What is the EU VAT Reform?
Aimed at making life easier for businesses, the EU E-Commerce VAT Package simplifies the VAT reporting requirements when trading across European Union Member States. This package is part of wider EU VAT reform.
Our live blog collates vital information on the package, with updates whenever governments or tax authorities provide new information. Bookmark this blog or subscribe to our newsletter to stay updated with the latest developments.
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EU VAT Reform: A Timeline
Update: 14 June 2023 by Russell Hughes
EU Commission Proposes Major Reforms for EU Customs including Expansion of the IOSS Scheme
Following Brexit and the introduction of the IOSS, EU customs has seen a significant increase in trade volumes. Now, the EU Commission has put forward proposals to reform current EU customs practices.
The new measures will embrace the digital transformation and lead to a simpler customs process by introducing a data-driven approach to EU Customs that will replace traditional declarations. The aim is to provide customs authorities with the tools and resources to prevent fraudulent behaviour from traders, enabling them to pick out those imports that threaten the EU’s tax take.
The new framework would simplify customs reporting requirements for traders, reducing the time needed to complete import processes by providing a single EU interface and facilitating data use.
EU Customs Data Hub
The EU Commission has proposed a new EU Customs Authority to oversee an EU Customs Data Hub. Over time, the Data Hub would replace the existing customs IT infrastructure in EU Member States, which they believe will save up countries up to €2 billion a year.
The idea of the new Data Hub is that businesses can log all the information on their products and supply chains into a single online environment. This technology will compile the data provided by businesses, providing customs authorities with a 360-degree overview of supply chains and the movement of goods through machine learning, artificial intelligence and human intervention.
Based on the transparency of inputting information into the portal, these businesses will become trusted traders – allowing them to release their goods into circulation into the EU without any active customs intervention. This will allow customs authorities to prioritise their resources and prevent illegal and unsafe goods from entering the EU.
The Data Hub is looking to open by 2028 for e-commerce traders and 2032 for other importers. This will initially be voluntary up until it becomes mandatory in 2038.
Expansion of the IOSS Scheme
The final pillar of the new reforms will be the abolishment of the €150 threshold at which customs duties are charged, effectively expanding the IOSS scheme. Currently, any goods imported at €150 or below are exempt from customs duties, whilst VAT is collected and reported on the IOSS return.
However, this reform will remove that threshold to ensure all goods will be brought into the customs duty regime and prevent fraudulent traders who look to undervalue goods for customs purposes. It is currently believed that around 65% of parcels entering the EU are undervalued.
Under the new reforms, online platforms and e-commerce sellers will become ‘deemed importers’ responsible for ensuring goods sold online to EU customers comply with customs obligations. Such platforms and sellers will charge VAT and duties at the point of sale and settle this via the IOSS return, no matter the value of the order. Therefore, import VAT and duty charges at the border for imported goods will no longer hit the consumer.
Looking for advice on how to handle these proposed changes? Contact our team of experts.
Update: 28 June 2022
One year on for the One Stop Shop – the changes and challenges of the new e-commerce VAT scheme
In this episode of the Sovos Expert Series, Cécile Dessy speaks with Russell Hughes, Consulting Services Manager at Sovos, to explain how these new schemes have evolved during their first year.
Still have questions on how to stay ahead of OSS? Speak to our experts.
Update: 15 April 2022
The EU E-Commerce VAT Package – What Have We Learned Nine Months On?
It’s been just over nine months since the introduction of one of the most significant changes in EU VAT rules for e-commerce retailers, the E-Commerce VAT Package.
Under the new rules, the country-specific distance selling thresholds for goods were removed and replaced with an EU-wide threshold of €10,000 for EU-established businesses. Non-EU-established businesses now have no threshold.
How the EU E-commerce VAT Package has affected businesses
Initially, the thought of charging VAT in all countries businesses sell to was overwhelming. Though, businesses now see many benefits from the introduction of OSS.
The biggest benefit for businesses is VAT compliance requirements simplification. OSS implemented one quarterly VAT return instead of meeting many different EU Member State filing and payment deadlines.
Businesses that outsource their VAT compliance have reduced their costs significantly by deregistering from the VAT regime in many previously VAT-registered Member States. Businesses also receive a cash flow benefit under the OSS regime as VAT is due quarterly instead of monthly or bi-monthly.
As part of this EU VAT reform, we saw the removal of low-value consignment relief. This change meant import VAT was due on all goods entering the EU. It brought many non-EU suppliers into the EU’s VAT regime, with the European Commission (EC) announcing over 8,000 currently registered traders.
EU Member States had some hiccups, including not recognising IOSS numbers upon import, leading to some double seller taxation. But for most businesses, IOSS enables them to streamline the sale of goods to EU customers for orders below €150. The EC recently hailed the initial success of this scheme by releasing preliminary figures showing €1.9 billion in VAT revenues collected to date.
Want to know more about the EU VAT reform and One Stop Shop and how it can impact your business? Download our detailed guide.
Update: 22 November 2021
IOSS Four Months On
As with any new initiative, IOSS has not been without its issues. Here we look at some of those issues early into the new VAT system.
EU VAT reform and double taxation
Some clients tell us there is some confusion with their freight forwarders, who continue to operate the “landed cost” model even though the seller intended to sell under IOSS.
Under this model, the seller charges the customer an amount including VAT. The freight forwarder then imports the goods in the name of the customer. Then, the freight forwarder settles the customer’s import VAT liability and seeks reimbursement from the seller.
In this case, the local tax authority receives the VAT due as import VAT. However, freight forwarders still use this model in cases where the seller has provided its IOSS registration number.
Although the customer pays import VAT, the seller also accounts for supply VAT on its IOSS return. Double taxation must be funded by the supplier if the seller reimburses the freight forwarder without correcting the error.
Fraudulent IOSS VAT number usage
The EC removed low-value consignment relief on 30 June 2021. It levelled the playing field and reduced the VAT gap by dealing with fraud. However, there appears to be a gaping hole in the system, meaning fraud is just as possible, and the playing field is anything but level.
Where a shipping document includes an IOSS number, the underlying assumption is that the goods are under €150, and the seller will pay the VAT due. The IOSS number is checked for validity but not identification of IOSS number ownership.
IOSS numbers are widely available online, especially for online marketplaces. We are hearing that some unscrupulous sellers are using valid IOSS numbers that belong to other businesses.
This activity allows them to sell goods knowing they will never have to account for VAT in the EU, thereby undercutting local suppliers. The owner of the IOSS number does not account for this VAT, and the tax authority will find this discrepancy during an audit.
Issues with particular types of transaction
There is confusion around certain categories of goods and their IOSS treatment. Businesses can sell magazines and other goods under a subscription service, and the subscription period can often be more than one year.
In an annual subscription scenario, there will typically be one payment at the beginning of the subscription and then a succession of deliveries of goods – 12 for a monthly subscription.
So, the question is, how are subscriptions treated under IOSS? Where IOSS is applicable, if the seller reports the full amount at the outset, there will be a mismatch between the VAT return and the imports. If the seller reports an amount equal to one month’s subscription month, then VAT is accounted for late since VAT is generally due at the earlier of the issue of the invoice or the receipt of the payment.
How is the IOSS eligibility assessed? Is it the value of each shipment or the value of the subscription considered when determining whether the intrinsic value is less than €150?
There is speculation that each consignment’s value determines if a seller can use IOSS. We put this question to one EU tax authority. They replied that we could find the issue of subscription treatment within the rules on when the seller must account for VAT. The rules clearly state that tax authorities consider goods supplied at the time when the seller accepts payment.
In this case, the tax authority recognises all 12 magazines as supplied when the seller accepts payment. If that payment is above €150, then IOSS is not available. Not all Member States share this view. It raises the question of which tax authority decides – where the business is registered for IOSS or where the VAT is due?
Update: 8 September 2021
The EU E-Commerce VAT Package: Lessons Learned Two Months On
Delays and teething problems
Unfortunately, there were initial delays and teething problems when the EU introduced the E-Commerce VAT Package. We expected this with the adoption of such significant EU VAT reform, but as with any new scheme, the tax authority can resolve this over time.
Some examples include:
- Netherlands system issues: The introduction of the system in the Netherlands appeared to cause an IT glitch whereby the system did not recognise Article 23 licenses to defer import VAT.
