Taxing the Digital Economy – VAT Changes in 2021 has been saved
Taxing the Digital Economy – VAT Changes in 2021
Indirect Tax Matters February 2021
In a previous edition of Indirect Tax Matters we looked at some of the VAT changes announced by the European Commission which were aimed at Taxing the Digital Economy from a VAT perspective. The European Commission had planned to introduce three new VAT measures on 1 January 2021 to tax the digital economy but due to difficulties caused by the pandemic the implementation of these new roles has been delayed until 1 July 2021.
The three new VAT measures being implemented on 1 July can be summarised under the following headings which we will investigate further in this article:
- The One Stop Shop – For Distance Sales
- The One Stop Shop – For Electronic Interfaces.
- The Import One Stop Shop
These new rules are an extension of the Mini One Stop Shop “MOSS” which came into effect in 2015. “MOSS” was introduced with the aim of reducing the administrative burden for businesses engaged in the supply of telecommunications, broadcasting and electronically supplied (TBE) services to non-taxable customers. Prior to MOSS a business could have had a VAT registration obligation in multiple jurisdictions, by opting to use MOSS a business can report sales for all EU jurisdictions via a return made to one Member State. There are currently two types of MOSS scheme, one for businesses established within the EU (the EU Scheme) and the second for those established elsewhere (the Non-EU Scheme), both relate to supplies made to consumers within the EU and are very similar. Businesses do have to follow certain rules, such as sourcing and retaining pieces of evidence regarding where the customer is located to determine the country where tax is due.
1. The One Stop Shop – For Distance Sales
Following the success of the MOSS system for taxpayers in reducing their filing obligation in many jurisdictions the new rules coming into force from 1 July 2021 will significantly expand the scope of the MOSS scheme which is now being renamed the One Stop Shop (OSS) with the Mini being dropped for both the EU and NON EU schemes.
a) EU OSS Scheme
The scope of transactions that will have to be reported through the EU OSS scheme will be increased to include not just TBE services, but also other B2C services and B2C supplies of goods.
Currently, supplies of goods sold and dispatched from a business in one Member State to a customer who is not registered for VAT and is located in another Member State are treated as being supplied in the country from which they are dispatched unless the supplier has breached the ‘distance sales threshold’ in the customers country. Many countries, including Ireland, had adopted the lowest threshold available of €35,000, whereas some countries, such as Germany, The Netherlands and Luxembourg have applied the maximum threshold of €100,000.
From July 2021 EU based suppliers will report these supplies, which were referred to as ‘distance sales’ but will now be defined as ‘Intra-Community distance sales of goods’, under the revised ‘One Stop Shop’ which will eliminate the requirement for multiple VAT registrations in different jurisdictions. The principle of taxing in the country of destination will also apply to all other services supplied B2C (as well as TBE services currently taxed this way), which will all be reported through the OSS. A threshold of €10,000 will apply to the total value of both services and ‘distance sales’ of goods so that if your cumulative annual sales of these types of supply exceed that threshold you must register for OSS and report your sales in every country to which you makes such supplies.
b) Non - EU OSS Scheme
The non EU MOSS scheme will also be extended to include all B2C supplies of services and with effect from 1 July 2021 the supply of all B2C services into the EU will also have to be reported by non-EU businesses under the OSS.
The subtle difference between the changes for the EU and Non-EU scheme is that the B2C sales of goods is not being covered under the OSS for the Non-Union Scheme.
2. The Import One Stop Shop (IOSS).
The reason for the subtle difference between the Union and Non-Union scheme for OSS on distance sales is due to the implementation of the Import One Stop Shop (IOSS).
With respect to the supply of goods B2C, from outside the EU to non-taxable persons (generally consumers) within the EU, any Customs Duty or VAT is generally collected as the goods are imported. The current exemption from declaring import VAT on goods of negligible value (less than €22) will be abolished from 1 July 2021. Customs Duty exemption (where applicable) for goods valued less than €150 will still be applicable.
Due to the removal of low value consignment stock there will be a significant increase in the number of transactions where VAT will be due on imports. Such goods will fall under a new category of ‘distance sales of goods imported from third territories or third countries’ and these will be dealt with by way of the new scheme – Import OSS (IOSS) which is available to both EU and Non-EU established traders.
The purpose of the IOSS is that suppliers importing goods into the EU can declare and pay the VAT due on those goods through the IOSS in the member state where they have registered for the scheme. Where IOSS is used the supplier will charge VAT to the customer at the time of the supply and the goods will not be subject to VAT at the time of importation.
From 1 July 2021 the B2C supply of goods from outside the EU to a customer in the EU, where the value of the goods does not exceed €150, will be chargeable to VAT which is payable and reported through the IOSS in the member state of identification.
A similar scheme to the IOSS was introduced in the UK on 1 January 2021 where UK VAT becomes due at the point of sale instead of on importation on both B2B and B2C sale of goods if the consignment is valued at less than £135 the VAT on these supplies is paid and declared to HMRC through a similar portal to IOSS in the EU.
From a UK perspective some of the difficulties our clients have been noticing in this area is knowing precisely what the £135 valuation includes. For example is it the customs valuation, should the VAT valuation include shipping/delivery costs, or, is it just the value of the goods supplied?
The EU IOSS has a valuation of under €150 and given the issues that have arisen for clients in the UK determining the valuation further guidance needs to be provided by the EU or Revenue before implementation.
3. The One Stop Shop – For Electronic Interfaces.
From 1 July 2021 if an Electronic Interface (effectively an Online Marketplace) facilities the sale of goods by a Non-EU established trader to an EU customer then the electronic interface is considered to be the seller and is liable for the payment of VAT. The payment and declaration of this VAT will be made by the Electronic Interface through the OSS for Electronic Interfaces.
The effect of OSS for Electronic interfaces is that the Electronic interface is deemed to have made the supply for VAT purposes. A supply of goods from an underlying supplier into the EU through an Electronic interface is effectively split into two transactions
- A supply from the Underlying supplier to the Electronic Interface
- A supply from the Electronic Interface to the customer.
IOSS will also apply to supplies made on an Electronic Interface where the Electronic interface facilities the importations of goods from outside the EU by an underlying supplier. The Electronic Interface will be deemed to have made the supply and will be liable for the VAT through the IOSS
These new rules are a fundamental shift towards the principles of taxing at destination. These rules will reduce the filing obligations required by taxpayers as there will no longer be a requirement to have multiple VAT registrations across Europe in turn reducing the VAT compliance cost for taxpayers.
Irish Revenue have provided some guidance on these new rules coming into force on 1 July 2021 on the Revenue website here. However limited guidance has been provided on the registration process for businesses that wish to prepare in advance but it is our understanding that the registration process will be available in April 2021.
Guidance has also not been provided on the deregistration process for businesses that have multiple VAT registrations across the EU that wish to reduce their compliance costs. With only four months until these measures take affect businesses should be considering these new rules now and how it might affect their business.
This article provides only a high level overview of some of the implications involved. We are happy to discuss how this impacts your business more specifically.