July 1, 2021, saw a major change in the EU’s value-added tax (VAT) law, which affects online retailers and marketplaces across the EU. When it comes to cross-border e-commerce, VAT law in the EU has been largely unchanged—almost left untouched—since 1993. It was no longer compatible with the rapidly advancing development of e-commerce.
In order to remove EU-wide barriers to online retailers, at the end of 2017 all EU member states agreed to translate what is now known as the “VAT e-commerce package” into national legislation. Originally, the plan was to implement the reform by Jan. 1, 2021. However, the implementation was postponed until July 1, 2021, as many member states were challenged by providing the technical platform for the so-called One-Stop Shop (OSS).
The EU found common ground with the VAT e-commerce package; however, every member state is on its own when it comes to reflecting this legislation in a platform solution.
One-Stop Shop Process Comes with New Tax Obligations
In 99% of cases, since July 1, 2021 international sales to end customers residing in the EU will be taxed in the destination country, as the local distance-selling thresholds have now been removed. These thresholds were introduced in 1991 to prevent online retailers from registering for VAT purposes abroad when selling goods and items to consumers across Europe.
In theory, the OSS should simplify many aspects of VAT in e-commerce: Tax liabilities in other EU countries can now be handled in the country of residence through the OSS to avoid reporting VAT locally in each member state.
However, OSS reporting will only be possible for certain types of transactions. Online retailers who take part in Amazon’s pan-European FBA program or use other cross-border fulfillment systems, for example, will require additional solutions.
The regulatory framework behind it—the second stage of the VAT e-commerce package—was already outdated at its official introduction on July 1, 2021. While the member states of the EU had the brilliant idea of introducing such legislation in a bid to fix national tax loopholes and achieve an increase of VAT revenues of 7 billion euros ($8.23 billion) annually for EU member states, technological innovations could have offered better solutions.
In principle, the most significant reform of the EU VAT provisions simplifies the lives of online retailers and tax consultants but also holds many pitfalls for them.
Distance-Selling Regulations and Thresholds up to June 30, 2021
Cross-border sales within the EU to end consumers are known as distance sales. In 1993, distance-selling thresholds were introduced to prevent small and medium-sized enterprises (SMEs) from having to register for VAT in every EU country to which they would send goods. This means that SMEs do not have to consult local tax experts, adding to their costs. Up to a certain limit, online retailers are allowed to continue to report their cross-border sales within the EU to their domestic tax authority.
The value of the distance-selling threshold should be 100,000 euros; however, the EU member states were allowed to reduce this amount to 35,000 euros, and this is what almost all member states have done. There were only three countries that applied a distance-selling threshold of 100,000 euros until June 30, 2021—Germany, Luxembourg, and the Netherlands.
Once a distance-selling threshold is exceeded, the following three steps apply:
- The sale that has led to the distance-selling threshold being exceeded must be taxed in the destination country, i.e. the country in which the recipient of the order is located. The applicable VAT rate of that country must be applied. The EU being a union of 27 member states, it is important to note that the range of standard tax rates varies from 17% to 27%.
- It is mandatory to notify the tax authority in the destination country and register for tax purposes.
- VAT returns and the VAT paid for the relevant international sales must be submitted on an ongoing basis.
With regard to company audits, and special VAT audits in particular, online retailers will still need to deal with the distance-selling thresholds and existing regulations, since the audits conducted by tax authorities can apply several years retrospectively.
Distance-Selling Regulations Since July 1, 2021
The regulatory framework of the VAT e-commerce package, which all EU countries were required to implement in national law by July 1, 2021, stipulates the discontinuance of all national distance-selling thresholds. These have been replaced by a single pan-EU distance-selling threshold of 10,000 euros.
Since July 1, 2021, cross-border business-to-consumer (B2C) sales and/or digital services (e.g. streaming or e-books) to end consumers must be taxed in the destination country once the standard EU-wide distance-selling threshold of 10,000 euros (net) is exceeded. This means that even one parcel sent from one EU member state to another will be taxed in the destination country.
Application of Standard Distance-Selling Threshold in the 2021 Tax Period: Distance-Selling Thresholds not Halved
The question is, how should this standard distance-selling threshold of 10,000 euros (net) be applied in the 2021 reporting period? For the 2021 tax period, both the regulations of the former system of distance-selling including national distance-selling thresholds and the new OSS process will apply.
For the 2021 tax period, no pro rata allocation of the 10,000-euro net sales threshold will apply. The “old” distance-selling thresholds should also not be allocated on a pro rata basis in line with the old regulations.
Moreover, sales and digital services executed in the calendar year 2020 and in the first six months of 2021 must also be taken into account for assessment of the standard distance-selling threshold in 2021. This will result in a tax obligation arising in almost every EU member state to which even only one parcel was sent.
