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EU canceled the tax exemption policy for overseas direct mail parcels, and non-EU based seller’s cross-border e-commerce faces challenges

The EU has made some important changes to the VAT rules, which will take effect on July 1, 2021. The VAT rules regarding cross-border B2C e-commerce activities will change. The fundamental reason for these changes is to overcome the tax barriers of cross-border online sales and solve the problems arising from the value-added tax system for remote sales of goods and low-value imported goods. The EU value-added tax reform will have an impact that cannot be underestimated on cross-border e-commerce including China and UK.

Three major changes:

1. Cancellation of the exemption of import value-added tax for goods below 22 euro

2. Launched import one-stop service plan (IOSS: IMPORT ONE-STOP-SHOP)

3. Some e-commerce platforms will collect value-added tax

In the major countries where the business of cross-border e-commerce sellers in China is the most concentrated, the corresponding standard VAT tax rates are : France 20%, Germany 19%, Italy 22%, Spain 21%, and the Netherlands 21%. The promulgation of the new regulations means that most sellers selling to the European market will face increased operating costs and their profits will shrink significantly.

Cross-border e-commerce sellers in the European market should realize that the ‘opportunistic period’ of EU taxation is over, and compliance is the general trend. According to the European Council’s estimates, the EU’s VAT New Deal will take effect on July 1 this year and will increase the EU’s overseas tax revenue by more than 7 billion euros each year. The EU’s implementation of the e-commerce value-added tax package plan simplifies the declaration of cross-border e-commerce. At the same time, it will also combat cross-border e-commerce value-added tax fraud and provide more fair competition conditions for the EU commercial market.

Removal of the exemption of import value-added tax on goods under 22 euros

From July 1, 2021, all goods imported into the EU will be subject to VAT, regardless of value. For goods of 150 euros or less, the new import one-stop service program (IOSS: Import One-Stop-Shop) can be used to directly charge consumers VAT; or by the customs declarer (such as e-commerce platforms or Logistics service providers) collect value-added tax from consumers.

What is the impact on cross-border e-commerce business?

Consumers using online e-commerce platforms such as eBay or Amazon to purchase goods under 22 Euros from countries/regions outside the European Union will no longer be able to enjoy the benefits of VAT exemption for goods.

Case study: An online e-commerce platform in China sold a mobile phone case worth 10 Euros to a consumer in the European Union. Before July 1, 2021, since the total value of the goods is less than 22 Euros, the goods can be tax-free imported to the European Union. After July 1, due to the new VAT regulations, all goods will be subject to VAT regardless of their value. Small items of 10 euros must also pay 19% of German import value-added tax, which is 1.9 euros.

For e-commerce goods of 150 euros and below, the European Union has introduced an alternative import one-stop service program (IOSS: Import One-Stop-Shop), which means that sellers or e-commerce platforms are allowed to directly collect value-added tax when selling, and directly remit the collected value-added tax to the relevant agency. This means that in the future, it will be easier and faster to clear goods, more transparent to consumers, and help ensure efficient customs procedures. If cross-border e-commerce does not use IOSS, when goods enter EU customs, The logistics service provider will be responsible for the declaration and payment of import taxes, value-added tax plus service fees will be collected from consumers, and will have to pay taxes again to tax authorities.

What is the impact on non-EU’s cross-border e-commerce business?

The IOSS platform is a non-mandatory and optional platform. Cross-border e-commerce companies only need to register IOSS in one EU member state, and then they can declare and pay taxes in all EU member states at one time and import them into the EU’s B2C. Sales VAT will be submitted to the designated EU member states through monthly tax returns, and then the platform will forward the VAT returns and payment directly to the tax authorities of the destination country/region. Therefore, companies will not need to register a VAT number in every EU country where they sell their products. Deliveries with a valid IOSS number do not need to pay import value-added tax in the customs clearance process, which helps speed up the customs clearance of the deliveries and shorten the logistics and transportation time.

Case Study:  A UK e-commerce company sells electronic products worth less than 150 euros to customers in EU countries and regions. Before July 1, UK e-commerce companies must register and pay VAT in each EU country/region. After July 1, 2021, UK e-commerce companies first cancel their foreign value-added tax registration numbers, and then register an import one-stop service plan (IOSS: Import One-Stop-Shop) in any country/region, and then collect value-added tax directly from the consumer when the goods are sold and report directly to the tax authority.

For companies that do not want to register for IOSS, when the goods arrive at the EU customs, they need to declare and pay import taxes to the Customs Department through the logistics company. This service will incur new service fees. This sum of the fee will be collected from consumers or suppliers by the logistics company later, which will undoubtedly impose a heavy burden on cross-border enterprises or consumers.

Case Study:  When a consumer in Germany buys a mobile phone case from the UK for 5.50 euros, they should pay 1.05 euros of import value-added tax. Since this mobile phone e-commerce company has not registered with IOSS, in this case, the consumer must contact the logistics provider. The logistics service provider pays the service fee for the declaration of goods and the payment of import taxes. If the logistics service provider costs 6 euros for this service, the additional cost to be paid by the consumer is 1.05+6=7.05 euros.

It is particularly worth noting that IOSS, from April 1, 2021, cross-border e-commerce can register on the official website of IOSS of EU member states. Enterprises can start using it from July 1, 2021, to fulfill their VAT e-commerce obligations for long-distance sales of imported goods. If the company is not based in the EU, it needs to appoint a service agency established in the EU to fulfill the VAT obligation of applying for IOSS. If you have related questions, please us for consultation and solutions.

Some e-commerce platforms will collect value-added tax

When an e-commerce platform conducts B2C business, its withholding and payment of value-added tax system will apply to the following two situations:

  • the value of imported goods does not exceed 150 euros;
  • remote cross-border transactions or domestic transactions of non-EU sellers of any value goods.

For trading platforms that have registered for IOSS, they are responsible for collecting, reporting, and summarizing the value-added tax payable by consumers, and the seller does not need to participate.

The obligation to pay VAT tax has made clear that the third-party platform shall take on more responsibilities, for the VAT withholding and remit of goods and services sold by non-EU sellers in the e-commerce platforms.

What is the impact of IOSS?

If the third-party trading platform has registered for the Import One-Stop Service Program (IOSS), the cross-border e-commerce company must use the IOSS provided by the third-party online trading platform and provide the IOSS number to the party for custom declaration that is responsible for goods transportation to the EU customs, for example, the logistics and transportation company DHL. Cross-border e-commerce companies need to clearly retain the IOSS identification numbers provided by different online trading platforms for different products sold.

Case Study:  A UK e-commerce company registered and sold 90 Euros of an electronic device to an EU customer through an online trading platform that had completed IOSS registration. Before July 1, 2021, the consumer who purchases the electronic device is responsible for paying the value-added tax required to purchase the goods when the goods enter the EU customs. After July 1, 2021, since the third-party online trading platform that sold the electronic device has registered and used IOSS, when the electronic device was sold, the consumer had already been charged VAT and paid directly to the tax mechanism.

Compliance in the cross-border e-commerce industry is the general trend. This major tax reform will have varying degrees of impact on sellers and even service providers in the entire cross-border e-commerce chain. From the current implementation of the new regulations, there is a one-year transition period, giving sellers more time for tax planning. Sellers are advised to implement management compliance in a timely manner, proactively respond to new policy changes, deploy and prepare in advance, and strive to turn challenges into advantages.

Want to know more about our new services for cross-border sellers management compliances? Contact us for more information.