The new EU VAT rules, which are scheduled to go into effect on July 1, 2021, will update the regulations governing online sales to European Union consumers (B2C). Many online retailers who rely on drop shipping are worried about the effects of the European Union’s new VAT rules.
Is it necessary to go into emergency mode? What effect will these alterations have on dropshipping, if any? What are the financial ramifications, if any? Will there be a rise in prices for online retailers?
Concerning the new EU VAT policy, many questions have arisen, but few have been answered. In this article, we’ll break down the new VAT rules that affect your online store if you sell to customers in the European Union.
What are we waiting for?
What Is EU VAT?
To begin with the definition, VAT is the abbreviation for Value-Added Tax, also known as the “consumption tax.” All EU countries have implemented some form of value-added tax. But what exactly does “value-added” entail?
When there is an increase in value at the point of sale (POS) in the European Union, the seller must collect sales tax. You still don’t get it, do you? Let’s look at an illustration.
Image the final product is a printed T-shirt made from 100% cotton that is sold throughout the EU.
The cotton is sold to a T-shirt manufacturer in the EU for 50 cents plus 10% VAT (5 cents). Consequently, the cost to the T-shirt manufacturer amounts to 55 cents. The cotton farmer keeps 50 cents and gives the government 5 cents.
The manufacturer then makes the generic T-shirt and sells it to the branded store for 1 euro plus 10 cents in VAT, for a total of EUR1.10. The government receives 5 cents and the manufacturer keeps 5 cents, for a total of EUR1.5.
The T-shirt costs EUR3.30 (three Euros plus VAT of 30 cents) and is sold to the final consumer by the brand store, which prints a design on it. The government receives 20 cents and the brand store keeps EUR3.10.
Two claims can be drawn from this instance:
All sales tax money goes straight into the government’s coffers;
The VAT is paid by the final consumer;
What Are the Current EU VAT Rules?
Due to the many gaps in the current EU VAT Rules, non-EU dropshippers now have an advantage over their EU counterparts.
Imports with a value of less than 22 euros are not subject to value added tax. Because EU vendors must collect VAT, this exemption gives non-EU vendors a competitive edge.
The VAT registration number then becomes a problem for dropshippers who are selling to multiple EU countries. If you want to sell to customers in the European Union (EU), you’ll need to get a local VAT number in each EU member state.
In addition, the threshold for VAT registration for long-distance sales of goods or services varies among EU member states. This limit is currently 100.000 EUR for dropshipping in Germany, Luxembourg, and the Netherlands, and 35.000 EUR for the remaining 24 states.
As a dropshipper, up to these thresholds, you can continue to apply your domestic (local) VAT rate without registering for a VAT number in the customer country.
Let’s see if anything alters on July 1st.
What Will Change with the New EU VAT Rules from July 1, 2021?
Changes to EU VAT are expected to take effect on July 1, 2021, and are outlined below.
We will no longer be able to apply the VAT exemption for purchases under EUR22. Beginning in July, VAT will be charged on all sales to EU customers.
VAT only applies to import transactions up to 150 Euros. If the price is more than 150 euros, customs and VAT will be applied.
The new OSS (one-stop-shop) scheme in the European Union enables vendors to only have to register with and pay VAT to a single EU member state. Once the OSS is submitted, the system will automatically divide up the VAT payments by country of residence for each customer.
To pay their VAT, sellers from outside the EU can use the IOSS declaration. They only need to apply for a VAT number and submit their IOSS once before they can do business in any EU country. The IOSS will also divide up its VAT according to the country of the customer, just like the OSS does.
A new, uniform threshold across the EU of 10,000 Euros will replace the existing distance selling thresholds. At or below this threshold, vendors can continue to be VAT subject in the EU member state where their business is based, and charge at the local VAT rate. Once they reach this threshold, they must begin charging their customers the VAT rate in their country.
It used to be that import VAT was ignored by buyers or deemed too insignificant to bother with. Now, VAT must be paid at the register (POS).
Finally, marketplaces hosting sellers are responsible for collecting VAT on their behalf. They’ll be labeled as a “deemed supplier” instead.
What Is OSS/IOSS?
A new VAT scheme known as One-Stop-Shop (OSS) will be front and center in the revised EU VAT rules beginning on July 1, 2021.
