If you are currently trading online in the EU and find new VAT regulations challenging to stay on top of, then this overview of upcoming major reforms of the European VAT system will be helpful to you.
To create more efficient rules for online businesses, support e-commerce start-ups thriving in the EU and at the same time, tackle fraud costing billions of lost VAT on online sales every year, new measures from the European Commission’s ambitious VAT e-commerce package will be effective as per 1st January 2021.
In this article, we will be giving you some insights into what you need to know about these new rules as well as some context around their implementations.
An extension of the scope of the VAT Mini One Stop Shop scheme
Currently, this optional scheme allows a business supplying B2C digital services – referred to as telecommunications, broadcasting & electronic services – to declare the VAT due on its B2C digital supplies in a single quarterly VAT return, by registering in one EU member state only. The choice of the member state where you register for the VAT MOSS notably depends on where you are established and whether you have one or more fixed establishments in the EU.
In 2021, the Union scheme, for EU businesses, will be extended to include the supplies of all types of B2C services, intra-EU online sales of goods and specific domestic supplies facilitated by digital marketplaces.
The non-Union scheme for digital services, currently available for non-EU businesses, will be extended to cover all types of services supplied to consumers in the European Union.
The launch of a new import special scheme
Additionally, a new import special scheme – called Import OSS – will be launched from 01 January 2021 to cover the distance sales of goods imported from non-EU territories and third countries in consignments of an intrinsic value less than EUR 150.
Currently, imported goods from non-EU countries with a value lower than EUR 22 are VAT-exempt, which creates a distortion of competition for EU businesses. From 1 January 2021, this exemption will be abolished to ensure a level-playing field for EU and non-EU online retailers trading within the Community.
When using this import scheme, sellers will need to charge and collect the VAT from EU customers when the payment for the goods has been accepted. The total EU VAT will then need to be declared and remitted in a single monthly VAT return submitted to the member state where the seller is registered for the import scheme.
Should businesses not use this import scheme, for any reason, an additional simplification mechanism will be available for imported goods with a value less than EUR 150 where import VAT will be collected by the customs declarant. The VAT amounts collected will then need to be paid to the local customs authorities on a monthly basis.
An increased compliance burden for digital marketplaces
Finally, the last significant reform effective from 1st January 2021 is the increased responsibilities of digital marketplaces in collecting VAT on the cross-border B2C sales of goods they facilitate. Indeed, under certain circumstances, online marketplaces such as Amazon, Ebay, or French CDiscount, will be deemed as supplier for VAT purposes for the supply of the goods facilitated on their platform. That’s a major change as for the first time across the EU, digital marketplaces will play a prominent role in the fight against VAT fraud.
Why are these reforms being implemented?
Over the last few years, the European Commission and national member states have been releasing alarming estimates of the billions of euros lost in VAT each year. According to the September 2019 VAT Gap Report from the Commission, the total revenue loss across the EU amounted to EUR 137.5 billion in 2017. E-commerce has been particularly pointed at in recent years due to the vast VAT amounts that skip through the nets each year from online trade, either as a result of a misunderstanding of VAT compliance rules or tax avoidance from traders.
VAT is a major own resource for the EU ‘collective money pot’ and contributes to the funding of public services such as security, research, infrastructure and more. However, weaknesses in the VAT system show that current EU VAT rules are not suited for the boom in cross-border online sales in recent years.
By adopting this VAT e-commerce package, the EU is hoping to create a fraud-proof VAT system that can support online businesses and SMEs expand and thrive in a fair environment.
What can we expect in the next few months?
Member States have until 31 December 2020 to transpose these new VAT rules into their national legislation. Additionally, the development of the new schemes requires major IT investments from member states. So far, very little guidance has been shared by national tax authorities who are still updating their resources. The national MOSS teams contacted until now have confirmed the IT updates were still ongoing but with only a few months to go before the launch of the new schemes, it is worth wondering if every member state will be ready on time.
The aim of these practical measures is to create simplifications and harmony across the EU when it comes to VAT compliance of the digital economy. But if all member states aren’t ready by the deadline, online retailers could face uncertainty when deciding whether to join these new schemes. More importantly, online traders and digital marketplaces should also start thinking whether they have the adequately trained staff and IT resources to comply with these new VAT reporting schemes.
We are following up with different MOSS teams across the EU and keeping an eye on the guidance provided by each member states. Until then, if you have any questions about these changes or how to prepare for them, feel free to contact our team!
Please note that on 8 May 2020, the European Commission has submitted a proposal to defer the date of application of these measures from 1 January 2021 to 1 July 2021. Due to the Covid-19 pandemic outbreak, EU Member states have been put under pressure to shift their priorities and resources to fight the pandemic and mitigate the impact on businesses and citizens in general.
In this context, member states and other economic operators have been unable to guarantee that the initial fixed deadline to update their resources and adopt the new ecommerce VAT measures would be met.
The EU Commission is expecting that both the European Parliament and Council will formally adopt this proposal asap to give certainty and more time to prepare to the relevant stakeholders.
Once adopted, EU member states will now have until 30 June 2021 to transpose and publish in their national laws the new VAT e-commerce package.