August 28, 2021
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How will the EU VAT changes effect eCommerce?

How would the upcoming EU VAT adjustments in July 2021 impact dropshipping and China’s performance for e-commerce entrepreneurs?

There is a great deal of uncertainty. A similar situation happened before, when uncertainties existed until a few weeks before the change in the UK’s VAT occurred in December 2020. It is thus completely anticipated that things will be a little unclear until they happen this July as well.
Now, what is known already? What isn’t but will be further investigated? This post will provide you with all the information.
In July 2021 there were three main types of adjustment with VAT.

  1. Removal of the distance selling threshold for VAT and the consequent addition of One Stop Shop (OSS)
  2. Removal of low-value import VAT exemption
  3. Marketplaces became responsible for collecting VAT.

This article will go about each of the categories one by one.

Removal of Distance Selling threshold for VAT  and the consequent addition of One Stop Shop (OSS)

Let’s discuss the removal of the distance threshold. There is a specific line now depending on the nation in the EU that you must not be responsible for VAT if your sales fall below that volume. It is between EUR 30 000 to EUR 100 000 depending on the nation itself.

Before, you didn't have to be responsible for VAT if you came under a threshold for sales in that country
Before, you didn’t have to be responsible for VAT if you came under a threshold for sales in that country

They’re eliminating it entirely.

That’s not considered a good or a beneficial thing. Why so, you may ask?

If you haven’t sold over that level of sales before, then you would not be concerned at all about VAT. But now you are legally liable for VAT if you sell absolutely any sales in those countries.

Let’s discuss the one-stop-shop introduction. What does it do? This simply implies that instead of having to submit VAT files individually in each unique EU country that you are liable for, you can do it only once.

However, you still have to be accountable for the different VAT rates for each country of your sales, as defined by your client delivery location.

It makes it a little easier for you. It makes it so that you might have a more simplified process for filing your VAT once. Rather than looking at a wide range of various VAT rates in the countries of the EU.

There is also a thing called the IOSS import one-stop-shop. It’s pretty much like the one-stop-shop concept. You only really need to do one filing. But there is another additional step to take, and that is that you must first register in a certain country within the EU.

This change can also be considered rather neutral than positive. The EU VAT office facilitates the filing so that they could collect VAT more simply. It doesn’t actually alter your rates. The distance threshold is still abolished so that you are responsible for VAT everywhere now. However, you only have to do this once, and if you are outside the EU, the whole process is a little more difficult.

Removal of low-value import VAT exemption

This change talks about removing the exemption on low-value imports as well as moving the calculation of the VAT to point of sales. This out of all changes will have the greatest effect on many people, particularly if they are dropshipping from China.

Imagine that you were dropshipping your supplier from China before the change. Then your supplier could claim a specific worth of products under EUR 22 and all of those goods would go without VAT additional charges.

All packages now fall under VAT
All packages now fall under VAT

And it is not like that anymore. And frankly, the VAT offices are fully entitled to do so. The overwhelming majority of the time, no matter how highly you sell your goods for retail, your product price is probably really less than EUR 22 or even much below that. You can learn how to price your products here. Before suppliers or specialist sellers might have declared products of EUR 2 or EUR 5 value. Starting July 2021 this exemption is removed. Therefore, all of the products are going to fall under the VAT due category.

That is, except up to 150 euro and beyond that amount, when import taxes begin to be triggered.

Another super important change is that VAT now is no longer declared on the value of the import but rather is evaluated on the point of sales.

VAT now will be assessed on the point of sales.
VAT now will be assessed on the point of sales.

Before July, your supplier was to declare the value. And this is where they were able to very safely declare under the threshold even if the retail price was greater. But following this change they claim that the reported VAT value must be on your sales price.

For instance, suppose you sell a product for 30 EUR. You will receive it originally for 5 EUR from your supplier, then your supplier will be able to report that amount and fall below the threshold, thus not getting any VAT at all.

However, now this identical sale of 30 EUR will be taxed VAT at that full amount of 30 EUR.  This is obviously a huge change. Because this essentially closes a loophole, where before people could have had a lot of low-value goods going to the EU and no one had to worry about any VAT at all. 

And this is the most important reason why the EU VAT offices want to close this loophole. Unfortunately, now dropshippers will be responsible for VAT on all their transactions if they sell to the EU or the UK.  And the VAT will come on the sales price that is being charged from the customer as opposed to the import price.

