As of July 1, 2021, the value-added tax (VAT) rules for EU cross-border sales will change in all EU countries. The new reform aims to strengthen the internal European market, harmonize EU cross-border transaction rules and ensure fair competition with non-European traders.
Originally intended to come into effect on January 1, 2021, the European Commission postponed the implementation due to the Covid-19 pandemic to this new date. This article delves deeper into the driving forces behind these changes, the most significant amendments, and what actions businesses can take.
Why the new rules are introduced
The VAT regulations that applying until the end of June 2021 date back to the 1990s since when significant technological developments occurred. According to the current VAT scheme, traders supplying goods to other EU countries are required to charge and pay VAT in the customer's country once their business exceeds a yearly turnover threshold (ranging between 25,000€ to 100,000 €, as decided by each country individually). Different languages, rules, and costumes per country often presented obstacles for smooth cross-border sales. As the EU intends to strengthen internal markets, the European Commission decided to rethink the current VAT regulations.
Beyond that, the new regulations are intended to create an even ground for European and Non-European merchants, as the latter often managed to sell their goods to the EU, bypassing VAT.
In short, the three goals of the new VAT reform are:
- Modernize the current VAT reform
- Simplify the regulations
- Prevent fraud of non-EU traders
Main changes
Detailed information on the changed VAT reform can be found here. The main changes within the new reform that merchants should know about are:
1. Uniformed turnover threshold of 10,000€ within the EU
As of July 1, 2021, online sales of goods will be taxed equally as goods bought in physical stores. The tax rate will be charged in the EU Member State the consumer is based, regardless of the trader's location.
There will be a uniform annual threshold of 10,000€ for companies selling goods and/or services online for the whole of Europe. As online companies are now allowed to treat their online sales similarly to their domestic sales, they only have to deal with domestic VAT rules and their national tax authority. This means businesses don't have to worry about acting according to the invoicing rules of other European countries anymore.
Beyond that, companies selling cross-border with less than 100,000€ yearly cross-border sales currently need two pieces of evidence to identify their customers' location. According to the new regulations, traders need only one piece of evidence; this means more straightforward VAT rules and fewer obligations for traders overall.
2. "One-stop shop" extended to consumer goods
To prevent too many VAT registrations in different countries, the second amendment within the reform extends to the "one-stop-shop" by the Tax and Customs Administration to consumer goods. This change brings the option for one declaration for all transactions throughout Europe, waiving the need to apply for VAT numbers and submit VAT returns in several EU countries.
3. More responsibility for platforms
The third main change places the responsibility for correcting VAT payment on platforms and electronic interfaces where products and services are sold on. To facilitate accuracy, they need to keep records of third-party sales through their platform or webshop for ten years.
If platforms take an ‘active role’ in the process, it is up to them to deliver items to customers. In that case, platforms pay VAT to the country the customer is based in. A platform is defined as active if they do more than just mapping demand and supply, f. ex. enabling orders and payments. This regulation generally applies if goods are worth more than 150€ or are imported into the EU.
4. No VAT exemption for low-value shipments
Currently, goods imported into the EU below the threshold of 22 Euros were exempted from paying VAT. As of July 1, 2021, this threshold will expire, and all goods bought online by EU consumers from sellers outside the EU will be subject to VAT according to European regulations.
Creating a more level playing field for EU and non-EU traders might decrease sales from outside the EU. However, this will mainly be the case for dubious and fraudulent traders. At the same time, it offers opportunities for trustworthy sellers from outside the EU, enabling them more certainty about final prices to their EU customers. With the current regulations, a considerable number of parcels are refused by European consumers upon arrival as they are confronted with additional VAT and clearance fees from postal or courier operators.
What merchants can do now
European merchants have two options for tax return inside the EU:
- Declaring VAT for each European country they sold products or services to.
- Register for the Union scheme to use the new one-stop-shop system by the Tax and Customs administration. (Merchants from the Netherlands can register now. See more information here.)
With more than 20 years of experience in ecommerce we can help you adapt to the ever-changing demands of changed regulations and market trends.
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