Changes to EU rules governing value added tax (VAT) come into effect on July 1. These changes will affect imports into the EU as well as intra-EU sales. And as ecommerce brands try to navigate these changes, they’ll quickly learn there are also broader implications.
These new VAT rules can be seen as part of a larger trend toward greater tax management challenges that ecommerce brands need to prepare for. Let’s look at what the new VAT rules are, why these changes are being made, and what that means for ecommerce brands now and into the future.
New VAT Rules in 2021
The new VAT laws and regulations are long, technical documents that should be reviewed by in-house legal and compliance teams or by ecommerce partners that specialize in this area. But to put things in simple terms, the most important changes taking effect beginning July 1, 2021 include:
- Consumer products imported into the EU below €150 will be subject to VAT by the supplier, new import reporting process available to support this.
- For Intra-EU supplies to consumers, VAT will be determined based on the “ship-to” EU country where the customer lives, not the ship-from EU country. Single jurisdiction reporting process also implemented to support this.
- Online marketplaces and platforms facilitating supplies of goods in the EU will be considered resellers and in certain cases will be responsible for accounting for VAT.
Why the change?
In the short term, it may be fair to view these new VAT rules as part of the EU’s overall economic strategy for recovering from the COVID-19 pandemic. Because the tax changes are expected to bring more funding for local governments, it could produce a windfall at a time when governments worldwide are struggling.
Some EU member states like Germany enacted their own temporary tax changes as a means of stimulating their domestic economy. But those changes have largely all expired and—while certainly critical for businesses selling into those countries—are less significant than the more sweeping EU laws.
This brings us to the bigger picture and the more important lesson for brands. We live in a time when the speed and ease of cross border commerce is breaking down barriers between countries. So, the goal of these new VAT rules is essentially to level the playing field and ensure competitiveness of EU countries on a global scale.
In the coming years, more countries are expected to develop new tax and regulatory measures aimed at boosting domestic markets while protecting consumers. The nature of these policies will change by geography, but the trend is clear: global tax compliance is only getting more complex and more challenging for ecommerce brands.
This is not entirely new. Tax has always been challenging, and complexity in this area is expected. But the speed at which laws are changing is increasing and the additional layers of regulations that govern ecommerce activities bring added risk for companies. Because these issues can have a significant impact on a company’s bottom line, it’s critical for leaders of global brands to build out robust capabilities in these areas to anticipate and navigate changes as they occur.
What new VAT rules mean for brands
In the short term, brands need to figure out how they are going to handle the new VAT requirements. Brands that are currently selling into the EU will likely have new compliance and registration requirements that are best managed with the help of an experienced partner.
Brands that have already set up gross pricing on their consumer lists have to decide if they want to change pricing to achieve the same amount in net revenue. Do tax changes for reseller or other partners require any adjustments in fulfillment or supply chain models? Making short-term changes to accommodate day-to-day tax collection and remittance will be critical for ensuring continuous success in global markets.
For the long term, business leaders should think about how prepared their organization is for continued shifts in the tax and compliance landscape. Regulations are only going to get more complex and staying on top of compliance issues will become increasingly important and resource intensive. Establishing new processes or partnerships to handle VAT as well as other tax and compliance nuances will be essential for staying ahead of new regulations and devising winning strategies to manage change.
Need help cutting through the complexity of tax changes and other global ecommerce challenges? Connect with us today and see how we can use our industry-leading tax and compliance expertise and global footprint to power better results for your brand.