By: Anna Higgins, Strategy Programme Director EMEA, Sovos
On 1 July 2021, the EU introduced its e-commerce VAT package. Businesses are now adjusting to the notable differences regarding how VAT can be reported on sales to consumers in the EU. These changes span a number of different areas with key objectives including the simplification of VAT compliance requirements for businesses selling B2C, as well reducing the EU VAT gap associated with e-commerce. Whilst the legislation is complex, core components involve replacing existing distance-selling rules and extending the Mini One Stop Shop (MOSS – the mechanism in place already) into a wider-ranging One Stop Shop (OSS). At the time of writing, the MOSS has already transitioned into OSS and three separate schemes: Union OSS, non-Union OSS and Import OSS (IOSS).
Why has the original format been changed so drastically? The previous MOSS scheme only applied to telecommunications, broadcasting and electronically supplied services (TBES). Now however, the OSS schemes cover all types of cross-border services and goods to final consumers in the EU. They have been put in place to allow businesses to be able to account for VAT in multiple Member States in a simplified way. This will ensure that VAT is being accurately accrued from e-commerce transactions and is critical as consumers continue to increase shopping in a digital environment and brands scramble to keep up with supply and demand.
Under previous distance selling VAT thresholds, the compliance burden for retailers selling B2C within the EU was incredibly time intensive not to mention expensive for those who breached multiple thresholds. Under Union OSS, the need to register in each Member State is removed and retailers can submit VAT reporting and payment relating to all countries via one single registration and consolidated periodic filing. E-commerce companies need to be aware that thresholds have now been significantly reduced to a pan-EU annual threshold of €10k for EU businesses; there is no threshold at all for non-EU businesses. This means many more will need to consider VAT compliance obligations outside of their home territory, albeit via a simplified method.
From an import perspective, low value consignment relief was removed on imported goods so that EU and non-EU retailers compete equally. IOSS offers a great opportunity for these retailers to readily clear goods into the EU, ease the customer experience and benefit from the same simplified reporting as Union OSS.
Businesses must use this legal milestone to review and update current processes to see whether they are fit for purpose, a measure that is especially important for non-EU businesses that might not be so well-acquainted with EU procedures.
How it works
In addition to simplified reporting for retailers, the new rules pass liability to marketplaces to account for the VAT due on certain transactions. This occurs in scenarios where goods with an intrinsic value of up to €150 are being shipped from outside of the EU to EU consumers and also for sales of goods of any value that are in the EU at the time of sales by a non-EU seller.
For imported goods, the marketplace can benefit from the use of IOSS for reporting purposes. Large corporations such as the likes of Amazon and other large marketplaces will likely already have the mechanism in place to account for VAT although for those marketplaces choosing to use IOSS, accounting for VAT accurately has been challenging during early adoption and double taxation has occurred where goods have been cleared via IOSS and again via logistics providers.
Where the goods are shipped from within the EU, the marketplace has liability if the sale is being made by a non-EU seller. However, the seller will need to consider their VAT position in the EU as standard VAT registrations will be required. Where goods are shipped from within the EU by an EU seller, the seller is liable for the VAT compliance but can utilise Union OSS for intra-EU sales but not for any local sales. This streamlines a previously tricky process by reducing time-intensive admin for up to 27 Member States into one consolidated return. It does still require expert guidance in most cases – the main hurdle is ensuring correct filing and submissions of OSS returns, otherwise businesses may be interrupted or excluded from the scheme altogether.
When the marketplace has the liability to account for the VAT, there is no requirement for the seller to account for any VAT. If it does, there will be double accounting of VAT which will impact the margin achieved on the sale. Therefore, it is essential that the business identifies those sales where the marketplace will be accounting for the VAT. Where a non-EU seller only makes sales of imported goods where the marketplace has the liability to account for the VAT, it will not have to register for VAT in the EU. However, if it sells goods with an intrinsic value above €150, it will need to consider how the import VAT should be accounted for on these goods as the marketplace does not have the liability.
Ironing out the creases
Though it simplifies the process in the long term, the initial set up of OSS can also present challenges for both SMEs and tax authorities, as well as confusion amongst shippers.
