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The VAT e-commerce package: what the VAT reform means for online retailers

What the VAT e-commerce package means for online retail.
Image: © mavoimages / Adobe Stock

VAT reform in e-commerce: the key facts at a glance

There are only a few months to go until the playing rules for brands that sell their products or services online across borders within the EU will radically change on July 1, 2021 as part of the VAT e-commerce package. In December 2017, the EU Member States made a pledge to reform EU VAT rules with the aim of simplifying tax matters in the digital single market. At present, there are different national supply thresholds stipulating when goods become subject to VAT in the country of destination. These will be replaced by a uniform, EU-wide supply threshold. What opportunities and risks does that present for brands in online retail? And how can online retailers optimally prepare for the reform? We spoke to Dr. Moritz Lukas, Vice President Sales at Taxdoo, and asked him to shed light on the situation.

Who is the reform relevant to

Dr. Moritz Lukas: The reform will bring about substantial changes for any business that sells its products across EU-internal borders. The main reason is that the supply thresholds will change as of July. Supply threshold means that cross-border supplies up to a certain amount can be taxed in the Member State of the supplier. Only when supplies exceed that threshold do they become subject to VAT in the country of destination. In Germany, the threshold will be reduced from its current 100,000 euros to the EU-wide figure of 10,000 euros. In this respect, the reform is also relevant for companies that previously didn’t have to worry about VAT in other EU Member States. However, some relief may be given under certain conditions in the event that the new EU supply threshold is exceeded.

What is the background to the reform – why was it necessary?

Dr. Moritz Lukas: Current VAT legislation is in fact still the same as it was in 1993 – the year the European single market was established. A lot has happened in international trade in those some 30 years. Digital commerce in its current form was practically inconceivable back then, with only a few big distance sellers dominating the market. When it comes to transactions and logistics today, the current laws barely even cover the basics. That makes trading difficult. For example, up to now, companies that trade across borders have had to register in all the respective countries of destination, where there are different tax rates and varying legal frameworks. EU harmonization has so far been non-existent in online retail.

What are the scope and implications of the reform? What does it mean for online retailers in real terms?

Dr. Moritz Lukas: Unfortunately, the reform won’t benefit everyone. The One Stop Shop (OSS) will be introduced to simplify taxation on the surface by allowing online retailers to settle the VAT they owe in all EU countries in a central place if they exceed the supply threshold of 10,000 euros. However, it is only applicable to supplies from a domestic central warehouse and to private customers, although the majority of international trade can be attributed to B2B and many retailers also use the logistics structures of large marketplaces that automatically move goods around to meet demand. Nothing will change for these retailers.

”Small and medium-sized online retailers in particular will therefore still have to navigate a confusing labyrinth of tax rates. Managing the data will become even more complex. Many ERP systems are already overwhelmed.”

Dr. Moritz Lukas, Vice President Sales, Taxdoo GmbH

What tax traps could online retailers now fall into?

Dr. Moritz Lukas: A major risk is double taxation, because, on the one hand, we have the more consistent destination principle, whereby goods have to be taxed in the recipient’s country if the EU-wide supply threshold of 10,000 euros is exceeded, but, on the other hand, we have ERP and accounting systems that might account for VAT in the country of origin. Precisely that could lead to double taxation. Hardly any retailer could absorb such costs through their margin. In addition, since many retailers will have to adopt a two-pronged approach and be able to process some but not all of their transactions using the OSS, that will make things more complicated, time-consuming, and prone to errors.

In an interview with DMEXCO: Dr. Moritz Lukas
Dr. Moritz Lukas is Vice President Sales and authorized officer at Taxdoo GmbH. After earning his degree in business administration, where he specialized in tax, auditing, and finance, Moritz worked as a strategy consultant in the financial institutions group of a leading management consulting firm for many years. He then completed his PhD in finance. Since 2017, Moritz has been responsible for the Sales division at Taxdoo. As part of this role, he is in close contact with online retailers and their accountants on a daily basis to discuss the VAT challenges of cross-border online retail and suitable solutions.

Dr. Moritz Lukas from Taxdoo explains what the VAT e-commerce package means for online retailers.
Dr. Moritz Lukas, Vice President Sales at Taxdoo (© Taxdoo).

What tips do you have for online retailers who want to expand their business internationally?

Online retailers should first take stock of their situation. The key question they should ask themselves is: what tax obligations do I have now and which will I have as of July 1, 2021? Figuring out future tax obligations is a challenging task, even for experienced accountants. I can only recommend dealing with the topic early to avoid being caught off guard by the changes. The next question would be: how can I reliably automate these processes? And that’s where the costs and benefits need to be weighed up, in other words do I want to deal with the matter myself or would it be better to outsource so I have more time for my core business? Especially when things get complex, technology offers a number of possibilities for simplifying and automating processes.

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