Dropshippers selling products to EU customers or aspiring dropshippers will have heard of the EU’s VAT changes.
Dropshippers often ask: What’s changed? What will this mean for my business? What are my options? Should I raise my prices, or cease selling to/in Europe?
This article will discuss the new VAT changes that took effect July 2021, and how they could affect your business.
Overview of EU’s VAT changes: Effective July 1, 2021
VAT collection, reporting and payment
In the past, each country had its own distance selling threshold to distance sellers.
- Distance Selling threshold:sales volume before ecommerce businesses were responsible to collecting and reporting VAT
- Distance sellers Any business that sells beyond EU borders
The threshold in Germany was EUR100.000, while Spain’s threshold was EUR35.000. Dropshipping to German customers was exempted from VAT if your annual revenue was less than EUR100.000. However, now you are responsible if your last two years’ revenue exceeds EUR10.000.
Items less than EUR22 are no longer exempt from import VAT.
Distance sellers used to be exempted from import VAT for items under EUR22. This rule has been repealed. All purchases below EUR150 are subject to import VAT.
The EU has introduced the Import One Stop Shop. This tool allows sellers to report and remit VAT to the tax authorities. Buyers are not required to pay VAT when goods are imported into their country.
Smaller orders to EU countries can be subject to VAT through the tax authorities of one country.
Dropshippers who made more than the EU distance selling threshold had to register and pay VAT individually to each country.
You can now pay VAT on all EU country sales by one tax authority. You can choose which country you want, too!
If you are a micro-business with sales below EUR 10,000, you can continue to charge the local VAT rate.
The upcoming VAT rules will exempt small merchants based in EU Member States that have sales below EUR 10,000 from the tax.
The exemption basically states that you are allowed to continue to charge the VAT in the EU country where you have your business, for all EU countries you send to, and to continue to remit to your local tax authority.
What you should do now to prepare
Register to OSS or IOSS
Register for the One Stop Shop (OSS), if you are an EU company that sells to EU countries by distance, to remit all VAT taxes through a single authority.
Register for the Import One Stop Shop system (IOSS) if you are a non-EU company to get the same process as for goods less than EUR150. You might be able to file and remit VAT faster through IOSS. Additionally, customs authorities may also process your imported goods more quickly.
If you do not use IOSS, your shipments may be more likely to stop for additional valuation checks at border. This could delay your deliveries and result in additional VAT charges.
If you use an online marketplace to facilitate your transactions, the rules might be different. The new law allows you to deregister for VAT in certain EU states. This is because the marketplace you use might be considered the seller of the goods and be responsible for collecting VAT at time of sale.
You will need an EU intermediary to manage the process if your business is not within the EU.
Hire a tax consultant or lawyer
We don’t need to tell you, as a business owner or aspiring business owner, that taxes can be confusing and fast. It’s worth hiring a lawyer or consultant if you are unsure about your place in the new VAT laws.
They will be able examine your business and give you advice on the best way forward. You might find solutions they can help you discover that you wouldn’t have discovered on your own.
As you find new details, keep doing your research
Similar to the UK’s recent changes in VAT, many details are likely to remain unanswered until the VAT changes take place on July 1, 2021.
You should therefore keep your ears and eyes open for any updates or misinterpretations about rules.
We will keep you informed, but now is the right time to use your resources and network.
Why is the EU making these VAT changes?
Before we dive into the reasons why the EU announced the 2021 changes to VAT, let’s briefly recap what VAT is.
Value-added tax (VAT), is a consumption tax that applies to goods and services. This flat tax applies to everyone who buys an item. It is not like income taxes that are based on earnings. It is a tax that is levied in more than 160 countries. The most common, however, is the EU.
Each country in the EU has its own rate of VAT.
Reasons why the EU is changing its VAT rules
For a few reasons, the EU decided to alter the VAT system.
All member states (countries) can simplify VAT
It can be confusing to manage, register, and collect separate VAT in 27 different countries. For governments and tax authorities, the 2021 consolidation will greatly simplify the VAT process. It will also make it easier for merchants that have historically had to remit VAT in multiple countries.
Reduce VAT fraud.
In 2017, VAT fraud cost EU nations EUR160 billion. Non-EU businesses can find loopholes to avoid VAT payment. However, VAT fraud can also be simple. Professional thieves can operate sophisticated VAT fraud rings.
EU merchants will be able to do business more easily
EU-based businesses are more difficult to keep up with than non-EU-based businesses due to VAT fraud. This is particularly true for smaller items. EU-based businesses have had to work harder to keep up with non-EU businesses that could avoid collecting and paying VAT. EU businesses, however, never had this option.
