Welcome, I’m Tricia Schafer-Petrecz, Public Relations and Social Media Lead at Vertex. You’re listening to Tax Matters, a Vertex podcast. In this episode, business writer Eric Krell speaks with Peter Boerhof. Peter is VAT director in the Vertex chief tax office, and he’s based in the Netherlands. In this podcast, Peter highlights notable changes in the 2021 e-commerce VAT package. These rules take effect in July, and they apply to companies that sell to consumers in the European Union (EU). Peter discusses this shift to a destination-based principle and explains which organizations, including marketplaces, will bear the greatest administrative burdens. The discussion concludes with a list of compliance considerations. Now I’ll turn it over to Eric and Peter.
Eric Krell: Thanks for sharing your time with us today, Peter. Let’s start at a very high level: what are two or three of the most important aspects of the 2021 e-commerce VAT package that will take effect in July of this year?
Peter Boerhof: You get to the bottom of it immediately, Eric. Basically, I would say there are three key points. The most important point is that we’re moving to a destination-based principle for taxation. That implies that if you sell cross-border to private individuals, the transactions are taxable for VAT in the country where the consumer lives. This is similar to what you have in the U.S. as a result of the Wayfair decision. I would like to add that it’s crucial to understand that these rules and the rest we’re talking about apply to business-to-consumer (B2C) transactions. The second change is that these rules also apply to all sales by non-EU vendors for goods coming outside the EU. So, there will no longer be a VAT import exemption for low-value consignments coming into the EU from another country. And third, marketplaces will become deemed sellers and thus liable for the VAT for specific transactions.
Eric Krell: Thanks, Peter. And I hear your point – everything we’re talking about today relates to B2C companies. Now, there are also going to be some changes around sales thresholds. What are those?
Peter Boerhof: There are two changes to consider. The first one is that under the current rules, your sales to consumers in a specific country have to exceed a €100,000 sales threshold to be taxable for VAT in that country of destination. And some countries apply a reduced threshold of €35,000 for this. But as long as your sales to that specific country stay below this threshold, you pay VAT in the country of origin where you are established. Under the new rules that will go live in July, you are already taxable in the country of destination if your overall EU sales to private consumers cross-border exceeds a €10,000 threshold. That’s quite a significant reduction. And the second threshold change is under the current rules -- I referred already to it: we have a VAT import exemption for low-value consignments with a value under €22 – is that this VAT import exemption will be abandoned. All transactions coming from outside of the EU are going to be taxed for VAT in the country of destination within the European Union.
Eric Krell: Can you share an example of a hypothetical transaction that shows a little bit about how the new destination-based principle will be applied?
Peter Boerhof: Yes, there will be many. Let’s assume, for example, that you are a German retailer and you make incidental sales with a total value of, say, €20,000 to customers in Hungary. Under the current rules, your sales do not exceed the €35,000 threshold that Hungary applies. So, you only need to report and remit 90% of German VAT on these sales and on your sales to German customers. But under the new rules, this will change because you exceed the €10,000 thresholds. All of a sudden, because of this change, you will have to calculate the 27% Hungarian VAT. One of the potential consequences of this is that it might reduce your [net] revenue on these sales by a little over 6%.
Eric Krell: Peter, the EU has stated that the purpose of this change is to create a “level playing field.” When I hear that term, it usually implies that some companies were previously at an advantage, and some were at a disadvantage. What types of companies are likely to appreciate the new level playing field?
Peter Boerhof: The level playing field that they tried to create is between domestic and cross-border sales. So, for a local brick-and-mortar store, or a web shop in a specific [EU] country, this is a good development because, under the new rules, all sellers will have to calculate VAT for the country where the consumer resides.
Eric Krell: And what organizations may be less than pleased with the changes in the e-commerce VAT package?
