7 minute read 14 Dec 2020

What you need to know about the new VAT rules for e-commerce

By Jan Van Moorsel

EY Belgium Tax Partner

Indirect tax partner

7 minute read 14 Dec 2020

New VAT rules for distance selling will be introduced. Find out why, what the most important changes are, and whether the rules meet their objectives.

Executive summary

  • The new rules are mainly intended to strengthen the European internal market and to ensure fair competition with non-European traders.
  • Although these are noble goals, the question is whether the changes will succeed in achieving those goals and whether they will contribute to simplify business processes. 

E-commerce is booming. More and more companies are switching to digital to sell their products online, because people are more inclined than before to buy goods on the web. The corona crisis gave that evolution an extra boost.

With that in mind, it is important to discuss the new VAT rules for e-commerce. These normally would have come into effect on January 1, 2021, but the COVID-19 pandemic threw a spanner in the works. The European Commission has therefore decided to postpone the implementation until July 1, 2021. Although it remains to be seen whether that will actually be the final date.

Why are these new rules being introduced? Especially since current VAT legislation makes it more difficult for businesses in the European Union (EU) to trade. 

Current legislation

Suppose you as a company sell goods via the internet. If you are only active in Belgium, everything is still relatively simple. You use a Belgian VAT number, you submit your declarations in Belgium, and you know the Belgian rates.

But what if you have customers in other European countries? With other national rules on VAT rates and obligations? For that situation there are VAT rules on cross-border trade of goods to private individuals. The problem is that those rules date back to the 1990s, but there has been enormous technological progress since then.

As a result, companies operating in all EU Member States must register separately for VAT in each of those countries, at least if they exceed certain turnover thresholds in those countries (the so-called distance selling thresholds). And often have to follow the VAT obligations of those other countries. From submitting VAT returns to keeping VAT accounts, often in a different language and according to other customs that you are not familiar with.

Obstruction of the internal market

All this administrative and legal hassle for VAT makes it a lot more difficult for an entrepreneur to be active outside Belgium. And that is not in line with the EU strategy. Because they want to have a strong internal market, where VAT is not an obstacle if you want to sell goods in other European countries.

Another pain point of the current rules is the uneven playing field between European and non-European traders who sell goods on the European market. The latter often succeed in selling their products through abuse and even fraud without paying VAT andmight then achieve higher profit margins than European entrepreneurs, who do pay VAT abiding to stricter and more efficient controls.

That is why the European Commission decided it was time for new VAT rules on e-commerce. The goal was threefold:

  • Modernize the VAT rules.
  • Simplify VAT obligations.
  • Fight against VAT fraud so that European and non-European businesses compete fairly.

Main changes

You can find a complete overview of all new rules in our VAT e-commerce brochure. The four most important ones are briefly discussed here. 

2021 VAT package for e-commerce

View

The first is that there will be a uniform (to be viewed annually) turnover threshold of 10,000 euros for the entire EU. Are you exceeding that? Then you have to settle the VAT in the Member State of your customer. At the moment there are still two thresholds, of 35,000 euros and 100,000 euros per country. As a distance seller, under the new rules, you will start charging foreign VAT to your customers much faster than now, which would also mean faster foreign VAT obligations.

However, in order to reduce the need for foreign VAT numbers, the second amendment provides for the "one stop shop" to be extended to consumer goods. This means that you no longer have to apply for a VAT number and submit local VAT returns in every EU country where you sell. One declaration for all your transactions throughout Europe will suffice.

The third is that - in certain circumstances - the electronic interfaces (web shops, portal sites, etc.) will be considered to have bought and sold goods. In this way, they will be responsible for a correct payment of VAT. Even if they are not covered by these rules, they will have to keep records of third party sales through their web shop for 10 years.

The final one is that the VAT exemption for low-value shipments will disappear. Now there is a threshold of 22 euros. One problem that has been identified is that some non-European traders undervalue their parcels below that threshold, so that they do not have to pay VAT. Now that the threshold disappears, in principle every delivery in which the goods are imported into the EU will also be taxed with VAT.

