2021 is just underway and already proves to be a year of significant changes for e-commerce businesses. After significant (tax) changes caused by the UK leaving the EU per 2021, E-commerce companies selling to EU consumers directly or through online marketplaces will soon have to adapt to yet another set of new tax rules that will impact their business.
This is because per July 1, 2021, new VAT rules are introduced in the EU (the ‘EU VAT package 2021’) that will impact all merchants selling online to EU consumers.
These new rules will impact e-commerce businesses regardless of;
- where they sell from - from within or outside the EU
- how they sell - through online marketplaces or directly to the end consumer
- where the goods sold are shipped from - imported into the EU or held in an EU warehouses/fulfilment centre
The result is that all e-commerce businesses are affected and potentially disrupted by these new rules in some way, unless you prepare for it timely.
So what are these new rules?
The background goal of the new EU VAT package rules is to level the playing field on consumption taxes (VAT) between EU and non-EU sellers - which are currently treated differently, as well as to simplify compliance obligations for online merchants selling products across borders. And while the rules are entering into effect in 2021, the history of the new rules is long and started in the early 2010s - but the world and the e-commerce landscape hasn’t sat still meanwhile.
The reality is, that these rules do not necessarily make things a lot easier for today’s online merchants. That is because under the new rules taking effect in July, a combination of mandatory and optional rules are introduced that lead to different tax treatments, invoicing obligations and tax return filing requirements depending on the specific situation of the transaction.
For example, a US or Chinese business selling and shipping directly to consumers in the EU will experience different rules applying vs when the same business sells directly to consumers when the goods are already in the EU. And if goods are also offered and sold to EU consumers through online marketplaces like Amazon or eBay, different rules apply again. This means that e-commerce sellers need to be prepared to handle the tax and compliance consequences for different sales scenarios and sales channels. Easier said than practically done, especially when dealing with high volume of transactions.
What are the major changes?
The package of rules is broad and detailed, but here are the highlights:
- The EU VAT distance selling thresholds that are in place today (ranging from 35 to 100k EUR per country) are abolished under the new rules. This means that unlike now, goods sold to consumers in these countries are taxable at the local country rate from the first EUR in sales for non-EU sellers and after the first EUR 10,000 of sales for EU sellers. This also means VAT registrations and VAT returns are required in each EU country you have consumers in, from the minute you need to charge local VAT on your sales. The difference in applicable VAT rates can significantly impact your margins, so be sure to timely take a look at how this impacts you.
- A new optional system is introduced, however, that allows you to register and file your VAT on B2C sales in one central EU country, so you don’t have to have multiple registrations. This is a welcome simplification.
- The current exemption of import VAT on goods imported from outside the EU with a low value (<22 EUR) VAT will no longer exist under the new rules.
- A new optional system is introduced for imports of goods to EU consumers with a value of up to EUR 150 for which no import VAT is due. Instead, the seller has to declare the VAT on these imports in a new system called the Import One Stop Shop and pay the VAT due on these imports centrally.
- It’s important to note that in many cases, e-commerce sellers outside the EU will be required to appoint an intermediary to help them with their tax registration and filings.
- Online marketplaces (e.g., Amazon and eBay) will play a central role in the VAT collection process for certain sales occurring on their platforms. This can be helpful for e-commerce sellers based outside the EU. This is because marketplaces will take over the role of the B2C seller for VAT purposes for any goods imported to consumers with a value below EUR 150, as well as for sales of goods to EU consumers of any value if the goods are already imported into the EU (and sit in a warehouse for example). This does mean that a “deemed” B2B sale is created between the e-commerce seller and the marketplace for VAT purposes, which has its own set of consequences.
What happens if you don’t follow the rules or are not ready in time?
Not complying with the new rules can seriously harm your business.
Various EU countries have already implemented rules that force marketplaces to curate VAT compliance of underlying sellers. Practically, this means that if an online marketplace suspects non-compliance, your seller account will be suspended. And that means your business loses a major sales channel overnight. Plus, it’s not always easy to get your seller account reactivated. We have heard many stories from sellers with suspended accounts facing big issues and lengthy customer support processes to get reactivated.
If you do choose to make use of the optional new rules but at one point or another fail to comply with the rules, tax authorities can and will exclude you from the scheme. This means that you will face new VAT registration obligations overnight in the various countries you sell to. Given registering for VAT in EU countries can take time, this means you won’t be able to sell to consumers in these countries for potentially weeks. Next to that, you may incur costs in the form of penalties and late interest imposed by tax authorities, as well as any historical VAT liabilities that may arise as a result of not complying with the rules.
What to do?
We recommend e-commerce businesses to prepare for these new rules timely. For volume businesses, this means ensuring your IT systems and e-commerce software are ready to handle the complexity these new rules bring and provide you (or your tax accountant) with adequate data to file your tax returns.
At Fonoa, 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.
What’s more, reach out to us and we can help you handle your tax registrations, tax filings and representation where needed.