The European Union (EU) has established new rules for all EU imports in 2021 and those have continued to be tweaked and updated this past year.
The new rules, collectively called Import One-Stop Shop (IOSS) are an attempt to both simplify Import VAT collection and level the playing field between EU and non-EU players.
The newest updates to VATs on imports further extend regulations and provisions, something all shippers, carriers, brokers, forwarders, and anyone dealing with cross-border transport needs to understand. Everything from VAt collection to VAT returns can complicate cross-border logistics and imports significantly.
Until recently, EU and non-EU sellers selling goods online to EU consumers can import the goods into the EU, directly to the consumer, and import VAT-free if the consignment of good(s) is valued at or below €150. This can have a significant impact on M-commerce and online businesses.
This ends on 1 July 2021 and all imports will be subject to EU Import VAT. Sellers and facilitating marketplaces can collect import VAT on import consignments valued up to €150.
The new regulation regarding cross border logistics allows for a low-value consignment Import VAT exemption, known as the “low-value consignment stock relief”, and was intended to relieve EU member countries’ customs from the burden of checking large volumes of packages for small amounts of potential tax revenues.
An unintended consequence of this exemption left EU-based sellers at a major price disadvantage since they must charge VAT on goods that are dispatched from within the EU. The exemption has also encouraged large-scale fraud by sellers deliberately under-declaring the values of goods to escape the EU imports bill.
How Does This Impact B2B Fulfillment in the EU?
There are a number of considerations to keep in mind, especially as these regulations continue to be updated. In 2021, Michel da Silva, an e-business and B2B fulfillment expert at ModusLink was asked to help explain the new VAT on imports and similarly related regulations. His responses are below and later we will dive into the very latest updates that you need to know about B2B e-commerce fulfillment and imports.
Q: What does this supply chain change mean for a typical non-EU seller?
A: Non-EU sellers, including those from the UK, will have to appoint a VAT Intermediary to act as their agent. This is similar to a Fiscal Representative or to use a Merchant of Record, who will take care of payments, taxes, and compliance. It will significantly impact how importers handle fulfillment solutions, and customer service, and protect bottom-line profits.
Q: Can you give us an example to better understand the effect of the new Import VAT rate regulations on an average non-EU company?
A: Let us consider the EU imports VAT obligations today and post-2021 reforms for an example non-EU seller, Client ABC from China:
Today: Client ABC can sell and ship consignments under €22 to EU consumers VAT free. Over that limit, then either the customer or Client ABC has to pay the VAT on imports at the rate of the country of import. To provide a good seller experience, Client ABC pays the import VAT on behalf of its customers.
After July 1st, 2021: Client ABC will charge VAT at the point-of-sale and declare it in a cross border logistics return if not exceeding €150. They are then exempted from paying import VAT at customs. Client ABC may also declare sales to customers around the EU via its IOSS return, as discussed in the above section.
Q: What about transactions for items greater than €150 for non-EU sellers or those dealing with B2B and B2C orders?
For consignments exceeding the €150 IOSS threshold, the Import VAT must still be paid to customs. This could still trigger a regular VAT registration in the country of importation for Client ABC from the above example if they wish to sell the goods locally or to consumers in the rest of the EU.
Q: What is a Merchant of Record (MOR) and why would companies or big box retailers dealing with VAT on imports use them?
A: A Merchant of Record is a legal entity selling goods or services to a cardholder on a company’s behalf and to whom the cardholder owes payment for such goods and services. The MOR is the responsible party for meeting all of the cross border logistics and regulations in the EU. The MOR processes all payments and takes on those transactions. Using a MOR is a very good way to ensure VAT-registered companies are in compliance with the law as these payment service providers can manage the entire process for you.
EU Import VAT and Regulations for 2022 and Beyond
There are a number of considerations to keep in mind, especially as these regulations continue to be updated. In 2021, Michel da Silva, an e-business and B2B fulfillment expert at ModusLink was asked to help explain the new VAT on imports and similarly related regulations. His responses are below and later we will dive into the very latest updates that you need to know about B2B e-commerce fulfillment and imports.
Q: What does this supply chain change mean for a typical non-EU seller?
A: Non-EU sellers, including those from the UK, will have to appoint a VAT Intermediary to act as their agent. This is similar to a Fiscal Representative or to use a Merchant of Record, who will take care of payments, taxes, and compliance. It will significantly impact how importers handle fulfillment solutions, and customer service, and protect bottom-line profits.
Q: Can you give us an example to better understand the effect of the new Import VAT rate regulations on an average non-EU company?
