Value-Added Tax Changes for Retailers in the European Union

On July 1, 2021, after a six-month delay, the 27 member states of the European Union (EU) will introduce significant changes to the value-added tax (VAT) obligations for business-to-consumer (B2C) e-commerce sellers who sell directly to EU-based consumers.

Marketplaces that provide fulfillment and delivery services will also be impacted. Much like the rules in the United States, they will now be responsible for VAT on sales made through their platforms.

3 Key Value-Added Tax Changes for Sellers

The three main VAT changes are:

  1. A new and expanded single One Stop Shop (OSS) VAT return process for EU and non-EU businesses to simplify compliance
  2. An end to low-value imports of products shipped from outside the EU to EU-based consumers
  3. New rules that require marketplaces to account for VAT on EU sales

What the Value-Added Tax Changes Mean for Sellers

US-based businesses with EU-based consumers may need to undertake a three-stage assessment to correctly determine and collect EU VAT based on their specific situations. Items to evaluate include:

  • Physical supply chain. The ship-from location of goods will drive the need to register for one or more VAT compliance regimes. EU versus non-EU locations will impact businesses differently.
  • Pricing. With VAT now due on potentially all EU sales, businesses will need to determine the impact of VAT on profitability and assess if price changes need to occur.
  • Technology. Webstore checkout and tax determination systems may be required to help accurately assess tax and manage data prior to any compliance obligations.

In addition, marketplaces may need to assess their contract terms with their customers to help verify they’re handling VAT appropriately.

Further Details on Value-Added Tax Changes

The One Stop Shop VAT Return

Under current rules, businesses selling within the EU that are utilizing an EU-based ship-from location are required to collect VAT in either the ship-from or ship-to country, subject to certain distance selling thresholds. Once a threshold is breached, a full VAT registration in the ship-to member state is required.

VAT will likely always be collected under the new rules based on the country rate in the customer’s ship-to address and can be reported via a single EU VAT return filed with one EU member state. For businesses that have been using the 2015 version of the OSS to report sales of intangibles, the new rules will extend this concept to tangible goods.

This simplification could significantly reduce the number of VAT registrations and associated compliance, but businesses using multiple EU warehouses or the Fulfilled by Amazon (FBA) program will still need a standard VAT registration in the EU member state where the inventory is held.

As a result of these changes, businesses may need to review their current and proposed stock locations as well as any FBA sales to determine if the relative VAT complexity associated with them still makes sense.

No More VAT-Free Imports

Currently there’s a €22-VAT exemption on goods being imported into the EU. This exemption will be removed on July 1, 2021. The new rules will allow VAT to be collected from the customer in advance—at the point of sale—for all shipments not exceeding €150 in value, which is approximately $170.

VAT collected by this method will then be reported by the seller through a variant of the OSS return mechanism, and those goods won’t be taxed as they enter the EU. Goods with a value over €150 will be subject to the normal import rules.

There can be situations in which a marketplace may pay this import VAT and businesses will need to verify that it’s clear who will be collecting and reporting import VAT. If a business chooses not to use the new import system, the customer will have to pay the import VAT.

Typically, this would be done through the delivery agent, such as the US Postal Service or FedEx, but this is likely to create a significant burden on the customer and can reduce the overall experience associated with the purchase.

Marketplaces Will Be Responsible for VAT Collection

Marketplaces are being included in the VAT reform because they’re easier for EU tax authorities to check for compliance. The EU defines a marketplace as one that’s “facilitating” a transaction using an electronic platform to help sellers and consumers come together and conclude a contract for the supply of goods on a cross-border basis.

These marketplace rules will be like those already in place in the United States and will apply in two distinct scenarios:

  • Cross-border and domestic sales of any value for non-EU sellers
  • Imports not exceeding €150

While there’s scope for the marketplace to opt-out, not many are expected to do so. If they did, any VAT compliance requirements would generally become the issue of the delivery agent for the seller.

We’re Here to Help

With just over two months until the changes are in effect, businesses should begin assessing the three impact areas detailed above.

For more information about the impacts of changing VAT obligations on your business and assistance getting ready for July 1, 2021, application, contact your Moss Adams professional.

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