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VAT challenges for online traders and e-commerce companies

Cross-border trade presents complex VAT challenges for online merchants. Find out how to avoid stumbling blocks in the EU.

Cross-border trade presents complex VAT challenges for online merchants. Find out how to avoid stumbling blocks in the EU.

1 nov. 2024

Christopher Henke

Sales Lead DACH bei Mollie

Online retailers regularly face complex VAT challenges. With quick access to international markets and numerous orders being processed through various platforms and payment service providers, it is becoming increasingly difficult to keep track of everything. It is particularly tricky when trading across borders – there are numerous VAT pitfalls lurking here.

From the correct tax registration and the OSS procedure to the automated recording of payments and orders: it is crucial to structure the accounting cleanly and efficiently from the outset in order to avoid costly corrections later on. This article highlights the key VAT issues that e-commerce businesses should be aware of and provides valuable tips on how to avoid common mistakes.

1. Tax registration and the importance of the VAT registration number

The first important step for online retailers is tax registration. In addition to the tax number issued by the tax office, it is essential for companies that want to operate internationally to also apply for a VAT registration number from the Federal Central Tax Office. This is crucial to keeping the administrative burden low and to participating efficiently in the international market.

The VAT registration number is also an important requirement for selling on the largest and most relevant platforms such as Amazon, Shopify and other marketplaces. These platforms are now legally obliged to regularly provide the tax office with information about active traders and therefore require a unique identification of their traders. Without a VAT registration number, it is often not possible to register or sell on these platforms.

Particularly in the case of cross-border transactions within the EU, the VAT registration number enables goods to be purchased tax-free from other companies. Without this number, there may be significant complications in accounting, and there is a risk of paying more tax than is necessary.

We recommend applying for the VAT registration number early – especially in the case of company restructurings, conversions or new formations, ideally before trading begins. This will help to avoid unnecessary difficulties and ensure a correct tax set-up.

2. The OSS procedure

What is the OSS procedure?

The OSS (One-Stop-Shop) procedure simplifies VAT processing for online merchants who operate across borders within the EU. Instead of having to register for VAT in each country to which they deliver, merchants can pay VAT centrally through the Federal Central Tax Office (BZSt).

The obligation to register for VAT in a foreign country applies to sales of more than €10,000 in other EU countries.

The €10,000 sales limit applies not to individual countries, but to all EU countries to which goods are shipped to private customers. This means that all deliveries from one EU country to another – for example, from Germany to France and from Germany to Austria – are added together. If a company also maintains a warehouse in another EU country, such as Poland, the deliveries from Poland to Germany are also included in this limit. As a result, the €10,000 threshold is very quickly exceeded, since it applies to all European countries together.

That is why it is so important for online retailers to register for the OSS scheme. Unfortunately, we repeatedly see tax advisors neglecting to register their clients for this scheme in good time – even though there is no reason not to do so. The OSS scheme offers many advantages and makes VAT processing much easier.

Please note: anyone who does not use the OSS procedure must register for VAT in each EU country to which they supply goods. This is often very time-consuming and expensive, as registration can cost several hundred to over a thousand euros. In addition, there are the running costs for meeting the monthly filing deadlines in the respective countries.

Advantages of the OSS procedure

Centralised processing: VAT can be paid in a standardised way via the BZSt, which eliminates the need to register for VAT in each EU country to which goods are delivered.

Simplification: Registration and processing under the OSS procedure is much simpler than the cumbersome registrations and reports in each individual country.

Reporting period: Instead of monthly reports, the OSS report is submitted quarterly, which can lead to a liquidity advantage.

Challenges and limits of the OSS procedure

Despite the numerous advantages, the OSS procedure also presents some challenges:

No retroactive registration: Traders must decide in favour of the OSS procedure in good time, as retroactive registration is not possible. Anyone who crosses the €10,000 threshold should therefore act immediately.

Accounting implementation: Financial accounting becomes more complex when the OSS procedure is used. Transactions must be recorded and exported in a differentiated manner so that they appear correctly in the accounting records.

Limitations of the OSS procedure: Not all business transactions can be processed using the OSS procedure. For example, shipments of goods between the company's own warehouses in different EU countries (e.g. from Poland to Germany in the case of Amazon CEE) must continue to be reported separately.

3. Practical problems in e-commerce

Dropshipping

In dropshipping, the goods are delivered directly from the producer to the end customer. The OSS procedure cannot be used here if the producer organises the shipment. In this case, the online retailer using dropshipping must register for VAT in each European country to which it delivers its goods. This means that the retailer must file separate VAT returns and comply with the respective local tax requirements in each country to which they sell. This results in a considerable administrative burden and additional costs, as registration can cost several hundred euros, not to mention the ongoing costs of meeting monthly deadlines.

If, on the other hand, the online retailer handles the shipping process themselves, they can use the OSS procedure. This reduces the number of necessary VAT registrations, but leads to a significantly higher logistical effort, since the retailer then has to handle the shipping independently instead of instructing the producer to do so.

4. Challenges with regard to VAT rates

Another key issue that online retailers have to deal with is the different VAT rates. In Germany, the standard VAT rate of 19% applies, but for certain goods, such as food, there is a reduced tax rate of 7%.

One of the biggest challenges is that it is not always clear which tax rate applies to some products. One example is dietary supplements: if they are categorised as food, the reduced VAT rate of 7% applies. However, if they are categorised as chemicals, the full VAT rate of 19% applies. This uncertainty carries the risk of nasty surprises during tax audits if the wrong tax rate has been applied. If 19% VAT suddenly has to be paid instead of 7%, this can even lead to insolvency if the margin for such an additional payment is too small.

To protect themselves from such uncertainties, online retailers should seek advice in close consultation with their tax advisor. One way to achieve legal certainty is to apply for a binding tariff information. With such tariff information, the correct tax rate for a product can be bindingly determined, so that the company is on the safe side and does not have to make any corrections or additional payments later.

Case law vs. tax office: using an extended interpretation

However, it often happens that the tax office interprets the regulations more strictly than the case law would allow. In these cases, a good tax advisor can help to enforce the reduced tax rate through legal channels. Certain product groups could therefore be subject to the reduced rate of 7%, even if the tax office does not initially accept this.

Furthermore, there are some special regulations under which products may even be exempt from VAT. One example of this is photovoltaic systems or their modules, which are exempt from VAT up to a certain size and under certain conditions.

5. Tax setup: protection through procedural documentation

In the past, the tax office was often confronted with new challenges during tax audits of online retailers because business transactions in online retailing are more complex. The large number of purchases processed via different systems and platforms was not always easy to keep track of. It was often a challenge for the tax office to understand exactly how the various systems interacted and how transactions were mapped in the accounting system.

This complexity carries the risk that the tax office may consider imposing back taxes or surcharges if anything is unclear. Therefore, it is particularly important for online retailers to ensure that their accounting is complete and transparent in order to avoid possible back payments as a result of an audit.

Protection through procedural documentation

One effective way of protecting yourself against such risks is to create a procedural documentation. This documentation, which is ideally prepared together with your tax consultant, describes in detail the systems used and how they interact. During a tax audit, it shows the tax office how business transactions are processed in the company and how the data flows are mapped in the accounting system.

To ensure completeness and traceability, we strongly recommend using good systems and tools for processing data. Modifiable Excel spreadsheets should be avoided at all costs, as they do not provide sufficient security and traceability. Professional accounting programmes and integrated tools guarantee seamless documentation and reduce the risk of errors or ambiguities.

During tax audits, the auditor's first step is often to ask for the procedural documentation. If the company's processes are clearly documented, possible accounting errors can be better traced. Complete documentation offers the tax office transparency and can help to avoid misunderstandings and unnecessary additional claims.

We therefore strongly advise our e-commerce clients to create a procedural documentation. This not only serves as protection against additional tax claims, but can also serve as proof to investors that the company has well-organised data flows and systems in its financial accounting. A well-documented process demonstrates professionalism and strengthens trust in the company, both internally and externally.

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1. Tax registration and the importance of the VAT registration number

2. The OSS procedure

3. Practical problems in e-commerce

4. Challenges with regard to VAT rates

5. Tax setup: protection through procedural documentation

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MollieCreștereVAT challenges for online traders and e-commerce companies
MollieCreștereVAT challenges for online traders and e-commerce companies
MollieCreștereVAT challenges for online traders and e-commerce companies
MollieCreștereVAT challenges for online traders and e-commerce companies