Because of OSS, EU vendors need only register in a single state and submit a single report for all EU consumers. VAT is then allocated automatically based on the country of the customer.
IOSS, or Import One Stop Shop, is a registry open to non-EU dropshipping businesses that sell to multiple EU countries. They are free to register for IOSS in any EU member state, and once they do so, they will be entitled to the same advantages as EU companies.
Both the Original One-Stop Shop and the Integrated One-Stop-Shop are developed from the Mini One-Stop-Shop (MOSS) that was released in 2015. The MOSS system streamlines the process of collecting value-added tax on TBE services sold within the European Union (telecommunications, broadcasting, electronic).
Why Did the EU VAT Rules Change?
The European Commission argued that modifying EU VAT regulations would reduce bureaucracy and improve the enabling environment for business-to-consumer (B2C) cross-border e-commerce.
Any EU company that makes cross-border sales within the EU can benefit from the OSS model because it streamlines the process of charging and reporting VAT. It’s the same for dropshippers operating outside the EU; they just have to pick one EU country to register with and file their IOSS in.
With no more tax breaks for low-priced imports, public coffers across the EU can expect to see a significant boost. Dropshippers based in the European Union (EU) will no longer face a competitive disadvantage when compared to their counterparts based in other countries.
The European Commission believes the new EU VAT rules will eliminate VAT fraud, which had been left undefined previously.
Finally, the new EU VAT regulations will make life easier for consumers shopping online. Under the new regulations, the consumer’s location is used to calculate the VAT rather than the seller’s.
Who Will Be Most Affected by the Changed EU VAT Rules?
These new EU VAT rules will undoubtedly have repercussions for all parties involved in the production of a product.
It will be necessary for everyone involved in the supply chain, from dropshippers and online merchants to marketplaces, couriers, and, of course, consumers, to adapt to the new rules.
It is important for wholesalers and dropshippers to think about how these changes will affect their bottom line. To offset the added cost of VAT, you, as a drop shipper, will need to raise your product’s starting price in a way that still allows you to compete.
You must begin collecting VAT at the point of sale if you run your own online store (dropshipping with Shopify, WooCommerce, etc.). Your cash register also serves as the entry point for customer payments.
Get in touch with a marketplace’s representative to learn how they treat value-added tax (VAT) if you plan to sell through their platform. Virtual marketplaces will be “deemed suppliers” that must handle VAT on your behalf.
What Are the Major Impacts of the Changed EU VAT Rules on Dropshipping and eCommerce?
These new EU VAT regulations will have an effect on dropshippers both inside and outside the EU. You can expect these major effects (both positive and negative) to have on your company:
You can skip getting a VAT number from every country where you have customers. Just signing up for OSS/IOSS in any EU country will do;
Since the VAT exemption for purchases up to €22 is being eliminated, non-EU businesses will now charge VAT on all transactions; operating costs for EU and non-EU businesses will be equalized, leveling the playing field for EU online retailers.
As “deemed suppliers,” online marketplaces and platforms will be responsible for collecting VAT on behalf of sellers.
Do Dropshippers Pay VAT?
Any dropshipper with EU operations or EU customers must collect and remit VAT.
Beginning in July, businesses with an established EU dropshipping business who sell across multiple EU countries will be able to register for OSS and submit a single tax report covering all of their EU customers. VAT will be allocated automatically on a country-by-country basis.
If you’re a dropshipper based outside of the EU who plans to sell within the EU, you’ll need to pick a country to register in and obtain a tax number (Ireland has a user-friendly English website for this purpose). The next step is to submit your import one-stop-shop (IOSS) and allow the system to allocate VAT based on the location of your customers.
Do I Need to Charge VAT When Dropshipping?
Dropshippers must charge VAT if they are based in the EU or shipping to EU customers from outside the EU.
How Can I Get OSS?
OSS is a web-based program that operates in the background. Each member state of the European Union (EU) has its own OSS/IOSS registration portal. You can sign up for OSS and become subject to VAT in any EU member state where your company is located.
If you’re a dropshipper based outside the EU who wants to sell to customers inside the EU, you’ll need to pick a single EU member state in which to register for IOSS and obtain a tax ID number. Afterward, you will only need to submit your non-Union IOSS once, and the system will automatically divide the VAT among the various countries that are the end users.