For instance, there were initial teething problems with the adoption of IOSS within the Netherlands. This was because certain Dutch computer systems weren’t ready for the adoption, which slowed down the import process. This caused whole systems to go down, whereby a temporary fix had to be implemented for businesses to avoid paying VAT at the point of import. Now resolved, this stall in activity caused a short-term halt in trade; an example of just one unforeseen issue within a scheme that was new to all parties involved.
The issuance of standard VAT numbers and Union OSS numbers is another consideration for businesses. To use the Union OSS scheme, retailers must first acquire a standard VAT registration in the Member State of Identification and continued delays in the processing of standard VAT registrations – partly due to COVID – has caused complications for those wishing to quickly benefit from the new schemes. There was a period where in the Czech Republic, tax authorities were not accepting imports directly into the country under IOSS and confusion amongst logistics firms has caused double taxation issues where the IOSS number should have been used to clear goods, but the shipper did not follow the same procedure. Teething problems are to be expected with any new scheme although its non-compulsory nature may be contributing to some parties falling back on ‘old’ rules to comply. With time, the benefits of OSS will outweigh the initial set-up issues.
Following the roll-out of OSS and the initial set-up issues, the scheme does simplify EU VAT compliance – however, this should not be taken lightly. Firms still have liabilities and VAT rates in up to 27 Member States to understand, albeit only one form to report them through. Record-keeping, once properly set up, will be manageable, but retailers must work to understand the required fields and potential audit process.
Businesses using any of the OSS reporting schemes must retain more detailed records of transactions than before. This is so that companies are prepared for when additional data may be requested by tax authorities and used in audits to check VAT has been applied appropriately. Therefore, businesses often require a qualified team of experts on hand to guide teams through the set-up process.
If a business decides to use the Union or non-Union OSS simplifications, then it must apply it to all qualifying transactions – IOSS is different in that it can be used on a consignment by consignment basis. Declarations for Union and non-Union OSS are quarterly, and the submission deadline will change to the last day of the month following the return period. Comparatively, declarations under IOSS are monthly.
A final, and significant point to consider, is that most non-EU businesses utilising IOSS must appoint an intermediary to submit returns on their behalf. This includes those businesses located within the UK.
Reduced reporting across the board will free up time for businesses to focus on other impactful activity, so the benefits of the new system are clear. They just may take some time to come to fruition.
Penalties: paying the price
By not understanding the new requirements, businesses may trip and face weighty penalties. Failure to submit returns and make payments or notify the relevant tax authority of a significant change in supply chains (such as a warehouse) on time can result in fines that can make or break a business. These can be imposed in each Member State where VAT is due or even expulsion from the scheme.
So, the penalisation of a single late return in multiple countries creates significant exposure to penalties. On top of this, repeated noncompliance offences can lead to exclusion from the OSS schemes altogether. Once excluded, the taxpayer will then need to register for VAT in each Member State where it has a VAT liability.
If expelled from the scheme entirely, the two-year exclusion period could have significant commercial consequences as compliance costs are likely to increase and new VAT numbers will be required urgently. So, sellers and retailers need to bear this in mind and consider the long-term impacts of incorrect OSS management and whether they’re ready to take the plunge.
Simplifying the process
Though the use of the schemes needs careful consideration given the consequences for noncompliance, the future benefits of streamlining and reducing human error are worth the time investment. It is crucial businesses are properly onboarded to the schemes – exclusion may require businesses to completely change their commercial arrangements with customers. This in turn may have a significant impact on sales or increase compliance costs.
There’s no denying that implementing the changes required to comply with the EU e-commerce VAT package into ERP systems require thought, but the benefit of reduced reporting will be attractive to many retailers.
With that in mind, the best way for retailers to manage the process is to work with third party experts, leaving many of the practicalities and deep understanding of the rules to trusted advisors. This will ensure compliance and save a great deal of time, which is especially important for smaller businesses where staff are required to take on multiple responsibilities. Instead, teams can recalibrate and focus on other important tasks at hand such as strategy planning, business growth and pandemic recovery.