There’s a significant change happening in the eCommerce world as the EU VAT received a significant update. Red Stag Fulfillment and many of our customers are getting emails about the change. You might also see updates from platforms and partners concerning what’s new.
So, we wanted to take a deeper look at them.
Changes within the European Union’s value-added tax (VAT) will impact all goods entering the EU. This will have an effect on your business and EU customers. VATs apply on every order and still range from 17% to 27%, depending on the EU member state, and that’s outside other duties and fees.
EU VAT rules, requirements, and restrictions are also updated, which may change the way you and your partners can operate. We’ll dive deeper into these changes below.
We hope this blog will help your business start to understand these rules. That way, you may reduce the likelihood that EU-bound exports are held up in customs, returned, or abandoned. The new rules outlined below went into effect on July 1, 2021, so your business will need to adjust and adapt as quickly as possible.
Is your business impacted?
If you’re reading this, the EU VAT changes will likely impact your business. According to the EU, the efforts attempt to modernize cross-border VAT eCommerce, so there are adjustments for eCommerce sellers, marketplaces, eCommerce software providers, carriers, and consumers. We’ll be focusing on the changes for sellers and how you interact with these other partners for your fulfillment.
As you start to understand these changes, figure out how you’ll tell customers. Protect your sales by giving shoppers guidance about when the VAT is paid. Also, explain any extra expenses you or they face.
What are the EU VAT rule changes?
The EU VAT changes focus on two core areas. First, they address intra-EU sales of goods. Second, changes govern businesses exporting goods to consumers and company buyers in the EU. Let’s walk through each.
Are you operating within the EU or have a regional presence for someone to sell on your behalf? If so, there are three import changes to understand with the EU VAT update.
- One-Stop-Shop (OSS) filings. The OSS program allows merchants to file a single VAT return, or OSS filing, that works across multiple EU member states. The core benefit appears to be that the OSS filing does not require individual tax registration for each country. So, you can file and remit VAT for any member state you ship to if you’re exporting goods. That means it can’t cover your home country or an area where you have domestically produced or held goods. Note that you should consult legal counsel during your OSS filing process to ensure EU compliance.
- Ending distance-selling thresholds. The EU is eliminating a program requiring merchants to register for VAT in EU countries as soon as they reach a country-specific threshold. Now, the distance-selling thresholds are being removed. That means, you’re required to charge the VAT rate of the buyer’s country of residence from their first sale. The exception is for a micro-business threshold (see next item).
- New micro-business thresholds. The updated regulations established a new exemption for EU micro-businesses. Now, you can’t have sales greater than €10,000 in each of the last two years. Merchants who qualify can charge the local VAT rate of the EU country where their shipments originate. This applies to all EU countries you ship to, and you’ll continue remitting to their local tax authority.
Changes for exporters
If you’re not in the EU, there’s a pair of significant changes you’ll want to know. These may be relevant for your business if you sell anywhere in the EU, even if you have local partners in some countries. These updates concern the EU VAT threshold and your tax filing.
- Every order shipped to the EU is subject to a VAT. Updated regulations now say EU buyers must pay VAT on all purchases up to €150 when they’re shipped from a country outside of that region. The VAT exemption for orders under €22 is removed entirely.Orders above this threshold will face current import VAT and duties. If you’re shipping goods to EU customers from outside the EU, you can collect VAT on these smaller orders to make purchasing easier for your customers. Collecting the EU VAT will also keep your shipping process more straightforward. If you choose not to collect VAT on orders below €150, carriers charge customers upon delivery of the goods.
- Import One-Stop-Shop (IOSS) filing is available. Merchants collecting VAT on those orders below €150 can use the IOSS program to file a single VAT return for all low-value exports to the EU. You will need to appoint an intermediary when using the IOSS program. The EU notes that some restricted products, such as alcohol and tobacco, cannot be covered by the IOSS.
Where do U.S. companies register?
The OSS and IOSS programs are now available for registration. If you’re in the EU, you should register where you have a physical presence.
For companies outside the EU, the governing bodies recommend that you register in the country where your goods first enter the EU. Apply where your supply chain starts. If your goods enter the EU at multiple points, you can choose among those countries for your registration. Work with supply chain and financial professionals to make the best selection.
Is there good news in the EU VAT changes?
Of course, the EU is trying to spin the changes as a major win for your business and customers. Whether or not that’s true may depend on your position and the VATs charged on your products. There are a few compelling arguments that can be made claiming the EU VAT changes are helpful. Here are some of the most relevant that you may wish to tell customers when they inquire about price changes or new charges:
- Consistency. EU Customers now face a consistent VAT in their purchases. They’ll pay the same rate whether they buy your exported goods or for products produced in their home country. The VAT is based on where goods will be consumed, potentially making you more competitive.
- Simplicity. Your business can now use programs and institute rules on eCommerce platforms that make it easier to understand your business. The EU VAT changes aim to reduce technological burdens and make it easier to predict product expenses, revenues, and total landed costs.
- Clarity. Hopefully, the changes will create a more uniform VAT system that makes expenses and other concerns more transparent. The EU has been discussing ways to make its market competition fairer, and these rules changes provide clarity in how they’re approaching that issue.
Ask payment and sales partners for help
Today’s eCommerce businesses have many partners that the EU VAT changes will directly impact. Not only are their operations impacted, but they may also affect how your business can respond. Start asking these partners what they’re doing and how they can help you.
For your eCommerce store and payment services providers, reach out to understand what they need from you. Ask if they’ll automate VAT calculations or if you need to adjust your setup. Get updated guidance on how to enable different VAT percentages for EU countries. Your service should have guidance published to help, such as this update from Shopify.
Be precise in your questions. Because buyers are paying the VAT on all purchases up to €150, consider asking if your partner has an option that’ll help you smooth the import and delivery processes, especially if you’re a non-EU business.
Take proactive steps to discuss changes with any business that helps you sell. You want to meet new EU regulations as quickly as possible to avoid any issues, whether non-compliance would be “your fault” or the fault of a partner. For example, marketplaces and online sales platforms have new record-keeping requirements and are encouraged to register with the One Stop Shop. That’ll help their business but may need accurate information from you. You’ll be a better business partner by proactively ensuring they’ve got correct, verified information.
Our efforts around EU VAT updates
Most of the work around the EU VAT changes will happen at your point of sale. That’s where you can collect the appropriate tax and generate the correct documentation. To assist you, Red Stag Fulfillment will help with any shipments to the EU by including the documentation you provide. And, we’ll check to ensure the correct labeling of your shipments.
So, we recommend that you test your integrations with platforms like Shopify to ensure that it generates documentation correctly. You can contact your Red Stag expert if you have any questions or concerns with an order. We’ll help where we can, either with processes or identifying when you might need to reach out to a tax consultant for added protection.