The rules for ecommerce taxation in the EU are drastically changing from 01 July 2021. As always when it comes to taxation, planning and understanding your obligations is key. Forget what you have learned so far regarding EU distance sales and VAT rules for e-commerce as everything is about to be rebooted.
As an online business, where will you need to tax your supplies when the new EU VAT rules come into effect? Should you opt-in for the new OSS simplification scheme? Have you considered what VAT rates will need charging?
In this article, we have summarised the key VAT changes to look out for as an ecommerce business when making EU distance sales.
The abolition of the distance selling thresholds
These are individual thresholds set by each EU member state that businesses are expected to monitor over a calendar year. The thresholds range from EUR35,000 and EUR100,000 and vary from one country to another.
Under the current EU distance sales rules, a business needs to tax its intra-EU online sales in the country of departure of goods until its annual taxable turnover (excluding VAT) breaches a local threshold in the country where customers are located.
After breaching a local threshold in another member state, an online retailer is obliged to VAT-register in this country, start charging the applicable applicable VAT rates and remit the collected VAT amounts to the local tax authorities.
Charging VAT at destination from 1st July 2021
From 1st July 2021, the distance selling thresholds as described above will be abolished and replaced by a single, pan-EU exemption threshold set at EUR10,000.
Why is this new exemption threshold being introduced? The European Commission intends to simplify VAT rules for e-commerce businesses by applying the principle of taxation at destination. Essentially, this means that VAT should be charged in the EU country where the customer is based, rather than the supplier. However, for EU micro-businesses whose annual taxable cross-border turnover remains below EUR 10,000, VAT will continue to be due where they are established to relieve them from added administrative burden. As soon as the EUR10,000 exemption threshold is breached, the online business will need to start charging VAT in each EU country where its customers are based.
Additionally, to free up online businesses from the burden of registering for VAT in multiple countries under the new rules, the MOSS (Mini One Stop Shop) scheme will be extended into an OSS (One Stop Shop) scheme. This will allow businesses to account and pay for the VAT due on their intra-EU distance sales and supplies of other B2C services in a single quarterly electronic VAT return.
How beneficial these new rules will be for online businesses?
By introducing these new VAT rules and launching the OSS scheme, the European Commission is hoping to simplify VAT compliance for online businesses. However, simplifications can also bring a new layer of complexity for businesses. The first difficulty we can foresee is that by having to suddenly account for VAT in more EU countries – due to the replacement of distance selling thresholds by a lower EU-wide threshold – smaller retailers need to make sure they review and charge the correct VAT rates to their customers in more countries than they would under the previous distance selling regime.
Additionally, under the new OSS scheme, businesses will not be able to offset any incurred VAT like they are currently able to through their VAT returns.
Lastly, for businesses holding stock in the EU – including sellers on the Amazon Pan-EU programme – local VAT registrations will continue to be required despite the new rules.
How can online businesses get ready for these changes?
Change always comes quicker than we expect when it comes to taxation. After being postponed once already due to the pandemic, the new rules are due to come into effect from 01 July 2021. With only a few months to prepare, businesses should review their supply chain to make informed commercial decisions about their VAT registration options and ensure their ERP systems are ready to apply the various VAT rates applicable across the EU.