If online retailers have sold products to anyone in the European Union (EU) as of July 1, 2021, they’re most likely aware that taxation changes have been made. Non-EU retailers have been given new options for VAT payment in the EU. Online retailers, as well as consumers, will need to know what these changes and new rules are, why these changes have been implemented, and the options for businesses to incorporate them.
What has changed with EU import VAT?
The EU eliminated its €22 tax de minimis, implemented new value-added tax (VAT) regulations, and encouraged online retailers to adjust their methods of importing goods into the EU.
Before July 1, anyone importing goods into the EU valued under €22 was not charged VAT. Now (post-July 1, 2021), all low-value imports (where the total value of goods is less than or equal to €150) are charged a VAT fee applied to the COGS value (cost of goods sold).
Why the change?
There are several reasons why the EU decided to remove the €22 de minimis and distance selling threshold that previously voided the VAT fees for orders under the threshold, including the following:
1. VAT fraud
A massive amount of VAT fraud has been occurring in the EU, averaging around €7B in VAT fraud each year. The new rules aim to make shipments more secure and eliminate processes that allow fraud to occur quickly.
2. Level the playing field
The EU incorporated the VAT scheme in an attempt to level the playing field between domestic and foreign retailers. Online EU retailers previously paid VAT on all orders, regardless of the value of the delivered goods, while retailers from countries outside of the EU could slide under the de minimis, allowing them to offer more competitive pricing. As of July 1, 2021, non-EU retailers must also pay VAT fees on all of their shipments into the EU, helping EU retailers stay competitive.
it’s extremely important to consider what kind of experience retailers want their customers to have
Non-EU online retailers also have the cost of international shipping and the task of finding and paying for an intermediary/fiscal representation. EU retailers do not need an intermediary, and their domestic shipping costs are significantly less expensive than international shipping costs. While the EU initially intended to level the playing field for domestic EU sellers, the changes have given them quite the advantage over non-EU retailers.
An intermediary is a European tax representative, usually an international accounting firm, who acts as an in-country agent for online retailers selling into the EU. After retailers acquire an IOSS number, the monthly remittance of VAT for all EU sales will need to be paid to their intermediary, who will then go on to pay it on the seller’s behalf to the country that they’ve selected for representation.
3. Tax revenue
A more obvious benefit, but a benefit nonetheless, is that the EU’s removal of the de minimis causes an increased tax revenue.
The new VAT scheme is intended to simplify the VAT collection process. IOSS offers a new optional method of VAT collection by pre-collecting the EU import VAT.
Were online retailers and consumers ready?
Despite months of news coverage, many retailers were not prepared for the VAT scheme when it launched and have had difficulty incorporating the new scheme. Some local governments were unprepared to enforce the new rules, and communication has been less than ideal. The EU, retailers, and customers are still experiencing somewhat of a transitional period; however, implementation is getting better. Despite the difficulties of these changes, businesses should never try to cheat the system, engage in illegal shipping conduct, or fail to comply with the new VAT scheme because it will result in penalties.
What does the new EU VAT scheme mean for online retailers and consumers?
With the new VAT scheme, online retailers must decide how they want their EU consumers to receive their packages. While there are several different options to handle VAT collection, this article focuses on IOSS.
The Import-One-Stop-Shop (IOSS) service allows retailers to register in one European country (their choice) and report all European sales in a single VAT return to that country. For example, if a seller registers for an IOSS number in Ireland, they will report and remit taxes for all EU sales there. Ireland would distribute the VAT collected to the countries where the sales occurred.
This simplifies the registration and remittance process because retailers don’t have to register in multiple countries as they did previously with the distance selling thresholds. However, it does require non-EU businesses to appoint and pay for an in-country representative who will go on to disperse their collected VAT and take on liability if the non-EU businesses don’t pay.
When using an IOSS registration number on import documents, retailers must select DTU/DAP to ensure they will not be charged carrier disbursement or advancement fees on their shipments into the EU. Bypassing these fees can save sellers up to $16 (USD) per shipment, which adds up.
It’s also important to note that once sellers register for IOSS, they must stick with it. Sellers cannot pick and choose which orders to collect VAT on and ship with their IOSS number…it’s all or none. All low-value orders imported into the EU must include the online retailer’s IOSS number. However, if sellers decide they need to withdraw from using IOSS, it is possible to deregister, but they will have to cancel their VAT registration. They must also be on good terms with the country of VAT registration (current on VAT payments).
IOSS is only applicable for B2C (business to consumer) shipments where the value of the products is equal to or under €150. Retailers considering IOSS should evaluate how many shipments fall under the threshold. Many carriers have gone on record stating that they support the IOSS program since the VAT will be prepaid, and the online retailer will avoid paying the carrier’s advancements or third-party collection fees. Other carriers have said they will only work with IOSS-registered merchants.
IOSS can potentially have a quicker transit time than DDU (delivered duty unpaid) packages. IOSS also has the capacity to provide the best customer experience. The presence of an IOSS number on a package helps increase the potentiality for a more efficient customs clearance process because it lets customs know that VAT will be remitted later to HMRC (Her Majesty’s Revenue and Customs), which allows the package to move directly out for delivery once it has been cleared.
The IOSS number is required on every shipment. Displaying and collecting VAT at checkout [along with the other fees that make up a landed cost] also provides price transparency, letting customers know the entire landed cost at the time of purchase with no surprise fees upon delivery. This allows for a good customer experience, resulting in great reviews, fewer returns or abandoned packages, and possible repeat customers.
The additional options to manage VAT collection are as follows:
- Special Arrangement – DDU (delivered duty unpaid) carrier collects VAT from customer (⚠️ not recommended)
- Send DDP – (delivery duty paid) landed cost calculated and collected at checkout and paid to the carrier (no IOSS number)
- Zonos’ Landed Cost Guarantee – collects and remits VAT on the retailer’s behalf.
Note that it’s extremely important to consider what kind of experience retailers want their customers to have—displaying and collecting VAT, along with all other fees that comprise the landed cost, at checkout results in a clear, simple, and positive customer experience.