Why is the new VAT reform being implemented?
For almost 30 years VAT law in the European Union (EU) has remained the same. In order to make this important type of tax for online trade compatible with our digital age, all EU member states agreed on this comprehensive reform at the end of the 2017. The central element of which is the One-Stop-Shop (OSS).
Thanks to Courtney Pullen at Taxdoo for collaborating on this post.
What are the new changes?
In order to understand the fundamental changes that are being introduced, it is necessary to know the legal position that applies to all sales carried out until June 30, 2021.
Since 1993 it has principally been the case that every cross-border sale to private end customers within the EU (B2C) is liable to tax in the country of destination, i.e., the country in which the customer receives their goods.
In order to relieve small and medium-sized companies (SMEs) from not only having to immediately register for VAT in every EU state to which they send goods, but also having to search for local and potentially cost-intensive tax consultants abroad, the distance selling thresholds were introduced. Up to this threshold, online merchants can continue to pay VAT on their cross-border sales within the EU in their country of residence.
For sales to most EU states, a limit of €35,000 (net) per calendar year applies. Only three EU states have a limit of €100,000 (Germany, Netherlands, and Luxembourg)
If this distance selling threshold is exceeded, every online merchant or their tax consultant must be aware that VAT registrations in the country of destination become mandatory as well as the filing of VAT returns (with the associated tax rates) in the destination country for all subsequent months after the threshold exceedance.
New threshold as of July 1, 2021
As of July 1, 2021, the distance selling thresholds of each individual EU country will be replaced by one EU-wide threshold of 10.000 € (net). As of this date, every cross-border sale to a private end customer within the EU will be liable to tax in the country of destination.
This means, from the moment your cross-border sales (and digital services) to private end customers within the EU exceed the €10,000 (net), then you are liable to pay tax on these transactions in the country of destination.
In this context, it does not matter where the sale starts or ends.
Example: You sell goods with a value of €9,950 to private end customers located in France. As long as you have no other cross-border sales to private end customers in the EU, you can continue to pay VAT on these sales at your local tax authority. However, if a short time later, you send a parcel valued at €100 to Romania and one to Luxembourg. Then, you will have to pay VAT on these two packages in Romania and Luxembourg respectively, as you have exceeded the €10,000 (net) EU-wide threshold.
Important: Even though this rule does not apply until July 1, 2021, the measurement as to whether you have exceeded the €10,000 (net) EU-wide threshold by July 1, will be based on your sales from 2020 to the first half of 2021.
As such, anyone who has already exceeded the €10,000 (net) threshold in 2020, or in the first six months of 2021, will be liable for tax in the destination countries of all their cross-border sales within the EU starting on July, 1, 2021.
The central question is now: Will you now have to register for VAT locally in all EU countries? The Answer is: No!
The One-Stop-Shop will replace local VAT registrations
Online merchants, who will become tax liable in other EU countries as a result of their cross-border sales to private end customers will be able to declare their sales via the One-Stop-Shop, as well as pay their due VAT.
The advantage for merchants is that the framework for OSS declarations is identical in all EU states (no longer the UK, of course):
– OSS declarations will always be on a quarterly basis. (for the first time period of July, August, September)
– The deadline for declaration is one month after the end of the quarter.
(i.e., First declaration end of October 2021)
– You do not have a legal obligation to issue invoices on sales declared via the OSS.
– Due VAT is always paid centrally via the OSS
Usage of the OSS is voluntary. However, if you decide not to make use of this platform the new reform still applies to your B2C sales and it would become mandatory to declare all cross-border sales to private end customers within the EU locally.
The first downfall is that not all e-commerce transactions can be declared via the OSS.
The OSS is not suitable for all e-commerce transactions
The OSS is not all-encompassing for the modern infrastructure of e-commerce:
For example, if you use warehouses or have your own fixed establishment in other EU countries outside your country of residence, you are still required to have local VAT registration as well as file for local VAT returns. Transactions related to these cases cannot be declared via the OSS.
As an example, local VAT returns are still required for:
– Sales from a foreign warehouse to end customers located in the same country
– The storage of goods in foreign warehouses (as in intra-community movements & purchases)
– Local input taxes
If this applies to your set-up you will be required to establish two compliance strategies:
1. An OSS strategy for all cross-border distance sales to private end customers (B2C).
2. A strategy for local VAT registrations and local VAT returns, including all transactions involving warehouses and fixed establishments in other EU countries.
An additional challenge for all cross-border multichannel sellers will be to determine which tax rates applies for their goods for all EU countries.
And now, we take a look at how this applies for UK businesses.
How do you register for IOSS/OSS from the UK?
The exact registration requirements for One Stop Shop differ greatly depending on whether you are:
1. a business based in the EU
2. a business based in a non-EU territory
UK businesses – who have already had to cope with the upheaval of new VAT policies post-Brexit – may well need to establish an intermediary, like a warehousing facility. In this case, an IOSS VAT registration in the Member State where the intermediary is established would need to be acquired.
In the case of a UK business having multiples warehouses located in EU countries, you you may need a local VAT registration in each – but you can then choose one of those Member States to use as a base for an OSS registration.
It’s a little mind-boggling – but it’s surmountable.
Tax rates in the EU
You may now ask: How does one know which tax rate applies to which product in which EU state?
Tax rates and VAT within the EU is quite a complicated topic. EU law allows the following range of tax rates, which clearly offers a wide scope:
– Standard tax rate
– Reduced rate I *(application is limited to products listed in Annex III of the EU VAT Directive)*
– Reduced rate II *(application is limited to products listed in Annex III of the EU VAT Directive)*
– Zero tax rates: As suggested by the name, the tax rate here is zero percent. This is not to be confused with a tax exemption.
– Special rates *(These can be chosen at random – but only after approval by the EU Commission)*
Conclusion: The OSS makes some things easier, but not everything
The OSS will make many things simpler and more efficient. However, it will also lead to further complexity surrounding the determination of the correct tax rates. Even the use of foreign warehouses or fixed establishments in other EU countries will not lead to a redundancy in local registrations. However, the introduction of the OSS will mean that each individual transaction must be automatically evaluated for VAT purposes.
If you would like to achieve this via a platform like Taxdoo, book a free demo with one of our VAT experts.