Permanent bottlenecks and complexity

Now the question remains: will the legislative changes succeed in their goal of modernizing VAT rules, making VAT obligations easier and ensuring fair competition with non-European traders?

The (short) answer: not quite.

In the first place, important bottlenecks remain. Take, for example, buyers who fall within a certain category (the "gang of four"). Do they buy goods above a threshold value (11,200 euros in Belgium)? Then they have to register for VAT and the transaction no longer falls under the distance selling rules. The problem: if such a customer "forgets" to request a VAT number, it is impossible for a vendor to know that they had that obligation. There is a chance that the wrong rules are then applied. This problem has not been removed by the new rules.

The new rules are also very complex. Broadly speaking, there are three special schemes (a non-Union scheme, a Union scheme and a scheme for distance sales of imported goods), each of which constitutes a closed system with its own modalities, each of which applies to a specific sales situation. Suppose you sell something online and there is a concurrence of distance selling of imported goods, own sales and sales by third parties on your website. You would then have to apply all kinds of different legal schemes and ensure that your business processes are adapted to them.

In addition, the new rules provide for the very long retention obligation of ten years (usually this is 7 years in Belgium today). To keep data of your sales transactions for a lot of small shipments for ten years? That can be a tough effort for a company.

Finally, it is also questionable whether the new rules will succeed in ensuring fair competition. The VAT exemption for low-value shipments will disappear, which is a step in the right direction. But the valuation problem remains. A rogue non-European entrepreneur can therefore still pass his parcels on at an incorrect value - read: too low - and thus pay less VAT than his European competitor. The success of that rule will therefore mainly depend on how efficient the controls are. It is also the case that from 2024 onwards, the aim is to involve payment service providers for this.

Impact on entrepreneurs

What is the concrete impact of the rules on companies? It is not easy to give a general estimate. Because it is an amalgam of various rules with specific effects.

For some entrepreneurs, the new rules will provide a welcome simplification. For example, if you can use the one-stop shop (and possibly close foreign VAT numbers).

For other entrepreneurs, the rules make everything more difficult. Take online platforms and web shops, for example. There is a good chance that they will be confronted with VAT in more situations. And then there is the costly ten-year retention obligation.

There are also entrepreneurs for whom nothing changes. For example, if a company has already registered for VAT in another country and is satisfied with the way things are going, it does not need to switch to the - optional - one-stop shop.

My advice? If you are active in cross-border e-commerce, you would do well to review the new rules in time, analyze them and determine the impact they will have on your business.

Future

And then one last point about the future. The broadening of the one-stop shop is an important test case. The European Commission wants to establish a definitive VAT system throughout Europe in the long term, for B2C and B2B, in which the one-stop-shop system plays an important role (together with the concept of "Certified Taxable person", which is not yet unanimous within the EU). In short: for all cross-border transactions in Europe. If the measures work well (enough), we will take a new step in that direction.

To see what Belgian companies think of the impact of the new VAT rules, Comeos and EY organized a survey among the members of Comeos. Discover the conclusions in this brochure. 

2021 VAT package for e-commerce

View

What are the upcoming trends and drivers in the booming e-commerce landscape?

 

Click here to register for our series of e-commerce webinars starting 25 February 2021.

Newsletters EY Belgium

Subscribe to one of our newsletters and stay up to date of our latest news, insights, events or more. 

Subscribe

Summary

The new VAT rules for e-commerce have a noble goal: they want to modernize legislation, simplify VAT obligations and combat VAT fraud. However, the European legislator does not seem to have fully succeeded in this: bottlenecks remain, and the legislation is sometimes too technical and complex. As an entrepreneur, we advise and help you to take a closer look at the rules, to determine what the impact will be on your business and to prepare for it in good time.

About this article

By Jan Van Moorsel

EY Belgium Tax Partner

Indirect tax partner