On January 1, 2021, the 27 member states of the EU will introduce sweeping simplifications to the value-added tax (VAT) obligations of business-to-consumer (B2C) e-commerce sellers. The changes also seek to tackle the stubborn 5 billion euro ($5.4 billion) e-commerce VAT fraud gap, with member states looking to close import VAT loopholes and co-opt online marketplaces into collecting VAT in place of their sellers.
Single EU VAT Return for E-commerce
At the heart of the 2021 e-commerce EU VAT reboot is the introduction of the One-Stop-Shop (OSS) single EU VAT return.
From January 2021, B2C sellers dispatching their goods from a single country will no longer be required to register for foreign VAT and complete multiple VAT filings in countries where they are selling. Instead, they may opt to simply complete and file a new OSS filing alongside their regular domestic VAT return that will list all their pan-EU sales. The seller remits the VAT due to their home VAT authority, which then forwards the taxes to the appropriate countries.
Non-EU sellers may also apply to use the OSS regime, and just need to nominate any single EU state to register and file in.
This builds on the successful launch of the single VAT return for B2C digital services in 2015, referred to as the “MOSS” return (see below).
Ending the Distance Selling Threshold Rules
The current EU VAT regime “place of supply” rules require sellers to charge the VAT rate of their customer’s country of residence—known as the destination principle. For EU cross-border sales this means sellers have to VAT register in each country where they are selling goods.
Currently, to reduce the burden on small sellers, the EU operates a special VAT registration simplification for e-commerce, known as distance selling thresholds. This is generally only available for sales from a seller’s domestic stocks. The threshold in most countries is 35,000 euros (Germany, the Netherlands and Luxembourg are set at 100,000 euros).
From January 1, 2021, this registration threshold simplification will be withdrawn. Cross-border sellers will have to charge the VAT rate of the customer’s country of residence from their first sale and remit it to the foreign tax authorities.
Launching the Single OSS EU VAT Return
At the same time as withdrawing the distance selling thresholds, the EU is extending the single VAT return, OSS, to e-commerce cross-border distance selling of goods. This will replace the obligation to VAT register in every country where sellers are making sales to EU consumers from stocks in a single EU location—typically their home state. The existing obligation to register in all countries is often called out as the principal barrier to cross-border trade in the EU. A single VAT return, listing all pan-EU sales, (known as the Mini One-Stop-Shop, MOSS), has already been in place since 2015 for B2C cross-border sales of digital, telecoms and broadcast services.
Note: Sellers holding stock in other EU countries will not benefit from the OSS single return simplification. They must remain VAT registered in each country where they are holding stock. This includes selling using the Amazon FBA program.
Sellers with existing foreign VAT registrations, and selling from stock in their country of residence, may opt to close these nonresident registrations from January 1, 2021 and use the OSS report instead.
Sellers will continue to declare any sales to customers in their own country of residence through their existing domestic VAT return. The OSS may also be used to report cross-border B2C traditional services, and certain domestic sales facilitated by marketplaces (see next section).
The OSS filing is in addition to the regular domestic VAT return. Firstly, sellers will charge VAT at the rate of their customer’s country of residence. They can use the delivery address of their customer to identify the country of residence. They then determine the correct VAT rate, as well as applying reduced or nil VAT rates, according to the varying rates and goods classifications of each member state of their customers.
The OSS filing will be a quarterly return. It is intended as a simple listing to declare VAT due by the seller to each EU country apart from the domestic state. The OSS return will be standardized across all the EU member states, and will be structured as described below.
Non-EU Sellers May Use OSS Too
Sellers who are nonresident in the EU, including post-Brexit U.K. sellers, may also use the OSS simplified filing. They must first register as a “non-Union” taxpayer with the tax authority of any EU member state. They can then file quarterly OSS filings like any EU e-commerce seller. There is a requirement to file a regular domestic VAT return in at least one EU member state. VAT incurred on imports may also be declared in the OSS.
The OSS filing should be submitted on the same date as the regular quarterly VAT return. This is usually done through the tax authority’s online portal. Taxpayers on monthly VAT returns should consult their local tax authority’s website to check the due date. The VAT due should be remitted by the same deadline.
The domestic tax authorities will then be responsible for dividing up and paying the VAT received from the seller to each country as appropriate.
