After much delay during the global pandemic, the European Union’s rules on its value-added tax (VAT) took effect this month, and companies need to be prepared
To say that 2021 has brought and will continue to bring many changes in the tax world is an understatement. Much of what was suspended or delayed from 2020 during the global pandemic now is being implemented, and one such piece of regulation is the European Union’s rules on its Value-Added Tax (VAT) that took effect on July 1 of this year.
VAT is a consumption tax that is applied to nearly all goods and services that are bought and sold for use across many countries. It is said to raise about one-fifth of the total tax revenues both worldwide and among the members of the Organization for Economic Co-operation and Development (OECD).
Yet, what are the new VAT rule changes that have just taken effect? And what will those changes mean for e-commerce businesses that operate within and outside of the EU with their end customers in the EU?
These changes allow e-commerce businesses to have a more simplistic VAT processes. Businesses can now register with one Member State authority and pay tax to all remaining Member States, Gunjan Tripathi, Senior Proposition Manager, Indirect Tax, Thomson Reuters Europe) says, adding that this framework will make it easier to provide one clearinghouse, so to speak. Thus, businesses will have to deal with just one administration (with which they may be familiar or share common language with) rather than up to 27 different ones.
One of the first comprehensive VAT regulations for ecommerce enabled business were introduced in 2015 but were limited to services only i.e., applied to telecommunications, broadcasting, and electronically supplied services to consumers within EU Member States. Building on the success of that first phase, the changes from 1st July 2021 have extended the regime to include sale of goods enabled by e-commerce businesses, thereby broadening the scope of the legislation. “These regulations apply not only to the EU based sellers, but to any non-EU based business that sells into the EU,” says Tripathi. “The policy intention of the EU is to level the playing field between domestic and foreign suppliers of goods via e-commerce channels.”
These modified rules will affect online sellers, online electronic interface or digital platforms, postal operators, and couriers. With the explosive growth in e-commerce caused by the pandemic, these changes are set to be far reaching and – in some cases – complicated and are bound to require changes to business IT systems and logistics processes.
Here are 4 myths about these new regulations
Myth #1: Businesses are only required to make payments to one jurisdiction in the EU
Well, yes and no… the July 1 changes are focused to ease the burden of VAT reporting and payment for ecommerce businesses, when goods are destined to EU consumers. The practical aspect is that each of the 27 EU Member States may have different VAT rates for the same goods or services. Hence businesses need to understand, track, and apply the different VAT rates on their goods and services based on where they will be consumed, thereby complying with the ‘destination principle’.
Non-EU businesses can also select one of the 27 EU Member States for its VAT registration and reporting obligations. This simply means that instead of having to make 27 separate payments and declarations to each of the Member States, instead one consolidated payment and filing is made to the country of registration which will then redistribute the VAT payments & data attributable to each of the other Member States. Hence why the usage of term ‘One Stop Shop’ to distinguish this regime from the domestic VAT return registration and obligations that operate on a one-to-one basis with each Member State.
Myth #2: The new VAT regulations create simplicity
Streamlining VAT collection, declaration and payment doesn’t necessarily equate to simplicity. For instance, a non-EU business would still have to pay attention to any physical locations within EU borders where the goods are stored either by them directly or on their behalf by a third party. Businesses must be mindful if there is a discrepancy between billing versus shipping addresses. In case of goods, the shipping address is the strongest indicator of where they are destined to be consumed. In case of services, it is harder to determine the consumption destination if the billing address doesn’t match the recipient’s physical location (IP address used as acceptable proxy).
Therefore, businesses need to utilize this opportunity to understand their supply chains and customer consumption patterns in a more granular way than ever before.
Myth #3: I can worry about my VAT liability after the event
If you are taking this chance and given VAT rates can range from 0% to 27% across the EU, imagine the impact it can have on your net profit after taxes.
Each country has its own tax rate, and therefore the business must make sure it has the correct rate for each location factored into their financial planning and analysis. These new VAT regulations were enacted to create a simpler and more systemic way of tracking VAT payments from e-commerce businesses across the EU. For businesses with clients in the EU, it is now critical to make sure that there is a clear understanding of each country’s product and service classifications and corresponding VAT.
Given the complexity, the optimal solution for a business will always be found when working in a collaborative manner with their tax, finance, logistics and IT teams.
Myth #4: The tax team is solely responsible to navigate through these regulatory changes
The tax team alone doesn’t have complete visibility of logistics and payment processes within a business. Without this knowledge, their analysis and advice to the businesses can still fall short of the intended regulations.
Therefore, it’s important for all departments to be aware of the far-reaching impact that these regulations have and work to empower the tax team in ensuring the business is compliant and profitable. These changes can also give an opportunity for a business to embark on a process optimization and digitalization journey by leveraging this regulatory change as the compelling event for change.