In 2021, businesses in the United States will face new VAT rules for selling to final consumers in Europe. While the changes are meant to help streamline the filing and collection of Value Added Tax (VAT), they unintentionally make tax calculation more complex.
While these news rules originated in the EU (with similar concepts in the UK, Norway and Switzerland), they are crucial for U.S.-based vendors to understand — especially when it comes to new ways of reporting, including the Import One Stop Shop (IOSS).
Before jumping into the updated regulations, it’s critical to understand why the EU decided to make these changes. Many member countries voiced concern about unfair, albeit legal, VAT practices that made for an unlevel playing field for EU vendors.
For example, some customers have moved to buy cheaper products overseas rather than from their local shops. That’s because currently there is no VAT on imported goods valued under €22. However, those same goods purchased locally would incur that country’s VAT rate.
Called the “low value consignment stock relief,” the threshold was intended to reduce the administrative burden in customs compliance. The unintended consequence was that it gave international sellers a distinct pricing advantage.
The new rules broadly extend a 2015 VAT adjustment for certain sales of digital, telecommunications and broadcast services to include ecommerce goods. Thankfully, the EU decided to push the compliance deadline from Jan. 1, 2021 to July 1, 2021 due to the coronavirus pandemic, but U.S. retailers should be thinking now about how those changes will affect their businesses. They should also be aware that this delay does not include the UK, Norway and Switzerland.
What are the new rules and what do they mean for vendors in the U.S. selling to private individuals in EU countries?
First, the import threshold will change. The current rules for vendors selling imported goods to EU customers say that if the product is €22 or more, import VAT needs to be collected. For products below that value, no VAT is collected.
For example, if a U.S.-based vendor sells a €30 product to a customer in France and a €15 product to a customer in Spain, that seller (or their customer) would need to pay VAT on importation for the product going to France, but not for the product going to Spain.
Under the new rules, the €22 exemption is abolished, and destination country VAT is due through the IOSS. A U.S.-based business without a presence in the EU can choose in which country it would like to register for the IOSS. In the absence of an IOSS registration or in case the imported consignment has an intrinsic value over €150, import VAT is due.
So while products under the threshold will be exempt from import VAT, U.S.-based businesses will need to calculate and report VAT of the destination country on their sales.
Given the requirement to calculate and report destination country VAT, the IOSS certainly makes VAT reporting easier. But due to the new threshold measurement, VAT calculation will be more complicated.
If imported consignments with a maximum intrinsic value of €150 are sold via a marketplace or platform, these will be the deemed seller for VAT purposes. As a result, the VAT liability will shift from the vendor to the marketplace.
Vendors that previously did not exceed the thresholds of €22 may now have to calculate VAT of multiple destination countries under the new rules. Because of this, U.S.-based retailers will need to assess the setup of their sales transactions now in order to prepare for the transition. Businesses will need to rework their enterprise resource planning (ERP) platforms and tax technology to remain compliant.
Peter Boerhof is the VAT Director for Vertex. In his role he provides insight and thought leadership regarding the impact of tax regulations, policy, enforcement and emerging technology trends in global tax. Boerhof has extensive experience in international transactions, business restructuring, tax process optimization and tax automation. Prior to joining Vertex, he was responsible for leading the indirect tax function at AkzoNobel, where he designed and implemented a tax control framework, optimized VAT and managed the transition to a centralized tax operating model for global tax processes. He was also responsible for indirect tax planning and compliance for merger and acquisition, supply chain and ERP projects, as well as the implementation of tax automation initiatives like tax engines and robotics. Boerhof also worked at KPN Royal Dutch Telecom managing VAT, as well as Big Four accounting firms Deloitte and Ernst & Young (EY) advising on VAT compliance and optimization processes.