The effective date of the E-Commerce VAT Package has been postponed until 1 July 2021. As Germany and the Netherlands are requesting an additional six-month deadline extension, we may not see the new rules operating in practice until 1 January 2022.
While the difficulty of the practical implementation of the new rules by both tax administrations and businesses cannot be underestimated, it is doubtful whether a further postponement is justified. The main objective of the E-commerce VAT Package is to reduce compliance costs for businesses involved in cross-border remote sales of goods and to eliminate the currently existing distortions of competition that benefit non-EU sellers (i.e. the VAT exemption for the importation of the low-value consignments). The European Commission expects that the new VAT rules will reduce compliance costs for businesses selling goods remotely to multiple EU countries by 95% and will raise EUR 7 billion in VAT revenues as VAT will have to be paid over an enormous quantity of goods that were previously untaxed. Thus, the E-commerce VAT Package seems to be a perfect legislative measure for the (post) COVID-19 period – it would provide governments with much needed extra revenue and cash-constrained businesses would benefit from reduction of the compliance costs.
Unfortunately, although the VAT E-commerce Package seeks to close some of the existing loopholes that cause VAT revenue losses on e-commerce transactions, it does not provide any way to tackle illegal VAT evasion in the online trade. This should be achieved by the new reporting obligations for payment service providers. However, as discussed in my previous article, it is doubtful whether they will substantially reduce VAT fraud.
The good news about the postponed implementation of the VAT E-commerce Package is that businesses will have more time to prepare for the upcoming changes. As the benefit of VAT-free imports of low-value goods will be eliminated, many foreign retailers may switch from direct shipments to final consumers to the e-commerce fulfilment model.
Under this model, goods will be imported into the EU under the normal customs procedures. Import VAT must be paid either immediately when the goods are released for free circulation or through a periodic VAT return of the importer in countries where postponed accounting is allowed. A business using third-party fulfilment centers to store its goods in an EU country is required to register for VAT and meet all VAT compliance obligations applicable in the country of the fulfilment center. All sales of goods to final customers in the country of registration must bear local VAT and be reported in the periodic VAT return. Once the VAT E-commerce Package takes effect, there will be no need to register and file VAT returns in countries where the customers reside. Sellers will still be obliged to charge VAT of the customer country; however, this VAT will be reported via a quarterly return to one tax administration under One Stop Shop (OSS) scheme. A disadvantage of the OSS, as compared to local registrations, is that it does not permit businesses to claim an input VAT deduction on expenses incurred in the Member State of the customer. A non-EU business will be allowed to use the OSS to report VAT due on remote sales of goods to private individuals in all EU countries but he will generally appoint a fiscal representative to handle the compliance obligations.
If you want to read more about the impact of the VAT E-commerce Package on non-EU businesses shipping their goods directly to EU consumers and those operating an e-commerce fulfilment model, please take a look at my article What Non-EU Businesses Should Know About the EU’s New VAT E-Commerce Rules (Tax Notes International, vol. 98, no. 3, 20 April 20, 2020).