In the first part of our article series on the EU VAT e-commerce package, we focused on the impact on online merchants. The second part of our series examines the effects of the reform for online merchants using marketplaces and their cross-border fulfillment structures.
The “Union One-Stop Shop,” Amazon Pan-European FBA, Amazon CEE, and Quick Fixes in 2020
Online merchants using cross-border fulfillment by Amazon (e.g., Pan-European FBA), Zalando or other marketplaces can use the One-Stop Shop (OSS) in their country of residence or registration. However, in addition it will still be necessary to deal with local tax registrations in other EU countries.
It is precisely these fulfillment structures that reveal that the reform has failed to keep pace with today’s e-commerce landscape. Consumers want to receive their orders as quickly as possible—and this can only be fulfilled if goods are situated as close as possible to the customer even before the order is placed.
A marketplace like Amazon handles this service for online merchants and has perfected this highly technological form of logistics.
With regard to Amazon, goods are sent to several EU countries, resulting in constant warehouse transfers depending on the forecast demand and warehouse capacity. This is exactly where the complexity begins from a value-added tax (VAT) perspective. In particular, Amazon’s commingling transactions increase the complexity of VAT, and the OSS interface cannot currently process these transactions.
These constant cross-border stock transfers, which often occur several times per month, are taxable transactions from a VAT perspective. These sales consist of:
- intra-community movements in the country of origin;
- corresponding intra-community purchases in the destination country.
Importantly, the movements of goods have to be reported locally. The associated VAT-relevant transactions—intra-community movements or purchases, local sales, and inputs (input VAT) in the country of the respective fulfillment center—cannot be reported using the OSS. Instead, they still require local registrations in each and every relevant EU member state.
If online merchants do not report their stock transfers (e.g. intra-community movements) properly, they are required to pay VAT on these transactions. This is a requirement that was introduced January 1, 2020. These reforms are known as the “2020 EU quick fixes.”
Online merchants therefore need to implement at least two compliance strategies:
- reporting all distance-selling through the OSS in the country of registration;
- reporting intra-community purchases/movements, local sales, and inputs in other EU countries through local registrations in the respective EU country.
Which Tax Rate for What Product in Which EU Country? The Challenge Grows
When online merchants realize that the discontinuance of the distance-selling thresholds means that cross-border sales to consumers will become tax liable in almost every EU country, they may well ask, “How do I know which tax rate applies to my products in which EU country?”
The issue of tax rates and VAT within the EU is indeed complicated. EU law permits the following range, and offers a wider range than exists in Germany (where only two tax rates, of 7% and 19%, apply):
- standard tax rate: the range in the EU lies between 17% and 27%. The minimum statutory amount is 15%, and there has not been an upper limit for several years now;
- reduced tax rate I: this has to amount to at least 5% and less than 15%. Its application is limited to the products named in Annex III of the EU VAT Directive;
- reduced tax rate II: the requirements are the same as for reduced tax rate I;
- zero tax rate: as the name suggests, the tax rate here equals 0%—but this is not to be confused with a tax exemption;
- special rates: these can be chosen almost arbitrarily—but only after approval by the European Commission. They are often subject to a time limitation.
This range of tax rates is fully utilized by many EU member states, which makes it particularly challenging to determine the correct tax rate for e-commerce sales based on the new regulations which came into effect on July 1, 2021. Take coffee as an example. In Germany, similarly to many other food products, coffee is subject to a reduced tax rate of 7%. A reduced tax rate also applies in France, however there are three different tax rates: 2.1%, 5.5%, and 10%. In this case, the correct reduced tax rate is 5.5%.
How can an online retailer with a four-digit range of different products, and tax obligations in all EU countries since July 1, 2021, correctly determine the tax rates for all their products and for all EU countries? Ultimately, this will only be possible with automation—ideally, based on a unique product characteristic like the customs tariff number. The customs tariff number allows each product to be assigned to a specific category in a worldwide context. This mechanism makes it possible to automatically determine the tax rates with the help of corresponding databases.
Checklist for Online Retailers
As the legal changes effective from July 1, 2021 have raised multiple challenges, we will summarize them again below in a checklist.
- Check that you can determine tax rates automatically for the whole of the EU—ideally using the customs tariff number.
- Register for the OSS in your country of residence or registration.
- If you participate in the Amazon Pan-EU Program—or similar programs—you will need to identify your distance sales and then report them through the OSS. All other transactions (business-to-business transactions, input VAT, and local sales) still need to be reported through local registrations in the respective EU countries.
- Make sure you are reporting your transactions—but not twice (OSS and local registrations)! Due to the complexity, this can happen.
OSS and/or Local Registrations?
The last point above especially causes uncertainty as online retailers wonder if they can use the OSS process and local registrations at the same time.
The EU VAT Directive related to the OSS states that all sales must be reported through either the OSS or based on local registrations. But is this really a matter of either/or? If this was the case, participants in Amazon’s Pan-EU Program—or other cross-border fulfillment structures which also require local registrations—would not be allowed to use the OSS.
The good news for online merchants is—the either/or principle only applies to distance sales. In this respect, there is nothing to stop online retailers from using:
- returns through the OSS;
- local registrations at the same time, provided that all distance sales are reported via the OSS.
Important to note: Since distance sales are always reported through the OSS in the country of residence or registration, for a German-based online merchant this also includes, for example, a sale from an Amazon warehouse in Poland to a consumer in another EU country, such as the Netherlands. At first glance, this might seem counter-intuitive.
Summary of OSS: Additional Requirements Concerning VAT Obligations for Most Online Merchants
The legal reform that came into effect on July 1, 2021, is complex for online retailers. Below is a brief summary of the key takeaways:
- The individual national distance-selling thresholds will be discontinued due to the introduction of an EU-wide standard threshold of 10,000 euros ($11,800) net.
- There is a tax obligation in (almost) all EU countries, even if only minor sales are made in individual countries.
- Distance sales are centrally reported through the OSS process in the online retailer’s country of registration. In this case, local registrations in other EU countries are no longer required.
- Local registrations are required when participating in the Amazon Pan-European FBA/CEE Program or with various fulfillment centers/warehouses.
- It is necessary to determine the applicable tax rates for the whole product range for the entire EU.
- VAT reporting processes need to be designed and established to cover different types of transactions (distance-selling through OSS, intra-community movements/purchases through local registrations).
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Roger Gothmann, PhD is co-founder and co-CEO, Anna-Katharina Heidbüchel is a German Certified Tax Adviser and Senior Manager Knowledge, and Moritz Lukas, PhD is VP Sales and General Manager, at Taxdoo, the automated platform for financial compliance in e-commerce.