VAT, or value-added tax, is a tax levied on the purchase of a product or service whenever value is added to such product or service until the final point of sale to the end consumer, and is essentially the equivalent of U.S. sales tax. The European Commission recently issued new guidance for the application of the new VAT legislation that, due to the COVID-19 pandemic, will become effective July 1, 2021. The new rules are meant to simplify the obligations of companies engaging in cross-border e-commerce sales, while also eliminating differences in the way VAT applies to EU and non-EU based companies. The regulations also create a new import scheme which requires the collection and payment of VAT on sales of low-value goods from non-EU countries, such as the United States, to consumers in the EU-member states.
Under prior law, low-value goods, or goods with a value below EUR 150 (roughly $175 USD), imported into the EU were exempt from VAT, however EU based companies with sales of those same goods were not exempt from paying VAT. The result was that foreign importers of low-value goods were at a significant advantage in the EU market, compared to EU based businesses. The new system repeals this rule, and subjects all goods imported into the EU from third-party countries to VAT. If the goods sold by non-EU businesses have a value that is below the EUR 150 threshold, an online seller is required to charge the consumer for VAT at the time the goods are purchased online.
If all of the criteria related to the value and shipment of the goods are met and the seller has charged VAT at the point of sale of the goods, the seller will then register with and remit all VAT collected from all consumers to the EU member state of their choosing. It will be the responsibility of the EU member state with which a company is registered, to determine which other member states are entitled to a portion of tax collected, based upon disclosed information from the seller. Assuming the seller complies with the necessary reporting requirements, the purchased goods will be released from EU customs to the consumer, exempt from VAT.
While the new system imposes a tax on a previously untaxed subset of imported goods to the EU, the new “one stop shop” system, as it is referred to in the regulations, is meant to yield a faster and more efficient delivery system to the end consumer, as well as create a better system of payment of VAT to the appropriate EU member state. This system is also meant to remove the inconsistent tax treatment of EU businesses as compared to foreign competitors. As mentioned above, this new system eliminates one large advantage that U.S. (and other foreign businesses) were receiving in the past under the prior law.
The impact to U.S. importers could range anywhere from a more in-depth look at sales to evaluate risk to a requirement to register in an EU member state to collect VAT at the time of sales. It is likely that sellers to consumers in the EU will need to collect additional information from buyers to report to EU taxing authorities. Regardless, as website and internet sales continue to dominate the marketplace, companies should be aware of the tax impacts of expanding sales into international marketplaces.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.