Exemption for Micro-Businesses
The EU will grant micro-businesses an exemption from the OSS rules. This reflects the experience of the roll-out of the 2015 MOSS return, which imposed overly complex customer tracking and VAT calculations on the smallest of sellers.
Any business selling less than 10,000 euros per annum cross-border on B2C goods and services will be exempt from the obligation to complete an OSS return. Instead, it will be able to charge its domestic VAT rate and report the sales below this threshold in its regular domestic VAT return.
Closing the Delivery VAT Avoidance Loophole
The EU member states have also agreed to close a delivery loophole being exploited by some e-commerce sellers to avoid charging and reporting foreign VAT. A limited number of sellers are not directly providing delivery to the foreign consumer, instead organizing a third-party fulfillment firm for the customer to sign a separate delivery contract. This means the seller may charge their national VAT rate instead of that of the customer’s country of residence.
To ensure that the tax authorities of the customer will be receiving their fair share of VAT, the EU is closing this avoidance loophole in 2021. Where the seller “indirectly intervenes” to provide transport on a cross-border sale, they will have to charge the VAT of their foreign EU customers and report it through their OSS filing or nonresident VAT return.
Recovering Foreign VAT
The OSS does not allow sellers to recover local VAT incurred on hotel or taxi travel, for example. Sellers will instead have to complete a VAT Reclaim, a process for recovering foreign VAT when the taxpayer does not have a local VAT registration.
Closing the Low-Value Consignment Stock Loophole
Today, EU and non-EU sellers selling goods online to EU consumers can import the goods into the EU, directly to the consumer, import VAT-free if the consignment of good(s) is valued at 22 euros or below.
This exemption, termed the “low value consignment stock relief,” was intended to relieve customs from the burden of checking large volumes of packages for small amounts of potential tax revenue. However, it is leaving EU-based sellers at a major price disadvantage, since they must charge VAT when the goods were dispatched from within the EU. The exemption has also encouraged large-scale fraud by sellers deliberately under-declaring the values of goods to escape the import VAT bill.
Switching Import VAT to Point-of-Sale—Green Channel Clearance
The EU has therefore agreed to scrap the import VAT exempt threshold. Instead, it will require EU and non-EU sellers to charge VAT at the point of sale for consignments of 150 euros or below. This will create a more efficient “Green Channel,” with quick and easy customs clearance. Note: the delivery agent may still act as the import VAT collector (see below).
Sellers will charge VAT at the rate of their customer’s EU country of residence at the point of sale on the website. Sellers can use the delivery address of the customer to determine the country VAT rate. No VAT is due at the point of import in this case.
IOSS Import VAT Simplified Reporting
To report the VAT charged at the point of sale, a new declaration, Import One-Stop-Shop (IOSS), is being introduced. This will report distance selling across EU borders of imported consignments not exceeding 150 euros. Sellers, or deemed supplier marketplaces, will have to register for IOSS in just one EU state. They will be issued a unique IOSS identification number which should be listed on all packages sent to the EU. This will indicate to customs that VAT is being properly declared and will help ensure speedy customs clearance.
Like the OSS, IOSS will be a quarterly filing submitted to a tax authority in one nominated EU member state. It will declare import VAT due in all EU countries. The format and due dates will be the same as the VAT OSS. Sellers will have to make a single cash payment of the VAT due to the country where they are IOSS registered.
EU Sellers and the IOSS
EU sellers selling goods located outside of the EU to EU customers may also use the IOSS. It will be particularly useful where the seller’s customers are located in other EU states and the seller wants to take care of the import VAT on behalf of their consumer. It also relieves the seller of having to undertake a full VAT registration in each country it is importing into.
IOSS is Optional—Postal Service or Marketplaces May Declare the VAT Instead
The IOSS is not compulsory for consignments not exceeding 150 euros. The seller may alternatively elect to have the import VAT collected from the final customer by the customs declarant: this is generally the postal operator, courier firm or customs agent. They can settle the VAT collected with the tax authorities via a monthly payment.
In certain circumstances, marketplaces facilitating the sale will be responsible for the VAT being charged at the point of sale for the EU or non-EU seller. This is detailed in the section below, “Marketplaces Become the Deemed Supplier.”
