the changes would make it easier for retailers doing business within the European Union to register and file their VAT transactions. Consumers would no longer be subject to VAT even for bigger purchases across borders amounting to €150. Likewise, marketplaces are now poised to play a more prominent role in ensuring that all VAT duties get paid.
What Can eCommerce Retailers Do to Prepare for Reform?
At the time of writing, no action is required from all parties, including online retailers. By July 2021, sellers may choose to close their VAT registration across different countries instead of registering through the OSS. Likewise, non-EU operators and new retailers may choose to register through the OSS instead of filing VAT registration to EU jurisdictions.
eCommerce has undeniably changed how the modern world does its transactions. The shift has been drastic enough for governing bodies to take notice and accommodate these changes.
If you are a retailer doing business with consumers within the European Union, the details above are crucial to your operations. Understanding the intricacies of the reform can help your business go global and scale to the next level. Let our team at ZhenHub support you through the process. Reach out to us or request a quote through our website today!