Dropshipping is a retail model in which sellers sell and deliver products to customers without storing or even owning the product. After a customer places an online order for a product, the company makes the same order to their supplier, who then delivers the product to the end customer. This makes the dropshipping business model attractive, as it has a low entry barrier and is easy to set up. Nevertheless, it comes with its own tax challenges related to the VAT requirements that businesses must fulfill in the EU and elsewhere.
EU VAT Obligations for Dropshipping
Dropshipping businesses need to determine whether they need to charge VAT, based on their location, as well as the location of their suppliers and end customers.
For example, if a supplier ships goods from China to Germany, there’s no VAT charge until the sales threshold of the destination country (in this case, Germany) is reached.
Once the business reaches the annual VAT threshold of the country to which they’re importing goods, they need to go through a VAT registration process and collect, report and remit VAT. At the moment, distance selling thresholds are different in the different EU member states and vary between €35,000 and €100,000. The EU VAT package, which will be introduced in July 2021, will change that and will create a common EU framework for distance shipping.
At the moment, dropshipping businesses need to monitor their sales in different member states of the EU and be prepared to complete their VAT registration as soon as they reach the sales threshold limit of each country. This is necessary so that they can react quickly and avoid fines, and also start collecting VAT as soon as they need to. Due dates, filing frequency and specific requirements for tax returns for distance selling vary by country.
New regulations will impact online businesses as of July 1st, 2021
After July 2021, businesses will be able to opt for the the One-Stop-Shop (OSS) VAT scheme, which aims to simplify tax compliance requirements. They’ll be able to register in a single country and file a quarterly VAT return for their EU sales, together with their regular VAT return. We already discussed this topic and you can find it here.
Keep in mind that if you reach the sales threshold of a given EU country before July 2021, you still need to complete your VAT registration and file VAT returns there. At the moment, the importer of record (in practice, this is often the end customer) needs to pay VAT and customs duties; with the introduction of the OSS scheme, sellers will need to collect VAT at checkout.
It’s also important to note that the €22 VAT exemption limit for the import of physical goods into the EU will no longer apply after July 1, 2021.
Intrastat Reporting and Thresholds
Intrastat is a monthly reporting regime related to the movement of goods within the EU. Member states use it to track trade between countries, and it’s used mostly for statistical purposes.
Intrastat reports are obligatory for businesses after they reach the annual Intrastat threshold, which varies by country. Even if penalties for failing to comply with Intrastat reporting obligations are rarely issued, some countries are using the information from companies’ Intrastat records to combat VAT fraud, which makes compliance particularly important.
How can Fonoa help?
We have developed a platform that is ready for the future and automates all aspects of your e-commerce VAT obligations.
Reach out to us and we will help you automate your taxes.