The Irish website for IOSS is the best place for English speakers to sign up because it is written entirely in the language. Obtaining a VAT number requires at least some local sales activity in the member state.
The need for a financial registry may be prompted by the action of registering for OSS or IOSS. You should consult your accountant or a tax expert to make sure you’re in accordance with all applicable local, state, and federal regulations, as well as EU-wide requirements.
In What EU Country To Register for OSS?
Your company can sign up for OSS in any EU member state in which it has a physical presence. If you are an online store based outside of the EU, you need only register with IOSS in a single EU country.
You must maintain your VAT subject registration in the EU country where your warehouse is located even after these modifications take effect if you have stock there.
Should I Register for IOSS as a Non-EU Seller with EU Customers?
Yes! It’s wise to play it safe with the law at all times. As previously stated, beginning on July 1, 2021, VAT will be required for all sales to EU consumers.
As a result, we urge all dropshippers selling within the European Union to sign up for IOSS in any EU country and begin collecting VAT immediately. This eliminates the need for separate registration processes in each country where customers are located.
*Warning – if you are a dropshipper based outside of the EU who stores inventory in any EU country, you will still be required to register as a VAT subject in that country after these changes go into effect.
Through the IOSS scheme, administrative burdens can be lessened. However, this will necessitate a rise in your selling prices. Changing your prices can be a bit of a minefield, so tread carefully when you’re dealing with different product types.
Think about the money you’ll lose if you don’t collect VAT at the register. Imagine some clever advertising campaigns, or maybe you import goods that have a higher profit margin.
Which Transactions Do the New EU VAT Rules Apply To?
From what we can tell, the following business-to-consumer (B2C) transactions will be subject to the new EU VAT rules beginning in July 2021.1
The selling of products or services across international borders (at a distance) within the European Union (from companies based in the EU who are either suppliers or deemed suppliers);
In-country sales to a single EU member state by a company with EU headquarters in that member state;
Product or service sales made from outside the European Union (EU) to EU member states via the Internet (a “third country”);
Are the New EU VAT Regulations a Good or a Bad Thing?
These new EU VAT rules are an attempt to modernize and simplify VAT across Europe, even if non-EU dropshippers may feel more restricted and suffer some financial loss as a result.
One of the most noteworthy changes is the creation of a One-Stop-Shop (OSS) scheme, which will allow companies to apply for a single VAT number and report VAT in a single EU country.
Those in favor of the new VAT rules argue that it will be better for the public budget of EU countries if VAT exemptions are eliminated. Further, the European Commission hopes this measure will curb VAT fraud. The future course of events is unknown at this point.
Can a Dropshipping Agent Help Me Comply with the New EU VAT Rules?
Yes. A comprehensive dropshipping agent can provide guidance on how to meet the requirements of the new EU VAT rules.
Is OSS/IOSS Registration Obligatory?
Use of the new OSS and IOSS schemes is recommended but not required.
A customer will have to pay the customs or courier agent to get their package if you don’t sign up for OSS and start charging VAT at the POS. Your company stands to gain nothing from this scenario.
If your business has had annual revenues of less than EUR10,000 in either of the two most recent fiscal years, you probably shouldn’t sign up for OSS. In such a case, you may remain subject to the jurisdiction of your national VAT authorities.
How Long Should I Keep VAT Records?
As per regulations set forth by the European Union, businesses must keep records of all VAT-related transactions and paperwork for a period of ten years. They are unnecessary in almost all situations. You must keep them on hand, however, in the event that authorities request to review them.
How to Keep Customers with the New EU VAT Rules?
To keep your clientele around, we suggest being forthright and honest about all fees, including VAT.
You can make your website more relevant to its visitors by recognizing their location data from cookies. By doing so, you’ll be able to apply the local VAT rate at the point of sale.
New EU VAT regulations are a net positive. However, the supply chain for a product is often lengthy and involved. Therefore, the question still stands: are we ready for this change? Is there a chance it could be equitable for everyone?
The new EU VAT rules will go into effect in a matter of months, so it’s time to review your supply chain and make necessary adjustments to your eCommerce business model.
In case you still require assistance. As a team, we are available whenever you need us. Don’t worry, we’ve got your back through all these transitions.