On 1 July 2021, new European Union tax rules will come into force when the e-commerce Value Added Tax (VAT) package takes effect. The changes are a significant overhaul of the current tax rules, designed to simplify processes and administration for merchants.
They will affect virtually every B2C (business-to-consumer) company involved in cross-border e-commerce (often referred to as 'distance selling') from the EU.
EU traders above the new EU-wide threshold of €10,000 will have to register in all EU countries where they make taxable business-to-consumer sales. However, they can opt to register via the newly created system One Stop Shop (OSS) in their own country. This allows eCommerce sellers to file a single VAT return for the entire EU and make only one tax payment spread across all countries in which they sell.
Who will be affected by the changes?
The EU VAT eCommerce package affects EU traders above the €10,000 threshold and non-EU traders importing goods into the EU. Traders can use the One Stop Shop (OSS) system to submit a single VAT return for the whole EU or separately for each EU country to which they send goods.
VAT rates vary by country, from 17% in Luxembourg to 27% in Hungary, so merchants will want to charge the VAT rate of the buyer's shipping country for orders within the EU. This also applies to orders shipped from an EU fulfillment centre to an EU location.
What is changing?
How it works now:
The current distance selling regime allows businesses to avoid registering for VAT in the country where they make taxable B2C supplies, as long as the total amount of those supplies does not exceed the distance selling threshold for the year. Businesses apply the local tax rate to these sales as if the goods sold had never left their country. Once the threshold is exceeded in a given country, they must register, submit VAT returns and charge the local tax rate from their country of registration for B2C sales.
Consider a domestic company that sells physical goods to private customers in Germany. Until the Polish company reaches the annual German sales threshold of EUR 100,000, its sales are taxed in Poland, with the standard Polish VAT rate 23%.
Once this threshold is exceeded, sales in Germany are taxable in Germany, where you must register and charge the standard VAT rate of 19%.
How it will work once the changes come into force:
On 1 July, country-specific distance selling thresholds will be abolished and a new EU-wide threshold of €10,000 will be introduced. Once this is exceeded, businesses will still need to register in the countries where they make taxable B2C supplies, but they will be able to opt to register through a newly created system One Stop Shop in their country.
This will allow ecommerce sellers to submit a single VAT return for the whole of the EU and remit only one tax payment spread across the countries in which they supply. In a sense, this system will be an extension of the current Mini One Stop Shop (MOSS) system available to digital service providers.
Thus, a Polish seller of physical goods making taxable B2C supplies to German, Italian or Czech private customers will not have to register in these three countries. Once he crosses the EU-wide threshold, he will register in Poland under the OSS, file one return and make one tax payment (instead of three). However, domestic B2C sales in Poland will still need to be shown on the local tax return and local VAT will need to be paid.
What about non-EU sellers?
The VAT exemption for imports of goods of a value not exceeding EUR 22 will be abolished. As a result, all goods imported into the EU will be subject to VAT. Non-EU sellers will have a zero registration threshold, meaning that they must register on their first B2C sale.
To simplify VAT compliance for non-EU traders, the Import One Stop Shop (IOSS) system will be set up. IOSS will allow a one-off declaration for traders who choose to apply VAT at the point of sale for consignments under €150. If a business chooses not to register with IOSS, VAT will be paid by the customer when the goods are imported into the EU. Shipments over €150 will be subject to VAT at the point of import.
IOSS will also have an impact on customs clearance, with the possibility of faster processing of imported goods. For some shipping suppliers, if VAT has been charged at the point of sale, the seller can indicate the IOSS number on the shipping supplier's commercial invoice for customs declaration.
There are further changes ahead, which will affect those of you who sell your goods in webshops to other EU countries. Before implementing changes on your websites and in the configuration of your tax management plug-ins, I suggest that you seek advice from an advisor specialising in taxation. This will give you peace of mind that the changes you are implementing will comply with the new regulations.
WooCommerce has the possibility of linking it with e.g. the system Avalarawhich automatically classifies items, calculates VAT taxes and even submits documents to the authorities. It is worth looking into if you are interested in automation processes.
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