A: Let us consider the EU imports VAT obligations today and post-2021 reforms for an example non-EU seller, Client ABC from China:
Today: Client ABC can sell and ship consignments under €22 to EU consumers VAT free. Over that limit, then either the customer or Client ABC has to pay the VAT on imports at the rate of the country of import. To provide a good seller experience, Client ABC pays the import VAT on behalf of its customers.
After July 1st, 2021: Client ABC will charge VAT at the point-of-sale and declare it in a cross border logistics return if not exceeding €150. They are then exempted from paying import VAT at customs. Client ABC may also declare sales to customers around the EU via its IOSS return, as discussed in the above section.
Q: What about transactions for items greater than €150 for non-EU sellers or those dealing with B2B and B2C orders?
For consignments exceeding the €150 IOSS threshold, the Import VAT must still be paid to customs. This could still trigger a regular VAT registration in the country of importation for Client ABC from the above example if they wish to sell the goods locally or to consumers in the rest of the EU.
Q: What is a Merchant of Record (MOR) and why would companies or big box retailers dealing with VAT on imports use them?
A: A Merchant of Record is a legal entity selling goods or services to a cardholder on a company’s behalf and to whom the cardholder owes payment for such goods and services. The MOR is the responsible party for meeting all of the cross border logistics and regulations in the EU. The MOR processes all payments and takes on those transactions. Using a MOR is a very good way to ensure VAT-registered companies are in compliance with the law as these payment service providers can manage the entire process for you.
EU Import VAT and Regulations for 2022 and Beyond
Like many things in life and global business, the only thing that stays the same is that everything changes. This is true of the latest Import VAT rulings in the EU as it relates to fulfillment centers, importers, and third-party logistic providers.
According to a report on cross border logistics and regulations in the EU from Bloomberg Tax on Oct 21, 2022, “Import VAT is payable by any person or persons designated as liable by the EU member state of importation, according to Article 201 of the EU VAT Directive 2006/112/EC. The indirect representative is generally a payer of import duties to customs and charges those duties from the business it is representing: However, the problem arises if its principal goes bankrupt, disappears, or refuses to pay the import taxes payable.”
But what does this mean for those who rely on imports and what power does EU import customs have when it comes to collecting VAT tax payments?
Customs has the power and authority to actually go back several years and request the payment of import taxes on past shipments and imports. They can, in fact, go back many years after the goods have been released and are in free circulation within the EU.
Waiting until years later to collect payments and chase down VAT on imports can help improve access to goods and materials among retailers and consumers. It is one of the downsides of the digital approach to omnichannel supply chain networks that are growing in popularity today.
However, there are obviously major risks involved for those funding, and dealing with the reimbursement and regulation side of imports into the EU. Therefore, representatives and those willing to take on this level of risk are not easy to find or only come at a very high cost.
The additional pressure on cross border logistics only adds to the complexity of managing finances, cash flow, invoices, payments, and overall budgets- something EU importers will have to adjust to and prepare for.
There are many layers to the EU import rules and regulations, including carbon emission monitoring and control, tax and payment constraints, load and product limitations, and many more. Each one brings fees and additional expenses for importers and adds to the cost of shipping and transportation services.
Many countries and even individual shipping companies are ill-equipped to handle these changes and will likely struggle to adapt and keep up with the ever-changing field that is EU imports. But you don’t have to struggle with ModusLink on your side!
Navigate the Changes Now and Down the Line With Cross Border Logistics Experts From ModusLink
ModusLink is a provider of a multitude of e-business services including Merchant of Record and can assist with a range of b2b fulfillment needs and concerns. Stop wandering around blindly trying to make sense of the latest changes to EU imports and the newest VAT on imports.
Let the pros handle the complicated work and let you focus on managing your logistics. Contact ModusLink today by clicking here to start the process to get help navigating these newest regulations.
Bibliography:
Council of the European Union. Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. 11 November 2006. Accessed 26 October 2022. From https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32006L0112.
Europe Daily News, 24 October 2022. 24 October 2022. Accessed 26 October 2022. From https://www.mayerbrown.com/en/perspectives-events/publications/2022/10/europe-daily-news/europe-daily-news-oct2422.
KULDKEPP, AIKI. EU Court Clarifies How VAT Applies to Customs Agents. 21 October 2022. Accessed 26 October 26 2022. From https://news.bloombergtax.com/daily-tax-report-international/eu-court-clarifies-how-vat-applies-to-customs-agents.
Russia/Ukraine Crisis: Update on UK and EU Sanctions on Russia. 17 October 2022. Accessed 26 October 2022. From https://www.ropesgray.com/en/newsroom/alerts/2022/October/Russia-Ukraine-Crisis-Update-on-UK-and-EU-Sanctions-on-Russia.