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Changes to European Union VAT Rules: What You Need to Know

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As of July 1st, 2021, changes to European Union VAT rules will come into force.

The long-term objective is to address disparities in the sale of low-value consignments and to reduce the difficulty of processing online sales across borders in the European Union's 27 member states. The short-term reality means that many parties who sell into the region need to adjust their systems and processes to stay on top of shipments into the EU.

In this article, we take a look at the details of the incoming changes to VAT and explain how we're handling the transition with our clients.

Changes to European Union VAT Rules

A value-added tax (VAT) is one that is levied on goods and services incrementally, reflecting activities from production and distribution to delivery and point-of-sale.

With such a wide aperture, changes to VAT rules typically impact a wide range of players up and down the supply chain. That's especially true when it comes to the European Union, due to the diverse range of nations and high value of the markets that make up the bloc.

Here are some of the key changes to EU VAT rules, according to EUROPA:

  1. Online retailers can register in one European Union (EU) Member State for the declaration and payment of VAT on all distance sales of goods to customers within the EU.
  2. Current thresholds for distance sales of goods to the EU will be abolished and new parameters put in place. For a breakdown of current EU VAT rates, see EUROPA's official updates here: https://europa.eu/youreurope/business/taxation/vat/vat-rules-rates/index_en.htm#shortcut-7
  3. The EU has set up the Import One-Stop Shop (IOSS) for retailers and shippers to register, which allows for a single monthly VAT for all shipments. Learn more about IOSS here.
  4. If no IOSS account is set up, each shipment's VAT will be due and paid for by the carrier upon import and a disbursement fee will apply.

Naturally, the official summary only scratches the surface of the complexity of the new rules and their impact on our clients and industry. The next section covers some of the real-world impacts of the EU's changes to VAT.

How to Handle EU VAT Changes

For our part, Capacity will help clients to verify their individual shipping procedures into the EU and assess any changes that need to be made. Much of this work comes down to how duties incurred by their shipments are paid, covered by the Incoterms DDU (Delivered Duty Unpaid) and DDP (Delivered Duty Paid).

While we generally advise clients to ship DDP rather than DDU, with these new changes we now strongly recommend shipping only DDP to ensure deliverability.

This is because all DDP shipments will be subject to prepaying VAT when shipments enter the destination country. With fees already collected, goods can proceed to their end recipient as usual.

Conversely, while all DDU shipments will be delivered normally, the changes mean that VAT is now collected on shipments of any value and that fee remains outstanding upon arrival. Previously, any shipments with a value below €22 were exempt and could proceed without incurring a fee. This new requirement could lead to negative experiences for consumers who are used to receiving goods with no charges due at the time of delivery. Note that shipments below €150 pay no other duties and taxes. 

In terms of specific parcel carrier limitations, we have notified clients that DHL E-commerce cannot handle shipments with a value of more than €150 and advised that sellers using this solution will need to select an alternative ship method. Individual carriers have delivered their own versions of guides to the EU VAT changes, which you can find below.

Resources by Parcel Carrier:

FedEx Guide for B2C eCommerce Sellers - https://www.fedex.com/content/dam/fedex/us-united-states/International/images/2021/EU_VAT_Changes.pdf

UPS Guide for Business Owners - https://www.ups.com/assets/resources/media/en_GB/EU_VAT_Reform_Business-APAC.pdf

DHL Guide for Business Preparation - https://www.dhl.com/discover/business/managing-your-business/prepare-your-business-for-VAT-de-minimis-removal

The most important thing is to be aware of how the European Union VAT changes affect your shipments and take the necessary steps with your logistics and transportation partners to prepare.

To talk to our fulfillment experts about shipping into the EU or any fulfillment challenge you currently face, contact us here or send an email to info@capacityllc.com.