The EU’s new VAT regime will create rules fit for the digital age and benefit businesses and consumers, writes Gerassimos Thomas.
Gerassimos Thomas is the director-general of the European Commission’s Directorate-General for Taxation and Customs Union.
The online shopping sector has transformed retail across the world in recent years, and its all-pervasiveness in modern life shows no sign of abating. Even after years of relentless growth, the pandemic has accelerated the boom, further accentuating the urgent need for reforms that respond to this fast-paced change.
The sector’s ubiquity gives rise to an important question in relation to taxation. How should online transactions be treated in terms of sales taxes, when consumers and sellers are no longer in the same country or even continent?
The current EU VAT rules were last updated in 1993 – long before the digital age – and are sorely ill-suited to the needs of businesses, consumers and administrations in an era of cross-border internet shopping.
Well before the pandemic came on the horizon, the European Commission started work to re-adjust EU Value Added Tax (VAT) rules in response to the e-commerce surge. These new rules will come into force on 1 July this year.
In reforming EU VAT rules for e-commerce, we sought to tackle head-on the most glaring problems. Small businesses should not be hampered in selling to consumers in different EU countries, just because of the complexity of the VAT rules.
Non-EU companies should not have an unfair advantage over EU businesses, simply due to VAT exemptions given to small consignments entering our Union. Buyers should not be expected to pay unexpected tax bills when their goods arrive.
We therefore set about creating a new VAT rulebook for e-commerce one to foster growth and innovation in online businesses, while ensuring that the right amount of VAT is paid in the right place.
We put a strong focus on cutting compliance costs for small online businesses so that they can thrive in our Digital Single Market. And we worked on improving price transparency for EU consumers, for fairer competition.
The new rules will help SMEs to overcome complexity, by introducing a new €10,000 VAT threshold. Below this threshold, VAT can be paid to the member state where the seller, rather than the consumer, is located. This will offer entrepreneurs and occasional sellers a chance to operate online, without having to worry about extra red tape.
For sales above this threshold, the new ‘One Stop Shop’ (OSS) was opened for registration in April this year. This is a digital portal where online companies selling to other EU countries can register, declare and pay the VAT they owe for all their EU sales in one place and in their own language.
This OSS system has already been tried and tested for sellers of e-services such as apps, music, and games, with great success. We are now extending its benefits to any company that sells goods online in the EU too.
A similar portal called the Import One Stop Shop (IOSS) is available to non-EU companies that want to sell into the EU. They will be able to register in a single EU member state for all of their EU sales, thereby easing their access to the EU market and simplifying the required administration.
At the same time, the current VAT exemption for packages valued at less than €22, entering the EU from outside, will be abolished.
This will block unscrupulous sellers from fraudulently declaring high-cost goods at prices below this threshold to evade VAT. It will create a much fairer environment for EU companies, who were often undercut by their non-EU competitors due to the exemption.
An important change in the new rules is that online marketplaces will now be responsible for ensuring that the VAT is paid when a non-EU business sells to an EU consumer, via their interface. This better reflects the way online sales are made today, and makes our system fairer and more robust against evasion.
Already, major global market players such as Amazon, eBay, and Rakuten have signed up to the IOSS, meaning more transparency and less hidden costs for consumers when they buy from those websites. Once the new rules kick in, the price advertised for goods sold on these platforms should be the final price paid by the buyer, including taxes.
All of these changes in our VAT rules will ensure that, at a time when every penny counts in public budgets, our member states are better protected against losses in their VAT revenues.
The new rules will also contribute to a new ecosystem in which e-commerce businesses can flourish thanks to reduced administration and a more level playing field.
To reap these benefits, each and every company that sells goods online to EU consumers should get ready for the upcoming changes by registering for the One Stop Shop via its dedicated website.
The new EU VAT rules are part of a wave of forward-looking change – a move to equip ourselves for a sustainable digital future. It is up to all of us to make sure they work – for the competitiveness of EU business, for the sustainability of our public budgets, and for a more vibrant online marketplace for all EU consumers.