EU postpones the VAT and e-commerce reform

24 July 2020

by Żaneta Niestier

The European Commission has proposed to postpone for six months the implementation of the new VAT regulations governing e-commerce and supply of services to individuals in the EU. Those regulations are set out in Council Directive (EU) 2017/2455, which obligates the Member States to amend the e-commerce laws.

However, the European Council must first approve the proposed postponement. If it does, the new tax regulations will come into force on 1 July 2021. Otherwise they will become effective on the originally scheduled date of 1 January 2021.

Just to remind you, the e-commerce package which the European Council adopted in December 2017 is a set of solutions for electronic retail commerce designed to facilitate intra-Community trade and simplify VAT formalities for enterprises, ensure fair competition with non-EU entities on the EU market and counteract VAT abuse and fraud.

What has given rise to the announced changes?

Electronic commerce has been continuously growing in popularity in recent years. Especially nowadays, when brick-and-mortar shopping has become difficult due the COVD-19 pandemic, many people have started to buy online. E-commerce involves selling products not only from the EU but first of all from third countries, notably Asian countries. Such rapid development has revealed that VAT laws regulating e-commerce have weaknesses which put the EU enterprises at a disadvantage compared to competitors from outside the EU. Also, many foreign sellers evade paying EU VAT. Therefore, the new regulations should ensure that VAT is paid in the EU Member State in which the customer resides.

Changes to mail order rules

Currently, sellers of goods delivered by mail may account for VAT in the country where they are established as long as they do not exceed the limit for mail order sales applicable in the country of destination. Each Member State must set such a limit, which may not be lower than EUR 35,000 and higher than EUR 100,000. Once the taxpayer exceeds the limit applicable in the country to which he sends the goods, he should generally treat the supply as made to that country. In such a case, the taxpayer must register for VAT there. The announced amendments should introduce a limit of EUR 10,000 net across the European Union.

New OSS platform and new rules of accounting of VAT

The announced reforms will apply to all EU and non-EU enterprises engaged in online sales of goods and services to individuals in the EU. Online retail suppliers who exceed the annual sales threshold of EUR 10,000 will have to account for VAT in a new procedure, namely, through the OSS platform (the current MOSS platform will be expanded and transformed into OSS). Registration with the platform will be obligatory also for online sellers of goods imported to the EU and valued up to EUR 150. According to the new laws, the seller will be obliged to calculate and pay VAT to the relevant Member State using the OSS system. The new laws are also going to abolish VAT exemption of goods below EUR 22.

Consequences

The upcoming changes mean that many businesses will have to adapt their IT systems to the new requirements and meet the registration and record keeping obligations. The new regulations will also shift much of the responsibility for VAT accounting to intermediaries in the online sale of goods imported to the EU. We can also expect a rise in prices of goods ordered online and imported from Asia.

The new implementation date results from the difficulties that individual Member States are currently facing due to COVID-19. Therefore, the European Commission wants to give the Member States more time to prepare for the new VAT rules for e-commerce transactions and to transpose the Directive to national legislations. We will keep you informed on the European Council’s decision.