Making compliance easier and fraud harder

After July 1, 2021, member states of the European Union (EU) will introduce sweeping reforms to the VAT obligations of B2C ecommerce sellers and marketplaces.

The key reform will allow some sellers to report all their Pan-EU distance sales on a single VAT return in just one member state instead of having multiple VAT registrations across the EU. The aim is both to boost cross-border online trade and promote trade across the EU’s digital single market by reducing compliance obligations.

The changes also seek to tackle the €7 billion ecommerce VAT fraud gap, with member states looking to close import loopholes and obligate online marketplaces to collect VAT in place of sellers (deemed supplier rules).

Three fundamental changes to ecommerce EU VAT

This guide provides an overview of the three major reforms planned for 2021 and discusses how the reforms will affect sellers and marketplaces’ obligations. Post-Brexit, the U.K. implemented its own version of these reforms beginning January 1, 2021. You can review Avalara’s separate guide on this topic .

A single EU VAT return for ecommerce

At the heart of the 2021 ecommerce EU VAT reboot is the introduction of the One Stop Shop (OSS) single EU VAT return.

After July 1, 2021, B2C sellers dispatching their goods from a single country will no longer be required to register for foreign VAT and complete multiple VAT filings in countries where they are selling. Instead, they may opt out and simply complete a single OSS filing listing all their Pan-EU sales along with their regular domestic VAT return. If sellers have physical locations in several member states, they may choose any of those states in which to remit VAT. If a seller has no physical locations, other rules apply.

This reform builds on the successful launch of the single VAT return for B2C digital services in 2015 referred to as the Mini One Stop Shop (MOSS) return.

Launching the single OSS EU VAT return

In addition to withdrawing the distance selling thresholds, the EU is extending the single VAT return, OSS, to ecommerce cross-border distance selling of goods and services (see below). This will replace the obligation to VAT register in every country where sellers are making sales to EU customers from inventory in a single EU location — typically their home state.

OSS may be used to report cross-border B2C traditional services and, for EU-based sellers, certain domestic sales facilitated by marketplaces.

Sellers will charge VAT at the rate of their customer’s country of residence. They can use the delivery address of their customer to identify the country of residence and determine the standard VAT rate (or apply a reduced or nil (0) VAT rate) according to the varying rates and goods classifications of each customer’s member state.

The OSS filing will be a quarterly return. It is intended as a simple listing to declare VAT due by the seller to each EU country. The OSS return will be standardized across all the EU member states and will be similar to the following template:

Example OSS return from 2021

The amounts should be shown in the local currency where the seller is registered for OSS. In the case of a foreign currency conversion, such as the U.S. or Canadian dollar, sellers should follow the guidance of that country on rates to use at the date of the transaction.

Filing OSS

The OSS filing should be submitted by the end of the month following the tax period covered by the return (calendar quarter). The VAT due should be remitted by the same deadline.

The tax authority will then be responsible for dividing up the VAT received from the seller to each country as appropriate.

Exemption for EU microbusinesses does not apply to non-EU businesses

The EU will grant EU-based microbusinesses selling less than €10,000 per annum cross-border on B2C goods and services an exemption from the OSS rules. Non-EU microbusinesses are not exempt from the OSS rules. This reflects the experience of the 2015 MOSS return that imposed overly complex customer tracking and VAT calculations on the smallest of sellers.

Closing the low value consignment stock loophole

Before July 1, 2021, EU and non-EU sellers selling goods online to EU customers can ship goods into the EU directly to the customer, import VAT-free, if the goods are valued at €22 or below.

This exemption, called the low value consignment stock relief, was intended to relieve customs from the burden of checking large volumes of packages for small amounts of potential tax revenues.

However, it is leaving EU-based sellers at a price disadvantage since they must charge VAT when the goods are dispatched from within the EU. The exemption has also encouraged abuse by sellers deliberately under-declaring the values of goods to escape the import VAT bill.

What will this mean for a typical non-EU seller?

To understand the effects for a typical non-EU seller, let’s compare VAT obligations before July 1, 2021 with VAT obligations after the 2021 reforms. A fictitious non-EU seller, SamEagleTrading LLC from the United States, will serve as our example:

Simplified customs declaration

To help importers and customs authorities cope with the ballooning volume of low value consignments, the standard customs declaration for goods not exceeding €150 is to be condensed. After July 1, 2021, sellers will be able to provide a simplified declaration at the point of import into the EU. This is a significantly reduced dataset for the party declaring the import.

The existing duties exemption for most sales not exceeding €150 will remain in place.

EU and non-EU marketplaces become the deemed supplier

Ecommerce VAT evasion is estimated to cost EU member states €5 billion per annum, a figure expected to grow to €7 billion by 2021.

Because online marketplace platforms now play such a significant role in facilitating the growth of online selling, EU member states have agreed to employ them in the fight against ecommerce VAT fraud.

After July 1, 2021, online marketplaces (OMPs) may become the deemed supplier when they facilitate certain cross-border B2C transactions of their third-party sellers. OMPs will therefore be liable to collect, report, and remit the VAT due from the customer.

Defining a marketplace

The EU Council implementing regulation for the July 2021 ecommerce package refers to electronic interfaces, which include online marketplaces, platforms, portals, or similar means. The role of the marketplace is to introduce customers to sellers who then enter into a contract that results in a taxable sale.

Two-stage VAT transaction for deemed supplier marketplace sales

Once a seller and customer have agreed to a sale, the existing single-transaction procedure between the seller and customer will be split in two:

1. The seller will sell goods to the marketplace on a B2B VAT exempt-with-credit basis. This means the seller remains free to deduct any input VAT suffered on the purchase of the goods. The transport of the goods will be attached to this transaction, entitling the transport to a zero rating.
   
   
2. The marketplace will sell the goods to the customer, charging the VAT rate of the customer’s country of residence. The VAT is due when the marketplace receives the order, the commitment, or the order to pay from the customer.

To understand the marketplace facilitation use case, let’s look at an example:

Calculating the €150 intrinsic consignment value

A major challenge for the new import program will be calculating the €150 consignment threshold for the IOSS reporting. This relates to the customs declared value of a single package or consignment being cleared through customs to a single customer. If the consignment is made up of multiple goods, the value of these goods must be added together to determine whether the consignment qualifies for the IOSS program.

For marketplaces, often a customer will buy goods from multiple sellers and then check out. The organizer of the shipment or marketplace may package these goods in a single consignment. If the combined value of the goods exceeds €150, then the VAT treatment, collections, and reporting cannot fall under IOSS. Marketplaces may therefore have to adjust the VAT determination after the checkout, which could present some issues.

The customer may seek a VAT refund from the facilitating marketplace or seller, whichever party was responsible for charging output VAT. This also helps to avoid double taxation in the case of goods with output VAT triggering customs import VAT when clearing into the EU.