You’ve probably heard tens of times about dropshipping, and that’s for a reason - over the past decade, dropshipping is one of the fastest-growing ways to run your online business. The popularity of dropshipping has increased thanks to Shopify, BigCommerce, and other platforms, that allow people to set up their own store and start their dropshipping business in just a couple of hours. So, what is it all about?
Seller doesn't own or keep the products in stock
Dropshipping is a type of online business where a seller doesn’t own or keep the products in stock. The question is - how is that possible? Well, easy - when the seller receives an order from the customer, it purchases the item from a third-party supplier and has it shipped directly to the customer. In this way, the seller doesn’t have to worry about the product and shipping.
Let us help you to visualize the dropshipping model.
As we can see in the flow above, a seller acts like an intermediary, but it’s not - it is the real seller of products but doesn’t own or stock products that have been sold. In practice, thanks to the platforms which automatically forward orders to 3rd party suppliers, this process is automated and lasts the same as a purchase process in a regular retail model.
We could write about dropshipping a lot, but let’s stick to the topic. Even though this e-commerce model is mostly automated for sellers, sooner or later, sellers come to the tricky part - the EU VAT directive and their VAT obligations.
What Are Your VAT Obligations If You Own A Dropshipping Business in the EU
There are many variables that have an impact on the tax treatment of your transactions, like:
- The place of supply - your location, customer’s location, supplier’s location.
- The subject of the transaction - some goods have different tax treatment.
- Tax statuses of all participants - your business, customer, supplier.
- Tax regulations in the supplier’s and customer’s countries.
- Selling thresholds in the EU Member States.
These are only some of the variables that determine the tax treatment of your transactions.
Sounds complicated? Actually, it is.
For this article’s purpose, we will focus on the tax treatment of transactions between your business and your suppliers on one side, and your business and your customers on the other.
Your supplier is a business established in the EU
In this scenario, both subjects participating are established in the EU, and this transaction will be managed through the EU reverse-charge mechanism.
Your supplier is a business established outside the EU
If your supplier is a business established outside the EU, for example, in China, the transaction should be free of any VAT, i.e., you shouldn’t be charged for a VAT.
However, it is important to note: if your supplier is located outside the EU and your customer is located in the EU, upon delivery of goods, the customer might be unexpectedly charged with VAT and import duties.
Your customer is located in the EU
If your customer is located in the EU, your transaction’s tax treatment depends on your customer’s tax status.
Your customer is not a business entity
If your customer is a natural person, so you have a business-to-consumer (B2C) transaction, you might need to charge a VAT. In this case, VAT rate depends on how much revenue you generate annually in the customer’s country, i.e., if you breached the EU distance selling threshold or not. Please find more information about the distance selling threshold here.
As we already discussed in our topic about changes that are coming into the force from July 1st, 2021, as a part of EU VAT package 2021, distance selling thresholds will be withdrawn. As of July 1st, 2021, if your annual revenue generated by the EU customers exceeds EUR 10,000, you will be obliged to register for VAT purposes and file VAT returns in each EU Member State you have consumers in. Find more information about new rules here.
Your customer is a business entity
If your customer is a business entity, and you have a business-to-business (B2B) transaction, you need to apply a reverse-charge mechanism to your transactions.
Your customer is not located in the EU
If your customer is not located within the EU Member States, you don’t need to charge a VAT since that transaction is considered as an export.
We’ve got you covered
We have developed a platform that is ready for the future and automates all aspects of your e-commerce VAT obligations.
A digital one-stop shop for online retailers with standard integrations to the world’s leading marketplaces and e-commerce tools like Shopify, Woocommerce, Magento and Opencart.
Reach out to us and we will help you automate your taxes.