23 June 2021 –
On July 1, 2021, as one of the priorities under the Digital Single Market Strategy, the EU will introduce new rules on the value-added tax (VAT) applied to cross-border e-commerce sales. These rules are part of a framework for modernizing procedures in the EU and bringing customs rules up to speed with the realities of our e-commerce environment and modern trade.
Introducing these changes brings the EU closer to operating a fully automated customs union, making it easier to combat VAT fraud and ensure fair market conditions for businesses operating in the EU. And while the changes will ultimately streamline and digitize VAT and trade as we know it, their near-immediate impact will predominantly be on the operations of e-commerce and express logistics businesses and postal operators. Such organizations will be met with two important changes:
- new tax compliance obligations for e-commerce shipments with a value up to 150 euros ($180);
- a rise in the number of low-value consignments that need to be cleared by customs, resulting from the ending of the 22-euro de minimis import VAT exemption.
The Import One-Stop Shop
Under the new rules, there are two* import processes for bringing goods up to 150 euros from outside of the EU into a member state. The first of these is the Import One-Stop Shop (IOSS), a non-mandatory online portal that allows e-commerce businesses to collect VAT at the point of sale.
Suppliers can use the IOSS when making e-commerce sales on eligible goods into the EU, allowing them to submit monthly VAT returns and remit it directly to the relevant tax authority. Under the IOSS scheme, the supplier will provide an IOSS VAT identification number to the carrier, who will then submit it to the appropriate customs body. The goods will not be assessed for VAT on arrival in the EU.
Any supplier that is based outside the EU and does not have an entity in the EU will be required to appoint an EU-based intermediary to fulfill VAT obligations on behalf of their business under the IOSS.
The second option is where a supplier chooses not to register for the IOSS: the customs declarant will be required to collect VAT from the end consumer and pay it forward to the relevant tax authority.
This has enormous potential to adversely impact the end consumer’s experience, at a time when buyers are increasingly expecting rapid and seamless delivery of goods. We are accustomed to logging in online, browsing e-commerce sites with ease, and having our chosen goods arrive on our doorsteps with a rapid turnaround and minimal fuss. The fast movement of the range of goods available at our fingertips, particularly those with a value of 22 euros and below, has become an expectation rather than a “nice-to-have.”
However, if a consumer purchases goods from outside the EU from a supplier that is not using the IOSS and VAT is not applied at the point of purchase, this harmonious customer experience could be disrupted—and e-commerce businesses and express delivery companies should not underestimate the potential negative impact of levying VAT at the point of importation to an unexpectant consumer.
Imported goods are not normally released by customs until VAT and any relevant duties are paid. Some carriers may hold the shipment for payment, others will clear and bill the recipient, along with a disbursement fee for doing so. Unanticipated customs clearance and disbursement fees may also be applied to parcels from suppliers that do not have an IOSS number.
While this is the reality of EU cross-border trade in which we must operate, postal operators and express delivery services will be all too aware of the business and reputational impact if, and when, customer experience is tarnished by additional unexpected charges.
End of Import VAT Exemption and Impact on Express Transportation Industry
Prior to July 1, 2021, goods valued under 22 euros were essentially exempt from both import VAT and customs duty. However, the planned lifting of the 22-euro de minimis, also known as the Low Value Consignment Relief (LVCR), will immediately increase the number of goods liable to VAT that are moving through the networks of express transportation companies in Europe.
In the near- and long-term, the lifting of the LVCR will have clear time, space and cost implications for express delivery companies: more time will be spent clearing the greater number of goods that will now be subject to VAT; more warehousing space will be required to store those items pending clearance by customs authorities; and ultimately it will mean investing in more employees to process the anticipated higher volumes of packages and VAT invoices, as well as in new processing facilities.
The onus will also fall on logistics and transportation businesses to assess their own obligations for collecting input VAT according to the new terms, to ensure they are compliant.
While the changes do have the potential to impact e-commerce businesses’ customer service levels, it is important to remember that the lifting of the LVCR will level the playing field for e-commerce businesses operating in the EU, by preventing parcels imported from outside of the EU intentionally or accidentally avoiding VAT by under- or misreporting the value of imported goods. The Commission’s VAT Gap Report 2020 estimated the 2018 gap between expected VAT revenue and actual amount collected at 140 billion euros, in no small part due to fraud and evasion, alongside other factors including maladministration and legal tax optimization.
Under the new rules, online marketplaces that facilitate cross-border sales (imported into the EU and up to 150 euros) to EU consumers will, under certain circumstances, also be responsible for the remittance of VAT due on goods sold on their platforms. These marketplaces will be eligible to register for the IOSS, allowing them to pay their VAT obligations on a monthly basis. Again, collecting VAT at the point of purchase will minimize handling fees levied by express transportation companies, to the benefit of the marketplace, the delivery agent, and the customer at destination.
What else can be done to mitigate the business impact of the new VAT rules on companies in the parcel and logistics industry?
- Securing commercial invoices from shippers is one of the most important things that can be done to support simplified customs clearance processes under the new rules.
- It is vital that express transportation businesses and postal operators educate their e-commerce customers on the importance of proper documentation and the accurate valuation and description of goods. This will reduce the risk of packages being held, support smooth logistics processes, and help to mitigate unexpected costs.
- Ensure your workforce has the capacity and expertise to manage the uptick in the number of low-value parcels that will require clearing.
- Where necessary, invest in your warehousing and processing facilities to ensure you are adequately prepared for the ending of the 22-euro de minimis import VAT exemption.
- Work with e-commerce businesses to educate them on the benefits of the IOSS platform and the potential impact on the customer experience of levying VAT on the customer at the point of delivery.
The EU is also taking steps to support the parcel and express logistics industry—an amendment to the Union Customs Code Delegated Regulation (EU) 2015/2446 will see the introduction of a simplified customs declaration for all shipments with a value below 150 euros, the “super-reduced dataset” (SRDS).
This amendment will help parcel operators and couriers to manage the uptick in consignments entering the EU by offering a simplified level of data in customs declarations. With the introduction of the SRDS, customs brokers will only be required to handle a third of the data found on a standard declaration, which has the potential to ease the pressure.
At FedEx, in anticipation of these changes and to support the smooth flow of our customers’ goods, we have made significant investments in our infrastructure, people, and training, to ensure we have the capacity and capabilities to process additional low-value shipments that will need clearing. Staff are being added in local areas across various member states and we have opened a new service center in Porto to support these efforts.
FedEx has also worked with KPMG to develop a streamlined IOSS registration process for customers, which will include support with the IOSS registration process, the submission of customers’ monthly IOSS return, real-time notifications handling, and an online portal and alerts.
We have also launched a range of online learning materials so customers can understand the changes and mitigate against the risk of non-compliance, to minimize disruption to their business and avoid adversely impacting their customer service come July 1.
It is crucial that shippers are kept informed by their chosen express couriers so they can act proactively. We aim to educate and support European businesses on any changes affecting their logistics processes, and will continue to do so and facilitate trade in Europe and globally as we move forward.
*A third scheme (Special Arrangement) allowing postal operators, carriers and customs agents to collect VAT for goods up to 150 euros from end-consumers and file monthly declarations with tax authorities, will not be covered here.