As a dropshipper selling products to EU customers (or an aspiring dropshipper), you’ve probably heard about the EU’s VAT changes by now.
A lot of dropshippers are asking: What has changed? How will this affect my business? Do I need to raise my prices or stop selling to/in the EU?
In this article, we’re going to take a look at the new VAT changes effective July 2021 and how they might affect your company.
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Overview of the EU’s VAT Changes: Effective July 1, 2021
1. If your business earns more than €10.000 per year, you are now responsible for collecting, reporting, and remitting (paying) VAT.
In the past, each country had a different distance selling threshold for distance sellers.
- Distance selling threshold: amount of revenue earned before ecommerce businesses were responsible for collecting and reporting VAT
- Distance sellers: any business that sells across EU country borders
For example, the threshold was €100.000 in Germany and €35.000 in Spain. If you dropshipped to customers in Germany, you weren’t responsible for VAT if you earned less than €100.000 per year – but now you are if you’ve earned over €10.000 in revenue per year for the past two years.
2. You can no longer avoid import VAT on items valued less than €22.
Previously, distance sellers were exempt from import VAT for items valued at under €22. This rule is no more. Now, import VAT is applicable to all purchases under €150.
This is why the EU is introducing the Import One Stop Shop (IOSS). This tool gives sellers the option to declare and remit VAT to tax authorities, as opposed to making buyers pay VAT costs when goods are imported into their home country.
3. You can pay VAT for smaller orders to any EU country through a single country’s tax authorities.
In the past, dropshippers who earned above the distance selling threshold in multiple EU countries had to register and remit VAT to each country individually.
Now, you can pay VAT from all of your EU country sales through a single tax authority. And you get to choose the country, woohoo!
4. You can continue charging the local VAT rate if you’re a micro-business in the EU with sales no greater than €10,000.
Under the upcoming VAT rules, there’s an exemption for small merchants established in one of the EU Member States with sales less than €10,000.
Basically, the exemption states that you can continue charging the local VAT of the EU country where your business is based for all EU countries you ship to, and continue remitting to your local tax authority.
What You Should Do Right Now to Prepare
Register for OSS or IOSS
If you’re an EU business that’s distance selling to other EU countries, register for the One Stop Shop (OSS) system to remit all VAT taxes through a single tax authority.
If you’re a non-EU business, register for the Import One Stop Shop (IOSS) system to follow the same process for goods valued less than €150. In addition to a speedier process with filing and remitting VAT through IOSS, you might also experience faster processing of your imported goods by customs authorities.
And if you don’t use IOSS, you might find that your shipments are more likely to be stopped for extra valuation checks at the border, which could delay your deliveries or result in extra VAT charges.
The rules are different if you’re using an online marketplace to facilitate your transactions. Under the new law, you might be able to de-register for VAT in certain EU countries since the marketplace you’re using might be deemed as the vendor of the goods, being the party responsible for collecting VAT at the time of the sale.
Please note that if you’re a non-EU business, you’ll need an “EU intermediary” to help manage the process under OSS rules. Click here to learn more about EU intermediaries for non-EU businesses.
Consider Hiring a Tax Consultant or Lawyer
As a business owner (or aspiring business owner), we don’t have to tell you that taxes can get rather confusing, rather fast. If you’re unsure of where you fit into the new VAT laws, it’ll be well worth the investment to hire a consultant or lawyer.
They’ll be able to examine your specific business needs and advise you on your best steps forward. They might even be able to help you find solutions that you never would’ve discovered on your own.
Keep Doing Your Research as New Details Develop
As with the UK’s recent VAT changes, it’s likely that many details will remain unknown until shortly before the VAT changes take effect on July 1, 2021.
For this reason, you should keep your eyes and ears open to make sure you’re not missing any important updates – or any misconceptions about rules that haven’t been clarified yet!
We’ll do our best to keep you updated, but now is the time to tap into your own resources and networks.
Why Is the EU Making These VAT Changes?
Before we get into why the EU has announced the new 2021 VAT changes, let’s do a quick recap on what VAT is.
The value-added tax (VAT) is a consumption tax on goods and services. It’s a flat tax that applies to anyone who purchases an item, as opposed to other forms of tax, like an income tax that’s based on earnings. More than 160 countries levy a VAT, and as you might guess, it’s most common in the EU.
In the EU, each country has its own VAT rate.
Reasons Why The EU Is Changing Its VAT Rules
The EU has decided to change the way that VAT works for a few key reasons.
1. Simplify VAT across all member states (countries).
When you’re managing, registering, and collecting separate VAT across 27 countries, things can get a bit confusing. The 2021 consolidation will significantly streamline the VAT process for governments and tax authorities, as well as for merchants who historically had to remit VAT to multiple countries.
2. Reduce VAT fraud.
It’s estimated that VAT fraud cost EU countries €160 billion in 2017. VAT fraud can be as simple as non-EU businesses finding loopholes to avoid paying VAT, and become as complex as sophisticated VAT fraud rings that are operated by professional thieves.
3. Make business fairer for EU merchants.
In addition to VAT fraud, EU-based businesses have had a harder time keeping up with non-EU businesses. This is especially true for smaller items, where non-EU businesses could avoid collecting and paying VAT, while EU businesses never had the option to avoid it.
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Big Changes Are Coming – Keep Your Chin Up
For many dropshippers with small businesses, the new 2021 EU VAT changes will mean you’ll have to change some (or many) elements of the way your business runs.
Whether it’s raising your prices to account for VAT, opting out of selling certain products to the EU, or some other change, you’ll need to plan accordingly.
It might seem overwhelming, but know that there are plenty of experts and resources out there who can help make sure that you’re making the best moves.
And as always, we’ll be providing you with support and updates as new details and considerations develop.
We got you.