By Anna Higgins, Strategy Program Director, Sovos
Last year, the European Union (EU) introduced new legislation designed to transform VAT compliance for both tax authorities and e-commerce businesses alike. Although the new statute is complex, it was designed to ease the burden on businesses trading with and within the EU and reduce their administrative costs dealing with VAT compliance. The changes have also enabled member states across the EU to increase the amount of VAT being collected on imported goods.
For e-commerce businesses, the extension of the One Stop Shop (OSS) represented a significant change to their reporting process. New rules mean that businesses were no longer required to maintain multiple VAT registrations for intra-sales of B2C goods. With Union OSS, businesses now only need to register in one member state for transactions that fall within the scope of the scheme. Payments are then collected and distributed to the tax authority where the VAT is due. However, it’s not quite as simple as it sounds.
As of July last year, every good brought into the EU, regardless of its value, is subject to VAT. Businesses selling imported goods in consignments valued under €150 are now able to use the Import One Stop Shop (IOSS) to declare and pay VAT obligations through a single VAT return.
However, amidst such significant change, businesses need to consider exactly how these new rules and processes affect them individually, as it isn’t a one size fits all scheme.
What’s changed for e-commerce sellers?
New rules introduced by the EU last year are asking for more in terms of data from sellers who use the OSS schemes in order for them to comply. Additional record-keeping is required under OSS, which means the automation of data collection has become a critical cog in the compliance machine. Technologies as well as knowledge around the new legislation are critical for brands to ensure transactions and the delivery of goods to customers continue seamlessly. The new data requirements outlined in OSS mean that businesses need to carefully consider exactly how they can comply to avoid any form of penalties.
The additional data that’s being collected through OSS must also be presented upon request from the tax authorities for audits to check that VAT has been accounted for correctly. So, effective record-keeping is essential for any e-commerce business trading in the EU today. As VAT reporting continues its digital transformation, automating collection processes minimises the risk for human error. At the same time, another benefit of the new OSS scheme is that it allows businesses to correct previously reported returns. Instead of correcting the original OSS return, a business can submit any changes in the current OSS return.
But this doesn’t mean businesses can get complacent. Non-compliance can lead to penalties being imposed and ultimately exclusion from OSS schemes and therefore a return to more time-consuming and outdated reporting methods. Businesses must therefore continue to look to technology to leverage the power of data as well as ensuring they have the capability and expertise to respond to multiple tax authorities if audited. This will be vital in easing the burden of compliance on employees and giving businesses confidence in the VAT reporting that they submit.
New rules for low value imported goods
Under Low Value Consignment Relief (LVCR), low value goods imported into the EU of a value up to €22 were not subject to VAT. However, under the new rules, all products sold will attract a VAT liability and consignments under €150 can be declared under IOSS. But there’s more to consider than just that. For example, selling imported goods below €150 via a marketplace – such as Amazon – would recognise the marketplace as the supplier, so the marketplace is responsible for collecting the VAT due from the purchaser to pay the tax authority.
As an alternative to IOSS, sellers selling goods below €150 into the EU can opt to continue to use traditional methodologies and make the customer the importer of record and therefore liable to pay import VAT before the package can be released. This can be achieved by using ‘special arrangements’ which is an alternative to IOSS. The downside is that this can negatively impact the customer experience as they have to pay to have the goods released. In addition, it is difficult for the supplier to recover the VAT charged on import if the goods are returned by the customer – whereas the use of IOSS allows the supplier to easily recover the VAT charged on returned goods.
To avoid any complications harming their brand reputation, sellers can apply for an IOSS number so that VAT gets paid accurately and goods can be delivered unimpeded. IOSS offers businesses many benefits, but understanding every aspect of IOSS compliance from registration to monthly filing and intermediary requirements is essential.
Despite the changes to VAT compliance for e-commerce businesses, the EU is continuing to monitor the e-commerce sector with the potential to make changes in 2022 and beyond. This has the potential to include compulsory use of IOSS so that suppliers have to register in order to account for the VAT due on goods below €150. This would significantly increase the use of IOSS. Additionally, the threshold could be increased to allow more consignments to be eligible for IOSS but consideration needs to be given to the interaction with customs duty; consignments below €150 are free of customs duty but if the IOSS threshold is increased, how will the customs duty be collected? So, how can businesses operating outside of the EU prepare for the next stage of IOSS and VAT compliance?
Preparing for the future
Ultimately, the changes were made with simplification and the digital transformation of tax in mind, enabling previous steps to be skipped such as reporting to multiple tax authorities. Over the next year, the EU will continue to assess OSS schemes, adapting them based on their effectiveness in accurately collecting tax. Currently, local sales cannot be declared Union OSS unless facilitated by a marketplace for a non-EU seller and this is one change that may occur – the aim is to remove the requirement for multiple registrations but it is a complex issue with many factors, especially how businesses recover VAT incurred on purchases, to consider. For many businesses, keeping up with these changes will be a challenge – that’s why more are looking towards technology to ensure compliance and leveraging third-parties for their expert knowledge.
Although OSS and IOSS were introduced to simplify VAT reporting for e-commerce businesses, they are in no way simple. As discussions on how to evolve OSS within the EU for EU and non-EU sellers continue on thing is for certain, technology will play a key role for businesses. Industries are continuing to streamline business operations through digitization, and VAT reporting is no different. It’s allowing businesses to collect all the data required by tax authorities with minimal human involvement and ensure this data is reported with compliance at its core.
To learn more about the latest VAT trends across Europe and around the world, download Sovos’ latest Trends report which provides a comprehensive look at the regulatory landscape.