If the Value Added Tax (VAT) is quite simple to apply on local products for local customers, it is a real headache, full of rules and exceptions, when you sell products internationally imported. E-commerce sites and marketplaces often aim to break down country borders and are therefore fully concerned by the complexity of VAT management.
In this first article, we try to see clearly in a complex regulatory and tax system, thanks to a few key benchmarks intended for operators of online sales platforms on European territory (physical presence of the seller and/or buyer in the European Union). After a short presentation of VAT (its role, how it works), we focus on the “e-commerce VAT package” which has thoroughly reviewed the application of VAT in the European Union since July 1, 2021.
In a second article, we will see how to concretely apply the rules for calculating VAT on an e-commerce site or a marketplace, by taking a few concrete cases, based on situations, types of products, customer contexts. They will show the need to clearly define the perimeter of the game to avoid tax shambles!
Before going any further, two important points of vigilance:
- We give here some popular answers, but it is always necessary to ensure the correct application of the VAT in its own context. The intervention of experts (accounting, taxation, import management) is therefore more than desirable!
- The rules change. What we write now may turn out to be obsolete more or less quickly. Again, get informed, ask for confirmation!
WHAT IS VAT?
Value added tax is an indirect tax on consumption that targets the end user of the product or service purchased (therefore the individual). The company that sells the product or service to the individual (B2C activity) increases its selling price excluding tax (HT) by the amount of VAT to obtain the price “all taxes included” (TTC). The amount of VAT is calculated via a VAT rate, a percentage applied to the price excluding VAT.
For example, a bar of chocolate with hazelnuts at €3.00 excl. tax will be sold for €3.60 including tax (application of a 20% VAT rate), while a box of chocolate powder at €3.00 will be sold for €3.17 including VAT (application of a VAT rate of 5.5%).
Why €3.17 incl. VAT, and not €3.16 incl. VAT, when the exact calculation gives €3.165? Because, by convention in France, it is the rule of rounding up (defined as financial rounding) that applies. Of course, if the amount had been €3.164, it would be rounded up to €3.16. And with €3.166, we would get €3.17.
Individuals are the ones who pay the VAT in the end, but a company that sells to another company (B2B activity) will also apply it in many cases! This is particularly common when the sale is made in the same territory.
The company that buys will therefore pay an additional amount to its supplier (the amount of VAT), but as it does not owe it to its tax authorities, it will deduct it from the VAT that it collects itself via its own sales.
VAT is therefore neutral on the company’s balance sheet, even if the latter often has to manage the impacts of a cash flow mismatch between the VAT collected, the deductible VAT and the VAT refunds made by the tax authorities.
First implemented in France in 1954, VAT now exists in nearly 170 countries. The problem is that the application rules are not unique, they vary greatly within a country (several rates depending on the product, many exceptions, particular areas), but also from one country to another. . This is what makes it so charming… A real challenge of implementation on online sales platforms!
B2B AND B2C, TWO DIFFERENT APPROACHES
As we have just seen, if a sale is made between two professionals located in the same territory, the supplier applies the VAT in force in this territory and the buyer pays the VAT then deducts it from his declaration. There are exceptions of course, but let’s stick to the general framework.
If the supplier sells to a professional buyer located in another country of the European Union, the invoicing will be excluding VAT. The buyer will be responsible for settling his VAT situation with his own tax administration.
If the buyer is an individual (B2C activity), it is a little different. If the seller and the buyer are in the same territory, the VAT of this territory applies (in general, but again there are exceptions…). If they are in different territories, the VAT of the buyer’s country must apply. And since that hasn’t always been the case, it’s time to address the big changes to VAT in 2021.
“E-COMMERCE VAT PACKAGE”: A MAJOR REFORM IN THE EU IN 2021
Before the arrival of the Web, few individuals bought their products abroad. A country could therefore impose its VAT rules on its soil without too much difficulty. The complexity existed on international exchanges between companies, but the mechanisms were (more or less) well established, traced and controlled.
The explosion of e-commerce sites and borderless marketplaces has upset the situation and encouraged massive VAT fraud, in particular via marketplace dropshipping (sale of a product by a third-party seller abroad to an individual on EU soil, without the operator of the marketplace being fiscally involved).
Now it’s over! At least, in the countries of the European Union (EU). The so-called “e-commerce VAT package”, applied since July 2021, is a series of European directives and regulations that close the VAT leak, while slightly simplifying management on the merchant side.
Now, as soon as you exceed €10,000 in turnover in all EU countries (it goes fast!), you must apply the VAT of the country of destination on each order. Below this threshold, you apply the VAT of your country, unless you choose to apply the VAT of the country of destination from the first euro (an interesting option if you want to save yourself significant costs on calculation rules in the tools).
