For online stores, it is becoming easier to deliver products and services to countries abroad. Online stores are able to offer their products and services to customers from EU and non-EU countries alike. Drop shipping, for example, allows products ordered from a Dutch online store to be shipped directly from suppliers in China to customers in their home countries. Thus, it is important to note that when an online store sells internationally, the different VAT obligations must be taken into account. The two most important questions are: what VAT rate should companies charge, and how should they submit VAT declarations?
This article will focus on the delivery of products and services to customers within Europe. First, the current situation will be explained, followed by the proposed changes that will come into effect in 2021.
The current situation
As a general principle, companies should charge the VAT rate applicable in the respective country of the customer. Next, companies must pay the VAT levied to the tax authorities of that particular country. However, this could cause hardships for companies interested in cross-border selling, as it would mean that for even a single delivery to another EU country, the company must be registered in that country for tax purposes. Therefore, it is possible to apply the following rule:
VAT can be paid in the country where the company is situated, rather than in the respective countries of its customers, unless the annual revenue generated in a particular foreign country crosses a certain threshold.
These thresholds differ per country. When an organisation crosses the threshold in a certain country, they are required to pay VAT in that country from that particular delivery onwards. Furthermore, it is mandatory to register the organisation with the national tax authorities, as well as to submit tax declarations in that country.
France has a VAT threshold of €35,000. Let’s say that a Dutch online store delivers to French customers. If the revenue (in France) of the Dutch online store remains under this threshold of €35,000, VAT for its sales in France should be paid in the Netherlands. However, if the store does meet this threshold, they should pay VAT in France in that year, as well as in the following year. Therefore, even if the Dutch online store only earns €20,000 in France the year after it crossed the €35,000 threshold, they still need to pay VAT in France for that year as well. After these two years are up, taxes should be paid in the Netherlands again, until the threshold is crossed once more.
Requests to remove the threshold rule
It is possible to request that the tax authorities do not apply these VAT thresholds. This means that you always have to pay VAT in the country of the customer and submit declarations there. This could save a lot of administration work when an online store sells many products within the EU. In this case, the online store would pay VAT in each country where products are delivered, regardless of the threshold in that country. This could be a strategic choice when the VAT rate of the country of delivery is lower. In this case, the organisation has to submit VAT declarations to each national tax authority.
Exceptions for digital services: MOSS
For the delivery of digital services (such as delivering e-books or streaming services) the aforementioned thresholds do not apply. For digital services, online stores must always pay VAT in the country where the services are delivered (regardless of whether the buyer is a company or a customer). Conveniently, organisations that deliver digital services can make use of the Mini One Stop Shop (MOSS) rule. The MOSS rule allows such organisations to legally declare VAT in one country only – the country of registration. The tax authority in that country will then divide the taxes over the different countries, as required.
However, even with the MOSS rule, the problem of needing to know where each customer is situated remains. Otherwise, the tax authorities will not know which VAT rates apply to your services. The tax authority has identified a few factors, on the basis of which this information can be determined, such as the billing address and the mobile phone country code of the customer.
In addition to digital services, the thresholds do not apply to excisable goods (alcohol and tobacco) either. VAT for these products is always charged in the country of delivery.
The new rules for e-commerce
The European Commission has proposed to simplify the VAT rules for e-commerce. This proposal has been accepted, and the changes will take effect by 2021. The most important changes are as follows:
- The previously mentioned MOSS rule will be extended to apply to all distance sales. This means it will not only apply to digital services, but also to other services and products.
- The different thresholds will be lowered to one general threshold of €10,000.
- The VAT exemption for deliveries below €22 will be removed.
- Providers of online platforms(such as an online market place), that facilitate distance sales, will also be held responsible for VAT under certain conditions.
- Suppliers can also make use of the MOSS rule for distance sales outside of the EU, but only if the products are charged within the EU and the value of the products are no more than €150.
This should be implemented before 2021. We will keep you updated on relevant developments!