Keeping Track of the EU’s Changing VAT Landscape

It is no longer “business as usual” for e-commerce. Higher costs and increased bureaucracy arising from a change in EU tax regulations at the beginning of the year have led to many online retailers based in the EU to refuse to ship goods to the U.K. Brexit was quickly blamed for the disruption, although it was actually part of a wider EU e-commerce value-added tax (VAT) legislative package that would have been implemented by the U.K. had it remained in the EU. Brexit meant it was introduced earlier than in the EU, where it was rolled out at the beginning of July 2021.

While online retailers selling to the U.K. face the prospect of obtaining a standard VAT registration, for non-EU retailers selling business-to-consumer (B2C) into the EU, the EU e-commerce VAT package has created a new opportunity across all member states—the Import One-Stop Shop (IOSS). This scheme allows retailers to collect VAT at point of sale and submit relevant reporting data via a single return. The payment of VAT is made to just one member state, which then distributes it to other territories.

Associated with the IOSS is an additional new concept—the intermediary. The intermediary’s role is similar to that of a fiscal representative—they share liability for payment of the VAT and obligations laid down in the IOSS scheme. Most non-EU vendors who opt to utilize the IOSS—including those in the U.K.—are now required to appoint an intermediary based within the EU to act on their behalf.

It is important then, especially as the U.K. continues to unravel its legislation from the EU, that suppliers and buyers alike are aware of the new reporting requirements in this new era of cross-border trade.

Reporting VAT on Low-Value Goods

Physical customs controls have long been the predominant means of enforcing tax borders between countries. Many tax authorities have historically put specific minimum limits in place to minimize friction at the border and optimize resources. Imported goods below these limits would be exempt from VAT, while cross-border services would often be taxed in the country of the service provider or, in some cases, escape VAT collection altogether.

In recent years, however, due to a massive rise in the volume of cross-border trade in low-value goods and digital services—many of which are difficult or impossible to check at the border—tax administrations have taken measures to tax such imports in the country where they are consumed. Specific recommendations were made for low-value goods. In July 2021, the EU e-commerce VAT package provided the framework to account for what tax is due in a straightforward and low-cost way for both the supplier and the tax administration.

The IOSS is one of three new One-Stop Shop (OSS) reporting schemes:

• the Union OSS for intra-EU supplies of goods and services;

• the non-Union OSS for services provided from outside the EU; and

• the Import OSS.

Reporting simplifications are therefore now available for B2C intra-EU supplies of goods and services from global retailers.

IOSS and Intermediaries

Packages over the low-value consignment relief threshold (which was €22 in most EU member states) bought online from outside of the EU have always been taxable in the EU. However, widespread non-compliance involving under-valuation of the goods being imported meant that in practice these sales contributed to the EU VAT gap of over $140 billion euros ($161 billion).

Now though, buyers and sellers need to be aware that, since July 2021, the removal of low-value consignment relief will prevent any packages from reaching customers unless the appropriate VAT has been paid.

Where selling directly to consumers, online retailers can take advantage of the IOSS for supplies with an intrinsic value less than €150. When selling such goods via a marketplace, it is the marketplace that has the liability to account for the VAT due and it can use the IOSS if it wishes. This use of the IOSS allows goods to be swiftly imported and the customer experience enhanced with quick delivery times and no unexpected VAT charges.

The appointment of the intermediary provides assurances to member states that retailers located in countries without mutual assistance agreements have a local representative who can support queries and audits related to EU VAT obligations; the intermediary is also there to make payment in case of default, in most member states.

Acting on behalf of a vendor selling into the EU, the intermediary is liable for submitting IOSS returns, making payment and providing the appropriate tax administration with all the relevant data as requested.

Should the intermediary be unable to meet these obligations, or meet them on time, in addition to potential penalties for the seller, the intermediary could also find itself facing some severe consequences. Failure to submit returns and make payments, for example, or to notify the relevant tax authority on time of any significant changes to the supply chain, can result in penalties for the seller as well as the intermediary. Repeated non-compliance can even lead to a two-year exclusion from the OSS schemes.

For retailers, the potential ramifications of this are considerable. Compliance costs are likely to increase, and new VAT numbers will be urgently required to enable the taxpayer to register for VAT in all EU member states in which it has a liability. Furthermore, exclusion from the IOSS may require a vendor to change its commercial arrangements with its customers, which could significantly impact its sales.

With the implementation of the IOSS being delegated to individual member states, each of which has its own nuances and interpretations of tax reporting legislation, it is hardly surprising that intermediaries are carefully assessing where to provide services from, as well as ensuring appropriate diligence is applied in taking on representation and providing compliant reporting.

Navigating a Minefield

The recent rollout of the EU e-commerce VAT package and implementation of the OSS schemes have changed the landscape for online retailers selling to EU consumers. Sellers need to consider which scheme is most appropriate for their business model, taking into account supply chains and the customer experience they wish to provide.

This is in addition to any confusion around new import and export rules introduced post-Brexit where the goods are shipped to or from the U.K. Indeed, this area has now become something of a legislative minefield.

It is also fundamental that retailers have informed conversations with their logistics suppliers about the use of the IOSS. Shippers need to ensure they follow the same mechanism, as while the IOSS number should be clearly visible on the parcel, there have been instances where double taxation—and customer dissatisfaction—is a risk where this procedure is not followed.

To successfully navigate this minefield and minimize the risk of non-compliance and the accompanying penalties, retailers and marketplaces should consider investing in a solution that takes advantage of the simplifications and benefits of the OSS schemes whilst ensuring expert support is on hand to mitigate against the risk of exclusion.

The e-commerce market is only going to continue to expand. Tax authorities looking to stay ahead, minimize compliance burdens, and maximize VAT collection, are continually tightening VAT reporting rules. Knowledge of this changing VAT landscape has never been more important; the right intermediary can provide great comfort and allow sellers to focus on growing their EU sales.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Anna Higgins is Strategy Program Director with Sovos.

The author may be contacted at: anna.higgins@sovos.com