New EU tax regulations will be in effect on July 1, 2021 when the European Union’s Value-Added Tax eCommerce Package goes into effect. These changes will simplify and streamline the administration of merchants’ tax processes. These changes will affect virtually all business-to-consumer businesses involved in cross-border eCommerce trades (often called “distance sellers”).
EU merchants who exceed a new EU-wide threshold, EUR10,000.00, will have to register in every EU country where they make taxable sales business-to-consumer. They can also choose to register in their country via the newly created One Stop Shop (OSS). This allows eCommerce merchants the ability to file a single VAT report for the entire EU and only one tax payment across all countries in which they sell.
Below are some key changes. We recommend that you consult with a tax professional in order to make sure your business follows regulations and best practices.
Who will be affected?
The EU VAT eCommerce Package affects EU merchants exceeding the EU-wide threshold EUR10,000.00 and non-EU merchants who import goods to EU.
Merchants have two options: they can either use the One Stop Shop (OSS), which allows them to file one VAT return for the entire EU, or they can separately file one for each country in the EU.
The VAT rate varies from one country to the next ( see full list of rates). Merchants will charge the VAT rate for orders within the EU at the buyer’s shipping location. This applies to orders that are shipped from the EU’s fulfillment center to an EU location.
What is changing?
How it works now:
Businesses can avoid VAT registration in countries where they make B2C tax-taxable supplies. As long as these supplies do not exceed the threshold for a given year, the current distance selling scheme will allow them to avoid VAT registration. These sales are treated as though they were made in their own country. Once they have crossed the threshold in a country, they must register, file VAT returns and charge the local tax rate for B2C sales.
Let’s say that a German company sells physical goods in Romania to private customers. The German VAT rate is 19%, and the sales are taxable until the German company reaches the annual threshold of Romanian sales at EUR25,305.00.
After the threshold has been crossed, Romanian sales become taxable. They must register in Romania and charge the standard Romanian VAT rate of 19%.
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After changes are made
The EU-wide threshold of EUR10,000.00 for distance selling will be eliminated on July 1. After it has been crossed, businesses will still need registration in countries where they make taxable B2C supply, but they have the option to do this via the newly created One Stop Shop system in their country.
This will enable eCommerce merchants to file a single VAT returns for the entire EU and remit only one tax payment amongst the countries they supply. This system will act as an extension to the mini-One Stop Shop (MOSS), which is available for digital service providers.
The German physical goods seller selling B2C taxable supplies of German goods to Polish, Czech, and Romanian private customers would not have to register in these three countries. After they have crossed the EU-wide threshold they will be able to register in Germany for OSS, file one return and pay one tax (instead of three). Their domestic German B2C sales must still be reported on the local tax return and a local VAT must be paid.
What happens to sellers who are not within the EU?
The VAT exemption for importation of goods not exceeding EUR22.00 is being removed. All goods imported into the EU will now be subject to VAT. Non-EU sellers will be subject to a zero registration threshold. This means that they must register for their first B2C sale.
The Import one stop shop (IOSS) will be created to simplify VAT compliance for non EU sellers. Merchants who choose to apply VAT at point of sale for consignments less than EUR150.00 will be able to file one return through IOSS. If a company does not register for IOSS, the customer will have to pay VAT when they import goods into the EU. All imports exceeding EUR150.00 are subject to VAT
IOSS can also have an impact on customs clearance. This could allow for faster processing of imported goods. If the VAT was paid at the point-of-sale, some shipping companies allow the seller to indicate the IOSS number in their Commercial Invoice data to the shipping company for customs declaration.
Information for WooCommerce Merchants
Our documentation has more information about how to update your tax settings.
Avalara, a service provider, has solutions for merchants who sell to the EU. Avalara AvaTax cross-Border. International tax solutions allow you to automatically classify products, calculate VAT at checkout and file with authorities. To further automate item classification, look out for an update to the WooCommerce extension.