The effects of the EU VAT reform on online retailers and initial experiences

The implementation of the entry into the 2nd phase of the VAT Digital Package, also known as the ‘’VAT E-Commerce Package’’, has meant enactment of sweeping changes to VAT regulations for online trade throughout the entire EU. This reform has extensive effects on all online retailers who sell their products to private customers across borders within the EU.

Since the enactment of the new regulations for distance sales, i.e., cross-border sales to private individuals within the EU, give rise to a tax obligation in other EU member states – even if the turnover is low. Previously, exceptions were made for these transactions up to a national distance selling threshold, which could be individually determined by each EU country, and within a certain framework.

The reform, however, established a common threshold for all EU member states of a total of €10,000 (net).

This means: as soon as a retailer exceeds the new distance selling threshold, a tax must be levied in the EU member state of destination as of the first package delivered. This relatively low threshold for the entire EU means that most online retailers will have tax obligations in many EU member states.

To streamline the reporting process for online retailers, the One-Stop-Shop (OSS) was created. For cross-border sales to private individuals in the EU, a centralized reporting process has thus been enabled.

Businesses can register at the relevant tax office in their own country and submit a unified report for all remote sales subject to tax in other EU countries outside of their resident country. Moreover, payment of the VAT is also handled at this single contact point. In Germany, for example, the Federal Tax Office is responsible for this.

The introduction of the OSS scheme means that online retailers do not have to register for VAT purposes in each individual EU country.

For distance sales to the EU from a third non-EU country, new regulations and new reporting options were also created in the form of IOSS (Import One-Stop-Shop).

That was the idea behind the reform. And for some online retailers, that will be the case. For example, let’s consider the case of a retailer who, due to the pandemic, now sells their products through their own web shop and delivers them centrally from a single country to other EU countries.

This retailer can report their turnover in the future using the OSS scheme, enabling them to meet their tax obligations in other EU countries with significantly lower time investment and costs than before the reform. Since using the One-Stop-Shop procedure, it is no longer necessary to register in the individual EU-member states.

For retailers who do not send their products centrally from a single country – and this applies to most online retailers – it has become significantly more complex to process VAT after the enactment of the reform on 01.07.2021.

Today, this simple delivery structure is no longer the standard in e-commerce. Nowadays, many online retailers rely on existing international fulfilment structures of large-scale marketplaces such as Amazon.

This enables them to benefit by dispensing with time-intensive activities such as packaging and shipping of products, billing, customer service and even handling of returns.

In addition, they can rely on the extensive storage infrastructure that these marketplaces have in place. This guarantees fast delivery, because today’s consumers are used to having products always available.

It is precisely this market-driven demand for storing products abroad that was not taken into consideration in the recent VAT reform.

To prevent VAT charges for transferring products to a foreign warehouse, retailers will need a VAT ID number that is valid abroad at the time of this transfer. Storing products abroad results in a direct obligation for online retailers to register for VAT in other EU countries. Registration for the OSS scheme does not help in this respect, since only cross-border B2C sales can be declared using the One-Stop Shop.

Besides the (useful) registration for the OSS scheme for cross-border sales in all EU countries, online retailers must now take the additional step of keeping track of the countries in which their products are stored, and thus VAT registration is still required.

The VAT regulations for warehouse usage in other EU countries have not been modified by the reform. Nevertheless, online retailers are now required to separate these two methods for compliance cleanly – namely, the OSS scheme and the local VAT returns – and to declare transactions using the correct procedure.

Occasionally, this can get very complex, and so an automatic procedure must be implemented for this purpose. Software solutions can be used to assign turnover to the respective compliance method based on the transaction data.

Regardless of whether the OSS scheme is being used, the lowering of the distance selling threshold to €10,000 introduces obstacles that previously only affected businesses registered in other EU countries.

All online retailers must deal with tax obligations much earlier in other EU countries, hence they must also deal with local regulations on tax rates.

Since EU countries have extremely diverse regulations on tax rates, this is not always easy. The different standard tax rates can still be determined relatively easily, since support is also available. For example, on the online portal of the Federal Tax Office through which the OSS declaration is submitted.

 For certain products, however, countries can set reduced tax rates, and some countries even allow for several reduced tax rates. Hence, online retailers must check on an individual basis for each product whether a reduced tax rate applies in a specific EU member State.

Misconception #1. The OSS scheme is obligatory: often, online retailers assume that submitting an OSS declaration is mandatory. That is not the case, however. Registering for the OSS is optional, and online retailers can instead opt to continue to report their distance sales through local VAT returns.

Misconception #2. Manual submission in Q3/2021: One unique feature of this important tax reform is that the tax authority must establish the technical prerequisites for registration and submission of declarations within the framework of the new tax procedure.

Unfortunately, from a technological standpoint, the OSS scheme is not yet fully developed. The first declaration (Q3/2021) cannot be submitted automatically in Germany by uploading the data: it must be submitted in a time-consuming manual process.

In addition, the first technical bugs have already appeared in the Federal Tax Office, and they interfere with the successful submission of the report.

Misconception #3. Returns: In principle, returns can also be reported via the OSS scheme. One of the questions that has not yet been clarified is whether this also applies to returns of products sent before 1 July 2021. In this case, the original VAT reporting was carried out in a local VAT return.

If returns of purchases made in an earlier period would continue to need to be reported in a local VAT return, it would mean that for online retailers, in the event of doubt, their local VAT registration would have to be maintained for an extended period. In our view, this procedure is inconsistent with the purpose of the reform, which was to simplify reporting through the OSS scheme.

Firstly, consider the advantages of the reform and apply them to your business. Using the OSS and when relevant also the IOSS scheme is beneficial for many online retailers, and, after an initial investment of time, it will lead to saving time and money over the long term.

It is crucial to consider the current delivery and storage structures in light of the effects of the reform and to establish a process for future tax settlement. Further details and tips are available at: OSS knowledge pool from Taxdoo.

If they have not yet done so, online retailers should look into the usefulness of OSS and IOSS schemes, and if they prove beneficial, register for them. In this respect, keep in mind that you must always register before the beginning of a new taxable period. For the OSS procedure, the taxable period is one quarter; for the IOSS procedure, one month.

If a warehouse is used in another EU country, then an automatic solution must be put in place to ensure a process is implemented for the separation of the respective transactions and their accurate reporting. This is necessary for declaration via either the OSS scheme or via local VAT returns in other EU member states.

If the retailer plans to use a warehouse in another EU country, it is absolutely necessary that a valid VAT identification number be assigned to the retailer by the EU member state in which the warehouse is located before the first movement of goods to the storage facility.

Online retailers who carry out transactions through marketplaces must become familiar with the new regulations for sales via electronic interfaces. These regulations must be considered in more detail, especially if products are imported from a third country, or if an online retailer is located outside the EU, but sells products within the EU.