In this reform, marketplaces are considered as suppliers of end customers, so they must apply VAT rates to products sold by third parties (including outside the EU) and take responsibility for declaring VAT (according to the cases described below). ).
Taxable persons are all companies that sell products and services intended for individuals in EU countries, including companies outside the EU!
To save EU traders from laborious VAT declarations and regulations in each EU country (where their customers are), a one-stop shop has been created to manage sales between EU member states: the One Stop Shop (OSS). The VAT collected is declared there and it is the tax administration of the seller’s country which is responsible for redistributing the VAT in the countries concerned (via a VAT balance system between EU countries). In France, the OSS is accessible from the official tax website.
When a site or a marketplace sells a product from a country outside the EU, there are now two cases:
- For a shipment with a value excluding VAT of more than €150, VAT is applied on importation and customs duties are added (as before the reform). VAT is declared to customs electronically and these formalities are carried out by shippers and carriers acting on behalf of online buyers.
- For a shipment with a value excluding VAT of less than or equal to €150, the merchant can go through a specific import window, the IOSS (Import One Stop Shop). The advantage is to eliminate all administrative constraints on delivery on the end customer side, since VAT is applied during the sale. Be careful, there are some exceptions (alcohol, tobacco…)!
It should be noted that a new declaration has been put in place by French customs for shipments with a value of less than €150: the H7 declaration. With a very small data set, it is deposited in a high availability online service, adapted to e-commerce activities: Delta H7.
You will notice that the thresholds are calculated on shipments, not products! The 150€ are therefore quickly reached with a well-filled package. This has the side effect of encouraging multiple sending…
Attention ! There is no longer an exemption for products imported into the EU with a value of less than €22. It’s all over now!
VAT AND CUSTOMER EXPERIENCE: A SUBJECT NOT TO BE NEGLECTED!
For the moment, we have talked about management, calculations, constraints, procedures, techniques… But the end customers in all this, how are they impacted by the application of VAT? They have the heavy responsibility of paying VAT on the products they buy! You might as well make its application clear and transparent, thanks to good UX (user experience) work upstream.
The “e-commerce VAT package” has a great merit, it places the customer in a context that he knows: the taxation of his country. He can therefore more easily understand and compare the offers. The application of VAT is systematic, with rates that correspond to the products they usually consume on its territory. From a UX point of view, this is rather good news, with a generalization of VAT display practices at certain stages of the customer journey (knowing that there are few obligations in this area). We will see some interesting details on this subject in the second article.
If an e-commerce site or marketplace outside the EU does not apply VAT at the time of sale (this is still the most common case, even for products under €150 and despite the application of the “Package VAT e-commerce”), the private customer from an EU country will be asked by the carrier to pay the duties and taxes (with any management fees), upon delivery. A rather unpleasant surprise for the customer who did not check the application of VAT when ordering…
The ideal is the e-commerce site or the marketplace that acts on a local market (a single EU country for example). The risks and constraints are minimal. On the other hand, in the case of an international website which presents an offer with prices excluding VAT for all customers in the world, the difficulty will be to get the customer to accept the application of VAT when ordering. . At what point in his career should the subject be broached? How to manage the case of non-connected visitors (therefore not localized) who will identify themselves during the purchase phase? In these kinds of situations, functional, UX and UI design work is crucial.
A final piece of advice for traders: it is in your best interest to communicate on the way you manage VAT, especially if you operate the IOSS counter for products from a country outside the EU. This is an advantage to highlight because it avoids bad experiences on delivery (VAT and fees to be paid)!
AND NOW, WHAT TO DO WITH ALL THIS?
So much for the theory and the regulatory framework! All that remains is to apply them correctly… and the questions abound. Should I display the prices including VAT, HT, both? How to manage VAT and shipping costs? How to calculate VAT according to product lines, quantities and VAT rates? What about promotions? Concrete and practical topics that will be at the heart of our next article!
SOME USEFUL LINKS
- Explanatory notes on the VAT rules for e-commerce: a very comprehensive document on the “VAT e-commerce package”, published by the European Commission.
- VAT – Value Added Tax: the VAT management rules in force in France by the Official Bulletin of Public Finances (BOFIP). (fr version)
- Rounding: page of the General Directorate of Public Finance (DGFIP) on the rounding rules in force in France. (fr version)
- Declaration and taxation of imports from July 1, 2021: a complete file on the management of imported products, offered by French Customs. (fr version)
- One-Stop VAT Shop in France: access to OSS/IOSS one-stop shops from the impots.gouv.fr website. (fr version)