- Data submission inconsistencies: There are inconsistencies in how taxpayers must communicate data to the relevant tax authority.
- Varying file format requirements: Some Member States require businesses to submit data in a .csv file, whilst others ask for a .txt file. The Netherlands requires taxpayers to key data directly onto its website.
- Data issues: Sweden was briefly unable to receive data, but this was resolved in less than a week.
- IOSS processing errors: Some freight forwarders used the shipment date and not the payment date causing the tax authority to process some ineligible consignments under IOSS. This inconsistency will lead to an underpayment of VAT, and it will be necessary to reconcile the data.
- Intrastat reporting: Neither the Directive nor explanatory notes mention how businesses should report Intrastat.
Goods import issues
Some Member States disallow the import of specific categories of goods due to local restrictions, e.g. foodstuffs, plants, etc.
It’s sometimes unclear if freight forwarders have used IOSS or not. This confusion could lead to repeated errors of VAT underpayment or overpayment.
Some non-EU vendors are trying to avoid an IOSS registration by stating that the customer is the importer of record. While this occurred before IOSS, it did not occur as much as it does now – and was not always spotted or queried.
However, since the introduction of the IOSS, some tax authorities, including Germany, have questioned this approach. In some cases, the carrier who imports the goods acts for the non-EU vendor and the buyer is unaware of their identity.
Update: 29 October 2020
OSS Explained – Explanatory Notes for July 2021 VAT E-Commerce Rules
On 30 September 2020, the EC published its Explanatory Notes on VAT E-Commerce Rules. It provides practical and informal guidance on upcoming e-commerce regulations. The EU initially adopted this EU VAT reform under Directive 2017/2455 and Directive 2019/1995.
The Explanatory Notes set out to explain the practical aspects of the upcoming changes to place of supply rules and reporting obligations for certain online supplies in Europe. It specifically addresses: B2C distance sales of goods imported from third countries, intra-community distance sales of goods, and cross border supplies of services.
The explanatory notes provide further guidance on applying OSS and IOSS schemes. It includes scenarios where Electronic Interfaces (such as marketplaces) are liable for VAT collection and remittance relating to underlying suppliers transacting on their platforms.
The OSS scheme:
For EU-EU goods deliveries, suppliers are no longer required to register and file VAT returns in every EU Member State where they’ve exceeded distance selling thresholds. Instead, a new EU-wide threshold of €10,000 applies, after which VAT must be collected and remitted based on the destination of the goods.
Under the OSS, suppliers (or deemed suppliers) may elect to register once in their Member State of identification and file a single, simplified OSS return for all their EU distance sales.
A similar scheme, the Mini One Stop Shop (MOSS), already exists for electronically supplied services by EU and non-EU suppliers. The EU will broaden its scope to include all B2C services where the VAT is due in a country where the supplier is not established.
B2C suppliers participating in OSS must use it for all supplies under the scheme. However, it shouldn’t be seen as a drawback because the EU designed the OSS scheme to reduce admin burdens.
For example, in addition to simplifying registration requirements, OSS imposes no obligation to issue a VAT invoice for B2C supplies. (An EU Member State may opt to impose invoice requirements for service invoices only, but not for goods).
The IOSS scheme:
Distance sales of goods imported from third countries, with an intrinsic value no greater than €150, may be subject to the new IOSS simplification regime. It is designed to facilitate smooth and simple VAT collection on B2C imports from outside the EU.
With the concurrent repeal of the €22 low-value consignment relief, IOSS is an attractive option for suppliers looking to reduce administrative and compliance burdens.
Under this new EU VAT reform, a supplier (or deemed supplier) may elect to register – via an intermediary for non-EU suppliers – for IOSS in a single Member State. It allows them to collect VAT in the respective EU country of destination and remit monthly IOSS VAT returns.
The new e-commerce rules explanatory notes emphasise the overriding goal of making VAT collection more effective, reducing VAT fraud, and simplifying VAT administration.
Nevertheless, businesses must be careful to ensure that their internal systems are properly configured prior to the changes taking effect.
To learn more about this new EU VAT reform, listen to our on-demand webinar: A Practical Deep Dive into the New EU E-Commerce VAT Rules