Drop-Shipping: VAT Duties
Drop-shipping companies must determine the location of the supply to determine if VAT is required.
Shipping from China (or any other country outside the EU) to France is called the “place of supply”. This refers to the location from which the goods were shipped, in this case China.
No VAT will be added to China’s imports as it is not a member of the EU. Not at all until the annual threshold for imports is met.
Vat registrations are required for all activities, including storing goods in a country, setting-up a company, or selling online. This includes any follow-up work such as filings, reports and VAT returns.
Distance selling thresholds vary in each Member State. Once you have reached the country-specific annual threshold you need to obtain a VAT number for the country of import.
Drop-shipping companies in Europa must consider this limit when selling to their customers.
The annual VAT registration threshold for distant selling makes it mandatory to have a VAT number. It is crucial to act quickly to avoid fines, penalties and other negative consequences. This page lists all European VAT threshold values.
Intrastat reports can be used to track the movement of goods within the European Union Member States. They are required when the Intrastat threshold has been exceeded. All EU Member States require that businesses declare all shipments and arrivals.
If you have a European VAT number, the reporting must be done on a monthly basis. This is done to allow governments within the EU to keep track of sales between countries and to collect statistical information to combat VAT fraud.
Although “normal” VAT payments may not be required when a product imports from outside the EU to an EU state member, and the threshold limit hasn’t been reached, import VAT will most likely be due.
Note To be subject to import VAT the value of the imported goods must exceed a threshold between 10 EUR and 22 EUR depending on where they are located.
Import duties/VAT to be paid by the importer of record
Dropshipping is when your customer is the importer-of-record. In this case, the import VAT is payable by the customer. Your business will have to pay import VAT and import costs if it is the importer.
Importer Of Record: A term that refers to the entity that (1) ensures imported goods comply with local laws, (2) files a completed duty entry along with associated documents and (3) pays the applicable import duties and other taxes. (Source: businessdictionary.com)
Although it is theoretically possible to include import VAT in the purchase price, this is not usually the case. Customers must pay it. Customers must pay the import VAT to their postal company or directly to customs.
Drop-Shipping: The Advantages
This article is not just about VAT and tax. It also includes some tips and tricks on how to get the most out of drop-shipping.
Very little financial effort
Drop-shipping is a low-cost way to make money. There are no storage costs and you don’t have to invest in inventory. You only purchase and sell the products you have sold. There is no risk. This means you are already paid by the customer.
It is easy to set up
It is obvious that you don’t have to deal with physical products or need space for storage. This reduces the workload and makes it irrelevant to do any pre-ordering, storing, or other tasks.
You don’t have to worry about any physical aspects of your business so you can sell from anywhere.
It is possible to quickly change the product catalog without having to order products in advance. This allows you to quickly add new products, or to respond to current trends.
Downsides of the Drop-Shipping model
Dropshipping businesses face low margins. This business model is easy to establish and has low overhead costs. It is often calculated with small margins and prices.
Note Make sure you have an online presence that is better than the competition and a reliable brand to 1. beat them and 2. offer reasonable pricing that is acceptable to potential customers.
Problems with suppliers
Dropshippers are responsible if your supplier has difficulty with delivery.
Important: To avoid any problems, make sure you have a reliable partner and a network that works. Good reviews and customer satisfaction are essential.
There are limited opportunities for brand building
Drop-Shipping doesn’t offer a lot of branding and customization options. Packaging is handled by a business partner. Manufacturing is also done by a business partner. This makes it more difficult to bind clients to your brand.
Note These limited opportunities are why it is crucial to have a strong online reputation and a high performance online to offset these disadvantages
Besides this small overview, it has turned out that the biggest challenge for most drop-shippers are the follow-up and administrative tasks that are associated with VAT and taxation.
Summary: Drop-Shipping VAT
Drop-shipping is a great way to reach millions of customers for businesses without having to spend a lot and taking a relatively low risk. Although there are some drawbacks to drop-shipping, such as the inability to establish a strong brand, it can be worth the effort depending on the sector and niche. Drop-shippers love the flexibility.
Taxation, customs, and financial issues can cause headaches, as we have already mentioned. Failure to comply with the law can result in fines, and some online marketplaces may ban sellers who do not have valid VAT IDs or proper VAT registrations.
PLEASE NOTE This article is intended for informational purposes only. Hellotax does not offer dropshipping tax services, but only VAT services to e-commerce customers in Europe.