Destination taxability and its impacts for EU e-commerce

By Christiaan van der Valk

Changes are on the horizon for import tax this July as the EU rolls out the 2021 EU VAT e-commerce package. The introduction of these new VAT regulations means it’s vital that digital businesses and buyers alike are aware of just what’s required when buying and selling goods across borders. This piece examines the current state of affairs and advice for businesses engaging in cross-border trade in 2021.

The increasing popularity of digital commerce is breaking down geographical barriers between suppliers and their customers. This has been especially true since lockdown measures were introduced, with a tide of revenue crossing international borders as homebound shoppers turn to online marketplaces such as Amazon, Rakuten, and eBay for both necessities and new distractions.

Falling below the Low Value Consignment Relief (LVCR) threshold, the value of many of these goods means they can be imported from outside the EU VAT-free. But this is about to change.

Although its rollout across the European Union has been delayed until July, the 2021 EU VAT e-commerce package was introduced in the UK when Brexit took effect, in January. Among the reforms that comprise the package are updates to the One-Stop-Shop (OSS) VAT reporting facility, a system that has been in existence since 2015. Under the new regulations, online marketplaces might be deemed as suppliers, and therefore liable for the collection, reporting, and remittance of the VAT due from the consumer.

With the dust still settling on post-Brexit trade arrangements between the UK and the EU, the introduction of these new VAT regulations means it’s vital that digital businesses and buyers alike are aware of just what’s required when buying and selling goods across borders.

Changing customs

Tax borders – both between and within countries – have traditionally been enforced in the main by physical customs controls. To facilitate trade and optimise resources, many countries historically put specific minimum limits in place, below which imported goods were exempt from VAT. In cases where it was difficult or impossible to check cross-border services at the border, those services might escape VAT collection altogether, or would be taxed in the country of the service provider.

However, the huge increase in the volume of cross-border trade in low-value goods and digital services has led to tax administrations taking significant measures to tax imports such as these in the country for which they’re destined. For example, the publication in 2015 of the Organisation for Economic Co-operation and Development (OECD) and G20’s Base Erosion and Profit Shifting (BEPS) Project Action Report on Addressing the Tax Challenges of the Digital Economy, saw most OECD and G20 countries adopt rules regarding the VAT treatment of cross-border B2C digital and electronic supplies.

Recommendations were made for low-value goods in particular, providing for both a vendor and an intermediary-based collection model. In the EU, where new rules were gradually being introduced to ensure that VAT on services was more accurately accrued to the country of consumption, a new regulation was enforced on January 1, 2015, pertaining to the supply of digital services. Under this new rule, these would now be taxed in the EU country in which the private end customer was located, had their permanent address, or usually resided.

At the same time, the OSS system was introduced, designed to facilitate reporting for taxable persons and their representatives or intermediaries. Still being expanded, the OSS system is a key part of the 2021 EU VAT e-commerce package, currently scheduled to take effect across the Union on 1 July. Under the extended scheme, all cross-border services and goods – including e-commerce imports – will be subject to changes in the way customs in EU Member States operate.

Small packages bought online from China or the US have always been taxable in Europe. But for practical reasons, they were exempted and never actually taxed. Now, though, buyers, sellers, and the marketplaces on which they transact all need to be aware that this is no longer the case.

Introducing IOSS

Anyone that understands taxation knows that when governments talk about simplifying processes, those processes will rarely become simpler. It looks likely that this will be the case with the introduction of the e-commerce package and the accompanying amendments to the OSS.

All goods valued at or under €150 shipped into the EU based on sales to European customers will be subject to an import one-stop-shop, or IOSS. While this is based on the concept of the OSS, and piggybacks on the same reporting infrastructure, it involves a significant legal change in the way that VAT is applied. If the goods in question are sold from outside the EU, via an online marketplace, to a customer within the Union, the sale is ‘deemed’ by law to comprise two distinct transactions: the first from the vendor to the marketplace, the second from the marketplace to the customer, in which case the marketplace is liable for the taxation on that sale.

The IOSS has introduced a level of complexity that effectively means e-commerce is no longer business as usual. Whether selling direct to customers or via a marketplace, vendors established outside the EU exporting goods valued below €150 to EU consumers are required to use a newly-created type of representative called an intermediary to report sales to the IOSS platform. In the past, this could be done either by the vendors themselves or by an appointed fiscal representative.

There is currently uncertainty around exactly what the role of an intermediary entails, how it differs from that of a fiscal representative, and just what its liability is. This uncertainty needs to be resolved, though. The law is stringent regarding joint and several liabilities for suppliers and their intermediaries, including for the provision of audit data.

Consider, for example, a supplier selling into the EU, and an intermediary acting on its behalf out of the US. If the Finnish tax administration, say, was looking to audit the customer, the intermediary is liable for providing all the relevant data, as per the EU legislation. But if the intermediary doesn’t have that information, or is unable to provide it on time, it could be held liable or, worse, see its ability to report via the chosen IOSS platform removed altogether.

Given that this comes into effect in Europe in July, there is still a great deal of clarification required around the exposure of intermediaries, and how the role can be implemented with minimal risk.

Looking for leniency

The situation is further complicated by the fact that, while the IOSS is nominally a European instrument, its practical implementation will be delegated to Member States, each of which has its own variations regarding tax reporting.

As a result, a degree of forum shopping is taking place, with vendors looking for the most lenient regimes in which to locate their intermediaries. Of course, this goes against the idea of harmonisation that the EU was set up to achieve. But it’s fairly representative of the way VAT has traditionally been institutionally organised by the Union. In truth, the EU has a very limited scope of responsibility when it comes to enforcing VAT in the different Member States, and limited ability to act within that.

Varying from country to country, even within the EU, VAT regulations are far from straightforward. The rollout of the 2021 EU VAT e-commerce package across Europe in July, and the amendment of the OSS arrangement is set to have an impact on the import of small goods from outside the EU in particular, especially when bought via an online marketplace. Misunderstandings around post-Brexit import rules is only likely to add to the confusion.

To reduce the regulatory burden and minimise the risk of non-compliance, vendors and importers, both within and outside of the EU, should consider the business benefits of investing in specialised technology that will ensure their sales and import operations are kept up to date with all regional changes, as soon as they occur. Knowledge and automation of tax decisions a necessity in a world where e-commerce is increasingly breaking down borders.

About the Author

Christiaan van der Valk acts as VP Strategy for Sovos Compliance which in early 2018 acquired TrustWeaver, a leading company in the e-invoicing and e-archiving compliance spaces that Christiaan co-founded in 2001. During his 25 years of experience, Christiaan has served on executive and supervisory boards for European and international businesses and organisations.