So, where does the simplification in this VAT reform for online trade come in? The answer can be found in the key technology of the OSS.
Key Technology of One-Stop Shop
As described above, the OSS is a platform developed by each EU member state and serves as a single point of contact for ensuring central VAT compliance in the country of residence or registration. Online retailers who become liable to pay tax in other EU member states in the future as a result of their cross-border B2C sales activities can report their sales through the OSS. They can also make their VAT payments through the platform.
The relevant tax authorities in the country of residence or registration will then distribute the reported revenues as well as the VAT collected to the respective EU member states. This ensures that retailers do not need to register locally for tax purposes in every single EU country and continuously submit their VAT returns as soon as the pan-EU distance-selling threshold of 10,000 euros has been exceeded.
The predecessor to the OSS—the so-called Mini One-Stop Shop (MOSS)—which was used to report cross-border digital services performed for private customers, has now been integrated into the OSS since July 1; so there will no longer be a separate MOSS process in the second half of 2021. The OSS will become the only go-to platform for cross-border distance-selling and digital services.
The following characteristics of the OSS process are intended to provide extra incentives to use this technology:
- Those who report their cross-border B2C sales (distance sales) through the OSS no longer need to issue invoices for these sales.
- Deadlines: The reporting period is the end of every quarter—in other words, OSS returns always have to be submitted by Jan. 31, April 30, July 31 and Oct. 31 of the respective year, at the latest.
- The payment term amounts to 30 days following the end of the reporting period.
- The VAT is also transferred to the relevant tax authority of the country of registration.
- Corrections for incorrect OSS returns are always entered in the current OSS return.
While these points all sound good, not everyone will be able to enjoy the benefits. So who will benefit from the OSS, and whose life as an online retailer will become more complicated?
Benefits and Disadvantages of One-Stop Shop
Anyone who has dealt with tax law for some time knows that tax reforms are always a fine balance between agile reality and rigid standards. Particularly in the ever-evolving environment of e-commerce, major legal reforms seeking to simplify online retailers’ lives seem doomed to fail.
This is also the case with the OSS. While some will benefit, e-commerce as a whole—including the technological innovations of 2021—will not, unfortunately.
Who Benefits? Distance-Selling Companies Operating from a Central Warehouse
The OSS will only be a fundamental simplification for companies that dispatch products from a single central warehouse to consumers in other EU countries. This is due to the fact that only distance sales may be reported through the OSS for online business within the EU—for example, sales from one EU country to consumers in another EU country.
As part of the legal changes that entered into effect on July 1, 2021, a single point of contact for distance sales to consumers in the EU from a third country has also been established, known as the Import One-Stop Shop (IOSS). Selling goods to consumers, the IOSS can be used for sales imported from a third country with a value of no more than 150 euros.
This raises the question of how to identify consumers in the EU in a highly automated system like e-commerce? The answer to this question is that distance sales are always deemed to exist where no valid foreign VAT identification number (VAT ID) is provided.
Planning Points
Finally, here are the most important facts that online retailers or tax advisers should know and observe with regard to the OSS procedure:
- The previous distance-selling thresholds of the individual EU countries (35,000 euros or 100,000 euros per year) for shipments to end customers abroad no longer apply.
- Instead, a Europe-wide distance-selling threshold of 10,000 euros (net) applies to all EU countries in total since July 1, 2021.
- This will make the vast majority of online retailers liable to tax in every EU country to which they send even one parcel.
- The reporting of EU cross-border sales required for all EU countries can be filed through the OSS of the country in which the company is located. In Germany, this is the Federal Central Tax Office (Bundeszentralamt für Steuern, BZSt). For this purpose, it must be decided on an individual transaction basis in which country, and with which VAT rate, a transaction is to be taxed there.
- OSS reports are submitted quarterly and must be submitted within one month of the end of the previous quarter.
- VAT is also paid in full through the OSS in the online retailer’s country of residence. The amounts collected are then divided by the OSS and automatically transmitted to the respective EU country.
- Local VAT registrations and notifications in other EU countries will no longer be necessary for cross-border B2C deliveries to end customers (distance sales) when using the OSS procedure.
- The use of the OSS procedure is optional.
- If online retailers use warehouses abroad, for example within the framework of Amazon Pan EU or CEE (Central and Eastern European Countries), they still have to carry out local registrations and declarations in the respective warehouse country.
- Business-to-business deliveries cannot be reported through the OSS, everything remains as previously, with local reports in the country of origin.
- B2C supplies within one country are not reported through the OSS, but as usual to the local tax office.
- In future, it will have to be decided on an individual transaction basis which transactions can be reported through the OSS and which cannot.
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.
The authors may be contacted at: roger.gothmann@taxdoo.com; anna.heidbuechel@taxdoo.com; moritz.lukas@taxdoo.com