Peter Boerhof: Of course, it’s clear that non-EU-based vendors will be confronted with new reporting requirements and tax-calculation requirements for VAT in the European Union. That’s quite a change for some of these vendors. There are also EU vendors operating, often on marketplaces, that do drop-shipments. Those companies sell to a consumer in Europe, but they order from a Chinese vendor and have it shipped directly from China to the final customer. And they currently use the low-value import exemption and thus gain a competitive edge over local stores because of this low-value import exemption. They do not remit VAT while a local store has to report and calculate VAT.
Eric Krell: What types of B2C companies will need to collect, remit and report VAT for the first time? I’m referring to companies that didn’t have to do so previously.
Peter Boerhof: In my view, the most effected companies are those that currently operate below to current sales thresholds that will have to calculate and remit VAT for other European countries starting in July. It’s difficult to determine what kind of revenue exactly belongs to these thresholds, because it’s applied for a country and not a group of companies for which a significant change occurs are, of course, the marketplaces.
Eric Krell: Yes. So, tell us what’s in store for those marketplaces?
Peter Boerhof: Under the current rules, marketplaces are not involved in calculating VAT and collecting VAT on third-party sales that use their platform. However, under the new rules, these marketplaces will become deemed sellers for VAT and thus become liable for VAT on the transactions on their platform… However, it’s important to stress that this liability only pertains to two types of transactions. The first one is for sales of goods coming from outside the EU with a value below €150. The other one is for sales of goods within the EU from EU vendors that are not established in the EU. This means that for VAT purposes, the marketplace will have a business-to-business purchase from the third-party vendor and a subsequent business-to-consumer sale to the consumer. For this final business-to-consumer transaction, the marketplace will have to calculate and remit VAT in the country of destination.
Eric Krell: All of those companies now have to calculate and report that across the entire EU. That seems like a significant administrative burden, a larger burden than they had in the past. Is that the case?
Peter Boerhof: I agree with that, it’s quite an additional burden. However, for the reporting of the VAT, also a one-stop-shop or OSS, a VAT return can be used to report all the VAT due across the EU. And this return only has to be filed in one EU country – so that’s a simplification from a reporting perspective. And a similar system will apply for imports for goods coming from outside of the EU, where destination country VAT with a value of €250 can be reported by a special import one-stop-shop registration. If you have that registration, no import VAT is due. But one of the important things to consider is that for the calculation of VAT on transactions, vendors need to be aware of the VAT rates and rules for their materials across the EU.
Eric Krell: That sounds like a fairly diverse collection of companies that you’re describing. Given that variability, what are some helpful considerations that leaders within these organizations should keep in mind as they work fairly quickly to get the processes and supporting technologies in place that they’ll need to satisfy their new VAT compliance requirements?
Peter Boerhof: That’s an all-encompassing question, Eric. I’ll highlight four points. I believe that the main focus for most businesses affected by this will be to set up a system to calculate VAT in all of the destination countries they sell to. A related point not specific to tax is that companies may want to look at pricing on their websites. Like I mentioned, revenue may go down several percentage points because of different VAT rates, and the administrative burden will simultaneously increase. Some vendors may want to compensate for additional costs in the pricing listed on their websites. So that’s one. The second point is that you need to ensure that your ERP system or e-commerce platform is capable of making the correct VAT calculations. Some e-commerce platforms have tax engine functionality embedded or available as an optional module to ensure correct VAT calculations. Make sure your supporting technology can make the correct calculations.
Third, some larger e-commerce retailers may want to consider withdrawing VAT registrations across the EU under the new rules, now that they can report the VAT due via the one-stop shop return that I mentioned earlier. And finally my last point is that some web shops may decide that incidental cross-border sales do not justify the additional VAT hassle. These shops may decide to only sell cross-border through a marketplace instead.
Eric Krell: Excellent guidance, Peter. Thanks for taking on a difficult question and also for shedding light on the upcoming compliance requirements and challenges companies are going to be facing starting July. Thank you.
Peter Boerhof: You’re welcome, Eric.
Tricia Schafer-Petrecz: Thank you for listening to Tax Matters, a Vertex podcast. Check back here for more episodes soon.