In July 2021, businesses across the world will be held to new e-commerce VAT rules in Europe. These changes will have a big impact on the way companies calculate and report VAT throughout Europe—both for products moving within the EU and those imported into one of the member countries from overseas.
First, let’s focus on sales to final consumers of goods that are already physically in the EU. Current rules use distance thresholds of €100,000 or €35,000 to determine whether the VAT rate of the country of destination should be applied.
For example, a Dutch vendor sells to final consumers in France and Germany. The sales to Germany exceed the current distance sales threshold of €100,000, so German VAT must be reported on those sales. France applies a lower distance sales threshold of €35,000 and since sales to France are below this threshold, no French VAT needs to be collected. Instead, local Dutch VAT needs to be calculated and reported.
Under the new rules, VAT obligations will be determined by a company’s overall revenue coming from cross-border sales within the EU. Those that exceed €10,000 in revenue will need to calculate VAT of the various destination countries but will be able to file this VAT through the new optional One-Stop-Shop (OSS) VAT return. In the example above, if the Dutch vendor’s revenue exceeds the threshold, it will have to calculate both French and German VAT and this can be reported through the OSS in The Netherlands.
The OSS certainly makes VAT reporting easier, but due to the new threshold measurement, VAT calculation will be more complicated. Vendors that previously did not exceed the thresholds, under the new rules may now have to calculate VAT of multiple destination countries. So, EU businesses will need to assess their supplies now in order to prepare for the transition.
The current rules for those selling goods coming from outside the EU to EU customers rely on a €22 import exemption. For products below that value, no VAT is collected.
For example, a U.S.-based vendor selling into France and Germany. The goods shipped to France have a value above €22, so VAT is due upon importation. The products sold to German customers have a value under €22, so these are exempt.
Under the new rules, the €22 exemption is abolished and the threshold that changes the VAT collection method will be at €150. For goods not exceeding this value, a special import One Stop Shop (I-OSS) will be introduced. While these products will be exempt from import VAT, businesses will need to calculate and report VAT of the destination country on their sales.
The forthcoming regulations will shake up the way e-commerce businesses both inside and outside Europe manage VAT. Retailers will need to rework their ERP platforms and tax technology to remain compliant. Look for my next blog that will examine the new VAT implications for e-commerce marketplaces in Europe.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.