There is a question. How the value of the declaration is actually handled?

They claim that the value is declared based on the value of your sales minus any transaction fees, shipping and other charges.

Platforms or shop owners collect VAT based on what platform dropshippers do their business.
Platforms or shop owners collect VAT based on what platform dropshippers do their business.

These items must be included on the customer’s invoice for dropshippers to be able to subtract them. This may be upsetting. Because most dropshippers probably don’t charge shipping. They prefer to charge it for free and instead include the costs in the price of the actual products. So if the shipment on the invoice is not sent separately, the VAT really applies to the entire sales price.

Now, if you do however charge the shipment, the shipping costs may be removed from the VAT computation. And obviously, you’ll be responsible for a lower VAT rate. In fact, this implies that you must charge shipping. 

Then businesses need to find the right balance with their new pricing. Because obviously charging shipping is going to affect conversions as well. So this is something that is tricky and something that needs to be managed carefully.

Marketplaces deemed responsible for collecting VAT. 

Let’s talk about Amazon and eBay. Now the marketplace is responsible for collecting and charging the VAT from the customer. So imagine that Amazon just forced you to basically collect the 20 % of VAT and pay it to the authorities.

Actually, if you are an Amazon seller, then it is Amazon’s duty to collect it.

This may not apply to you if you are a direct store owner, on  Shopify or Woocommerce.  That implies that you are indeed the point of sales so you are actually responsible for collecting and paying your own VAT payments.

It is not completely clear where stuff like Aliexpress falls in this.

Aliexpress charged VAT for dropping shipments when the UK VAT was introduced. And then dropshippers had to collect VAT.

At the time there was a method of reclaiming that VAT so you’re not double taxed on the VAT. But currently, it is not quite apparent how this process will work for the EU.

VAT changes based on which marketplace you dropship from. You could be dropshipping from Amazon, eBay, or other platforms. And the VAT will change accordingly.

EU VAT rates

There is a minimum VAT of 15 percent throughout the EU. However, it is also possible for various countries to establish their own VAT rates. The rates will therefore really be different. 

This can be a little difficult. Why so?  Because then you’re supposed to charge different levels of VAT for different countries. And then, therefore, collect them and pay the VAT offices. 

This is one of the advantages of a one-stop shop, where people are able to do everything in one spot. However, the rates will still depend on the location of product buyers.

What is still uncertain?

There is still no sign of a very clear mechanism for reclaiming VAT if you are charged VAT from using platforms like Aliexpress. Because then dropshippers on the platforms will also need to collect VAT from customers and pay it.

With the UK VAT changes last year there was a little bit more clarity in this. In fact, people could have actually deducted that VAT charges and not be double taxed. However, right now there is no clear mechanism for doing so.

Now, there is no need to be worried. These VAT computations usually attempt to prevent double taxation. To accomplish this, there will definitely be some sort of method.

Another issue is that if you’re using a private supplier or private fulfillment company, it is not clear where that falls in terms of whether they are a marketplace or not.

Do agents need to charge dropshippers VAT first? Before, they didn’t have to charge their customers VAT. And then the customer is responsible for VAT and there are no double taxes. However, at the moment, there is no clear rule about the agents and whether they are considered marketplaces. So that’s clearly something to look into.

Yet another thing to consider is how are couriers going to cope with VAT? 

Currently, VAT changes in the UK, particularly when you use an agency, there is no need for couriers to disclose the VAT. So the packages go through perfectly fine.

But even for people who are selling in the UK, it is highly recommended that everyone gets a UK VAT number. It is possible that the packages might require having these numbers to actually get delivered to the customers.

It is hoped that the UK VAT changes where packages can still go through with no issues and you deal with VAT afterward.

Now, it is hoped that this article explained the changes and how the EU VAT changes will affect you and your business. 

You should remember that these changes are not killers for your company. You had to pay VAT regardless. Taxes are just a thing. And consumers understand taxes as well. Taxes are really not something that is going to just kill your conversions altogether. If every drop shipper begins charging VAT you know that the market will simply adjust. And it is not really going to destroy your company. We still have plenty of customers selling goods to the UK and it’s all good.

VAT is nothing new. Do not be scared of the changes associated with it!

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