Simplified Customs Declaration
To help importers and customs authorities cope with the ballooning volume of low-value consignments, the standard customs declaration for goods not exceeding 150 euros is to be condensed. From January 2021, sellers will be able to provide a simplified declaration at the point of import into the EU. This is a “super-reduced dataset” for the party declaring the import.
The existing duties exemption for most goods not exceeding 150 euros will remain in place.
Marketplaces Become the Deemed Supplier
E-commerce VAT evasion is estimated to cost EU member states 5 billion euros per annum, a figure expected to grow to 7 billion euros by 2021. Since online marketplace platforms now play such a controlling role in facilitating the colossal growth in online selling, EU members states have agreed to co-opt them in the fight against e-commerce VAT fraud.
From 2021, marketplaces may become the deemed supplier when they facilitate certain cross-border B2C transactions of their third-party sellers. They will therefore be liable to collect, report and remit the VAT due from the consumer. Whilst the marketplace takes on the VAT rights and obligations of the sale, they do not take on other obligations, such as product liabilities.
This new rule comes into force as part of the e-commerce package of reforms to help simplify VAT compliance and tackle online VAT fraud.
To understand where the new rules will apply, the following facts should be examined:
- defining a marketplace;
- is there facilitation? and
- which transactions are in scope.
Once a deemed supply has been identified, a new two-stage VAT transaction process must be applied.
Defining a Marketplace
The European Commission Implementing Regulation for the 2021 e-commerce package refers to “electronic interfaces,” which includes online marketplaces, platform, portal or similar means. The role of the marketplace is to introduce customers and sellers offering goods for sale, who then enter into a contract which results in a taxable supply.
Is the Marketplace Facilitating the Sale?
A marketplace is considered to facilitate a sale when it participates in any of the following:
- controls the terms and conditions of the sale;
- authorizes the charge to the customer in respect of the payment for the supply; and/or
- orders or delivers the goods.
However, the marketplace is not considered to facilitate the sale if it only provides one of the following services in relation to the sale:
- payment processing;
- listing or advertising the goods;
- redirecting customers to other marketplaces where the goods are offered without any further involvement in the sale.
Which Transactions are in Scope?
Two types of cross-border transactions are in scope for the 2021 deemed supplier rule changes when facilitated by a marketplace:
- import sales by EU or non-EU sellers to consumers of consignments not exceeding 150 euros; and
- consignments sold by a non-EU seller to an EU consumer of any value. This may be on a distance sale (cross-border) or domestic sale basis.
Two-stage VAT Transaction for Deemed Supplier Marketplace Sales
To effect the new rules, once a seller and customer have agreed a sale, the existing single transaction procedure between the seller and customer will be split into two:
- The seller will sell the goods to the marketplace on a business-to-business (B2B) VAT exempt with credit basis. This means the seller remains free to deduct any input VAT suffered on the purchase of the goods. The transport of the goods will be attached to this transaction, so entitling it to zero-rating.
- The marketplace will sell the goods to the consumer, charging the VAT rate of the consumer’s country of residence. The VAT is due at the earliest of the marketplace receiving the order, commitment or order to pay from the consumer.
Marketplace Record-keeping Obligations
In addition to taking on potential deemed supplier VAT responsibilities, marketplaces will also have new record-keeping responsibilities. They will be required to keep sellers’ transactions in sufficient detail to enable tax authorities in the country of the customer to check that VAT has been correctly accounted for. These must be held electronically for at least 10 years after the year of the transaction.
Marketplace Liable for Misdeclared VAT?
A marketplace will not be held liable for underpaid VAT on deemed supplier transactions where the seller provided it with erroneous information that was required for the VAT calculation. But the marketplace will have to demonstrate that it did not and could not reasonably have known that the information was incorrect.
The U.K. left the EU on January 31, 2020 and will leave the EU VAT regime on December 31, 2020. The 2021 deemed supplier marketplace reforms will therefore not apply to transactions in the U.K.
The U.K. has not indicated that it would introduce similar marketplace deemed supplier rules post-Brexit. In this case, non-EU sellers would continue to be responsible for declaring U.K. sales VAT when they import and sell to U.K. consumers.
Richard Asquith is Vice President of Global Indirect Tax, Avalara.
The author may be contacted at: richard. firstname.lastname@example.org
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners