Warehousing, order fulfillment, and shipping are all individual aspects of the complex puzzle called logistics. There are, however, many other essential administrative components included under logistics’ broad heading. For online retailers who sell D2C internationally, understanding and accommodating global tax law is one such logistical element. Fortunately, with the emergence of the Import One-stop-shop (IOSS), the EU has provided a simplified way to help foreign e-commerce retailers navigate the region’s tax law complexities.
Today, the staff at Symbia Logistics would like to discuss the European Union’s changing VAT laws, IOSS, and how these programs might affect your company’s shipping and accounting procedures.
What is VAT?
VAT, which stands for Value Added Tax, is a taxation structure that assesses new fees whenever value is added to an item or service as it moves along the supply chain. VAT is prized for its efficiency in collecting a level of revenue reflective of the complete manufacturing, logistics, and shipping process. Proponents of value-added taxes view them as a non-discriminatory schema that does not target or act punitively towards higher-income people or entities. They are the same percentage regardless of the buyer’s overall financial status.
Value-added taxes are most commonly used in the European Union, aside from post-Brexit Britain. E-commerce brands that frequently ship goods to the EU must know how VATs work and the forthcoming changes that will take effect on July 1st of this year.
What’s Changing in July?
As a product or service traverses the supply chain, a progressively-increasing VAT is assessed. When a vendor purchases an item from a down chain, tax is assessed on the value of the item minus its basic production costs. In turn, when the vendor goes to sell the product, a new tax is assessed based on the item’s value after the vendor’s intervention, minus the cost of taxes already assessed. This system continues on until the end consumer purchases the product and a final VAT is collected.
That’s how value-added taxes work on paper. The reality across the EU is more complicated, however. Under current rules, each EU member state (MS) has its own VAT tax rate. Part of the EU’s current taxation schema is predicated on the distance the product travels. A VAT tax is assessed each time the product leaves a country. Under the new rules, effective July 1st of this year, that all changes.
The first thing that e-commerce brands must be aware of is that all imports are now subject to VATs regardless of their value. Secondly, the distance the product travels no longer factors into the tax. The VAT is assessed in the MS of arrival rather than departure. Thirdly, new mechanisms are in place to help simplify the process for foreign retailers.
Under current EU rules, each member state has a threshold amount in place. If the sale of a product exceeds that threshold, companies must register in that member state and pay their respective VAT. For foreign entities that do business across a range of European countries, that means registering in every single nation. The logistics of international shipping can be confusing and complex.
Previously, importers of low-value goods were given an exemption on VATs as long as the value of their goods did not exceed these thresholds. Now, under the revised rules, the exemption has been eliminated. Fortunately, there is a new and relatively easy way to account for your company’s tax burden: the IOSS.
The IOSS serves as a simple way to consolidate VATs collection while simultaneously expediting the speed that goods reach the market. EU importers and merchants who choose to use the IOSS may simply collect the tax at the point of sale to the consumer and then report the collection using a monthly online reporting tool. There is one major caveat, however: the price of the goods must not exceed €150. There are a few minor nuances when using the system, especially for companies that maintain a physical business presence within one of the EU’s member states. Still, the bottom line is an easy-to-use, consolidated tax collection schema tailored toward foreign business entities.
Using the IOSS helps drastically reduce transit times as it eliminates potentially confusing and labyrinthine tax collection procedures under the old method. The new IOSS option essentially makes United States Postal Service’s Mail Innovations program (UPSMI) a delivered duty paid (DDP) solution to the entirety of the EU.
Alternative Duty Methods
It should be noted that participation in the IOSS system is optional; it is completely at the importer’s discretion. For some business entities, particularly those whose shipments regularly exceed the €150 threshold, the IOSS isn’t a practicable option. In cases such as these, vendors and consignees may continue with the duty at place (DAP) system using the old VAT assessment schedule. However, it should be noted that companies who decline participation in the new VAT methods may be subject to a postal service charge depending on the country. Those rates can range from €5-€22, equating to $6.03-$26.55 in American currency.
For many, the IOSS represents a simplified tax collection schema for e-commerce brands that do business in the EU, but usage is 100% optional.
What Do I Need to Do in Preparation?
As with any new law, especially one with such sweeping ramifications, businesses will have a significant adjustment period. The only other caveat that American companies should be aware of is the IOSS registration process.
Currently, direct enrollment is only open to non-EU business entities who have something called a “mutual assistance agreement” established with a member state. The hitch? Norway is the only nation that currently offers mutual assistance to American businesses. Otherwise, your company must register an intermediary or point of contact with the IOSS in order to fulfill your EU tax obligations. Because the IOSS program is so new, expect a more robust level of foreign inclusion going forward. The UPSMI is currently working to establish full-time intermediaries and facilitate smoother payment options for companies who import from abroad.
Navigating Europe’s New VAT
Managing your global supply chain is more than just securing transport, warehousing services, and logistics. Good supply chain oversight means managing your costs as well. For e-commerce brands that do business overseas, especially in the European Union, working knowledge of the changing VAT laws will be essential going forward. Symbia Logistics can help you exercise control over your own supply chain through our 3PL services. For more information, please contact Symbia Logistics today.