By Anna Higgins, Strategy Program Director, Sovos

Back in July 2021, the EU introduced new legislation designed to transform VAT compliance in the e-commerce space. In addition to enabling Member States to increase the amount of VAT collected on imported goods, the changes were designed to ease the administrative burden on businesses trading with and within the EU and reduce their VAT compliance costs.

For the e-commerce sector, the extension of the One Stop Shop (OSS) portal – which business can use to comply with their VAT obligations – represented a significant change to reporting processes. For instance, businesses are no longer required to maintain multiple VAT registrations for intra-EU sales of B2C goods. Instead, they simply 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.

The new changes also affect imports. Since July last year, goods of any value brought into the EU are subject to VAT. Businesses selling imported goods in consignments valued under €150 can now use the Import One Stop Shop (IOSS) to declare and pay VAT obligations through a single VAT return.

Sounds simple, right? With the right guidance it can be. Businesses need to assess how these rules will affect them on a case-by-case basis, which can be confusing but when understood and appropriate processes and controls put in place, they create a streamlined VAT reporting process.

Additional data demands 

Under OSS, businesses are required to collect and store more data than ever before – or risk problematic audits and the potential for penalties. This data should be readily available for most though and use of the schemes allows for straightforward access to the whole EU market. With these new rules in place, automating data collection has become critical to keeping up with compliance requirements, as well as ensuring transactions and deliveries continue seamlessly. Automation also reduces the risk of human error – cases of which inevitably rise when more data is being handled.

The additional data businesses collect through OSS must be presented to tax authorities upon request. As such, effective record-keeping is essential for e-commerce businesses trading in the EU. And so is having the capability and expertise to respond to multiple tax authorities if audited.

A further benefit of the new scheme is that it allows businesses to correct previously reported returns by submitting any changes to their current OSS return. But this doesn’t mean businesses can get complacent. Non-compliance can lead to financial penalties. Or, in extreme cases, exclusion from OSS and a return to more time-consuming reporting methods. So, having the right easy to access technology solution in place to support reporting is crucial!

Low value imported goods

Previously, goods imported into the EU under the value of €22 were not subject to VAT. However, under the new rules, all products sold attract a VAT liability, and consignments under €150 can be declared under IOSS. Sellers can apply for an IOSS number, so that VAT gets paid accurately and goods are delivered unimpeded. But there’s more to consider. For example, when selling imported goods worth less than €150 via a marketplace like Amazon or eBay, the marketplace is recognised as the supplier, so they would be responsible for declaring and paying VAT to the relevant tax authority.

It’s worth noting that the use of IOSS is not compulsory. Sellers can use “special arrangements” via their shippers and opt for the customer to become the importer of record and is therefore liable to pay import VAT before the goods can be released. The obvious downside of this option is the negative impact on customer experience. What’s more, it can be difficult for suppliers to recover the VAT charged on imports if the goods are returned by the customer.

On balance, it’s clear that IOSS offers businesses many benefits, but understanding every aspect of IOSS compliance – from registration to monthly filing and intermediary requirements – is non-negotiable.

What’s next?

In addition to the recent transformation of VAT compliance for e-commerce businesses, the EU is continuing to monitor the sector, with the potential for further changes in 2022 and beyond. This might include the compulsory use of IOSS on goods below €150 – significantly increasing its adoption. Alternatively, the threshold could be increased to allow more consignments to be eligible for IOSS.

Yet another potential future change relates to local sales that are made directly by the supplier to the consumer.  Currently, these cannot be declared via Union OSS unless the sale is facilitated by marketplaces for non-EU sellers. This requires local VAT registrations in the country where the goods are sold but this may change soon. However, there would still be a need to be a viable solution for businesses to recover VAT incurred on purchases – amongst other complex factors.

Ultimately, OSS and IOSS were introduced to simplify VAT reporting for e-commerce businesses and reduce the VAT Gap. As discussions on how to evolve OSS for EU and non-EU sellers continue, it’s clear that for many businesses, keeping up with changes will help them to access the benefits of the schemes. That’s why more are looking towards technology solutions powered by third-party experts to ensure compliance.