If you are a business-to-consumer (B2C) e-commerce organisation supplying goods that will be imported into the European Union (EU), then you should already be aware of the Import One-Stop Shop (IOSS) rules that came into effect on 1st July 2021, marking an overhaul of the indirect tax regime across the union.
These new rules remove the previous VAT exemption for goods valued up to €22, meaning that now all goods up to €150 must pay VAT in the member state the goods will be delivered. With the threshold now prescribed at €0, even the smallest transactions are required to go through the new VAT process.
What types of e-commerce goods are impacted by the new VAT rules?
Some have described the new VAT rules as only applying to e-commerce stores, but the rules apply to all “distance sales” to consumers of imported goods. If you sell goods to consumers that will be imported into the EU, then your transactions may apply if they fall under the following criteria:
- Goods arriving in the EU that are dispatched or transported from another region at the time they are sold
- All dispatched or transported goods in consignments with a value up to €150
- Goods that will not be subject to any kind of excise duty
It is important to recognise that these changes not only affect sellers — regardless of their turnover — and consumers, but the entire transaction supply chain including couriers and, ultimately, tax authorities.
Why have the EU VAT rules changed?
For consumers the 2021 EU VAT rule changes bring clarity that has been missing for many years. We have all been in the situation where we have received an internationally dispatched delivery, only to find unexpected fees to pay when the goods arrive in the country they are to be delivered. It can hurt on the wallet, but also adds delays to receiving your delivery.
The EU’s primary goal however was to create a regime that would simplify VAT processes and reporting for organisations. IOSS forms part of the wider One-Stop Shop (OSS) rule changes introduced at the same time, and builds on the Mini One-Stop Shop scheme, which was created to enable telecommunications, broadcasting, and electronic (TBE) services to declare and pay in a single EU state the VAT they were required to submit for all states.
The VAT rule changes have two other significant benefits for the EU and the e-commerce businesses that operate in the region. Firstly, the rules level the playing field for EU businesses which already pay VAT on their sales. The new rules shift the responsibility so that organisations outside the EU, but selling into it, are not at a competitive advantage by not charging VAT. Secondly, for the EU itself, the new regulations and digital tax reporting requirements help the union close its substantial tax gap which was €140bn in 2018 and was projected to increase to €164bn in the 2020 tax year.
The reality is that many e-commerce businesses are not ready for the new EU VAT rules and this has, in part, been hampered by member states moving at different speeds on its implementation within their tax authorities. A key component of simplifying the process is meant to be the standardisation of tax filing requirements and availability of automated filing, but the file formats used and progress on this vary wildly across member states. Essentially, this is making the implementation of IOSS more complicated than it needs to be.
A survey conducted by International Tax Review and Thomson Reuters during a July 2021 webinar on compliance with the latest EU VAT regulations found half of organisations had not yet reviewed their processes in relation to the OSS rules and a quarter said it was the first time they had heard of their changing obligations under the EU VAT regime.
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How can e-commerce businesses comply with the new IOSS rules?
Getting to grips with the IOSS rules as quickly as possible is going to be critically important for e-commerce businesses, and not just in terms of compliance. VAT is the responsibility of the seller, so incorrect or missing VAT charges on transactions will have a direct impact on profitability and be an open invitation for authorities to consider whether greater scrutiny is needed of your business. Poor processes, too, will lead to huge overheads in your business as it grapples with the rules, which could impact other parts of the supply chain, as well as the customer experience.
One exception that may apply to sellers, is where they use an electronic interface, such as a marketplace to sell goods. In these circumstances it is the platform that is responsible for this. You can learn more about the details of the IOSS scheme by reading the “All You Need To Know About the One-Stop Shop” document released by the European Commission Taxation and Customs Union.
For indirect tax teams, some of the key actions they need to ensure are happening under IOSS include:
- Making certain a buyer can see the amount of VAT they will pay before the end of their transaction.
- Ensuring collection of the applicable VAT from the buyer, where an EU member state is the final destination.
- Submitting electronic monthly VAT returns via the IOSS portal in the member state where the e-commerce business is registered for IOSS VAT payments. Payments must also be made monthly to the member state.
- Providing customers with customs clearance documents that include IOSS VAT identification numbers and other VAT information.
7 tips for getting “business ready” for IOSS
Understanding European Commission expectations of your e-commerce business in respect of IOSS is one thing, but making it work on a practical level for the indirect tax team can be challenging. Here are some tips to help you smooth the path to IOSS compliance, if like many, you cannot confidently put a tick in the box marked “ready for IOSS”:
- Map transaction flows – Understand how the new rules will impact the workflows and processes in your organisation.
- Some other VAT returns may stay – Consider whether you will still need to submit other VAT returns, as IOSS is not a wholesale replacement. Transfers of goods between warehouses, for example, will still require separate reports and submission.
- Check if your tax IT system can support IOSS – Review whether your existing indirect tax technology can determine the correct taxes automatically for the various EU member states.
- Ensure your data is solid – Strong data is the bedrock of accurate tax determination. Review how products are classified in your systems and whether correct codes are being applied.
- Assess compliance processes – Check whether current compliance processes can support the preparation and filing of OSS/IOSS returns, and whether new record keeping requirements can be met.
- It’s time to automate tax tasks – If current indirect tax processes require a lot of human intervention, consider leveraging tax technology to help comply with the new regulations. An indirect tax engine, for example, can ensure that VAT is accounted for correctly and can automatically be updated to calculate future VAT changes in member states. Also, an integrated compliance solution can support and even automate the preparation and submission of IOSS (and other) returns.
- Review marketplace contracts – If you are trading using online marketplaces, review those contracts to ensure they respect the new VAT IOSS regime and each party’s obligations are clearly laid out.
The implementation of IOSS firmly underlines the global shift toward digital tax reporting that has been gathering momentum for years through initiatives such as HMRC’s Making Tax Digital and the forthcoming DAC6 EU Directive designed to mandate the digital disclosure of financial information from multinational organisations.
Tax determination software can help you navigate the digital tax transformation needed for a smooth transition to the new IOSS regime, and take the pain out of all the challenges we have talked about.
OSS/IOSS is already a legal requirement for goods arriving in the EU and is certainly a simplification of the rules, but it does require companies to think carefully about their operations and how they implement digital tax reporting. You can learn more about how Thomson Reuters ONESOURCE and our tax professionals can support your e-commerce business along its tax journey by visiting our indirect tax software product pages.
Keep reading for more resources on digital tax reporting and how to keep pace with VAT changes:
- Resource: What are the new EU VAT rules and how do they impact e-commerce businesses?
- FAQs: Top 20 FAQs about the EU VAT One-Stop Shop
- Special report: How the new One-Stop Shop EU VAT rules affect e-commerce
- Blog: Overcome the new One-Stop Shop’s challenges and unlock its opportunities
- White paper: How to keep up with new complexities in tax
- Blog: Avoid incorrect tax calculations and protect your organisation
- Blog: Top 4 considerations for a successful MTD for VAT implementation