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New European VAT regulations for e-commerce: The gateway to new opportunities for SMEs

A major reform of VAT rules came into force on the 1st of July 2021 to facilitate B2C e-commerce within the European Union (EU) and prevent VAT fraud. This reform aims to modernize and simplify existing rules, allowing Member States to collect EUR 7 billion in additional tax revenue per year from 2021.

The European Commission takes action to fight tax fraud and guarantee fair competition

In France, 98% of active foreign sellers checked on e-commerce platforms were not registered for VAT in France and therefore did not pay this tax to the State (IGF, 2019).

As tax issues require the unanimity of Member States, the European Commission has been trying for 10 years now to act against the rules that favor e-merchants located in the least taxed countries over e-merchants in the buyer’s country. However, it seems that the latter has finally found a compromise. Initially scheduled for January 2021, the VAT package on e-commerce was postponed for six months (due to the Covid-19 crisis) and entered into force on July 1.

The new provisions (described in the following sections) are divided into two parts with, on the one hand, those relating to merchants making sales from one EU country to another and, on the other, those that affect merchants exporting goods to EU countries.

Three big changes for intra-community distance sales of goods (within the EU)

Removal of the thresholds applicable to distance sales:

Before the reform, each EU Member State had its own threshold for distance selling. EU merchants were therefore required to register for VAT in the buyer's country as soon as their sales exceeded the threshold applicable in that country. On July 1, the thresholds applicable to distance selling were removed. Traders carrying out cross-border transactions will always, from the first euro, be subject to VAT in the country of arrival.

New threshold for micro-enterprises across the EU:

An exception to the change described above is granted to micro-enterprises established in an EU country and whose annual turnover does not exceed € 10,000 in the last two years. The latter will be able to continue to apply the VAT rate of the EU country where they are established, regardless of the EU country where they sell. This exemption will help promote the economic development of SMEs.

Reporting through the Single Window System (OSS):

Under the July 1 reform, traders will now be able to file a single VAT return through the One Stop Shop (OSS). This system will be valid for a set of EU countries and will ease the burden of registration with each tax administration. More concretely, it will allow declarations to be made once per quarter, for all countries of sale at the same time, electronically, in their own language, and by paying the total amount to the national tax authorities at once.

Two big changes for third countries traveling to the EU

New threshold of 150 € for imports:

Currently, imports of goods contained in consignments with a value less than or equal to € 22 are exempt from VAT. As of July 1, this rule has been replaced by an import-only VAT exemption. It will be applicable to packages whose value does not exceed 150 €, and whose sales are declared via the IOSS system. Beyond this threshold, import VAT and customs duties will continue to apply.

Declaration through the Single Window Import System (IOSS):

From now on, merchants from third countries can use the new one-stop-shop for imports ("Import One Stop Shop" or IOSS in English) in order to file a single monthly VAT return for all low-value exports (not exceeding 150 €) to the EU that are not facilitated by a marketplace or platform. The use of this one-stop-shop for imports is not compulsory.

The consequences for marketplaces and consumers

Accountability of Marketplaces with regard to VAT

Since July 1, 2021, marketplaces are considered to have bought and sold the products themselves (with regard to VAT). Therefore, the platforms are held fully responsible for the payment of VAT and responsible for paying it instead of the companies using the marketplace. Fortunately for the latter, they will have the option of benefiting from special regimes through the use of the IOSS one-stop shop for imports under € 150.

This reform will help fight more effectively against tax fraud in Europe, estimated at 5 billion euros, including 1 billion from the Amazon group alone (Attac, 2019). It will officially end the "Black Market" of marketplaces that escaped VAT on items for which VAT had already been paid once before being repackaged.

Impact on consumers

The consumer could become a collateral damage of this reform. Indeed, there is a good chance that many third-party sellers (Amazon, AliExpress or Wish) who previously benefited from sales excluding VAT will pass the increase in the cost of this new measure on to the prices for the end consumer. According to Capital, the price increase could be of the order of 20 to 30%...