The VAT digital package is the most comprehensive VAT reform in recent European history. The measure is because the increasing cross-border movement of goods sold through online channels has overburdened the resources of Europe’s customs and tax authorities. According to the EU Commission, the numerous tax loopholes for online merchants have resulted in an estimated annual loss of EUR 50 billion in tax revenues. The EU wants to fight tax fraud by modernizing the VAT regulations. But this poses several challenges for companies and consumers.
EUR 22 exemption limit no longer applies
Deliveries from third countries of goods valued at less than EUR 22 are no longer exempt from import VAT after July 1, 2021. Consumers are charged their country’s tax on the products. Customers in Germany currently pay 19% or, in the case of the reduced tax rate, 7% on the purchase price.
Online merchants from third countries who sell goods in the EU are now faced with an additional burden. They must register with the competent tax authority and pay tax on their sales at the respective rates.
EU tax liability starts at EUR 10,000 in annual sales revenues
As of July 1, 2021, online merchants based in an EU country are liable for tax on EU-wide goods deliveries with a volume of EUR 10,000 or more. This makes the old delivery thresholds in the different countries obsolete for distance sales. Online merchants must now apply the tax rates valid in the destination country, which results in wavering consumer prices. In some cases, the difference in VAT rates is 10% (Luxembourg 17% vs Hungary 27% VAT). The 27 EU Member States are still far from standardizing their VAT rates.
But despite the additional costs involved, Ralph Brügelmann, a tax expert from the German Trade Association, believes these regulations are fair – especially considering the Far East. He spoke to the Süddeutsche Zeitung: “We think consumers should accept the somewhat higher prices. Because this guarantees fair competition.” Speaking to WDR about consumers, Iwona Husemann, a lawyer from the NRW Consumer Center, predicted: “Many will be caught by surprise. Customers are not prepared for this.”
André Schwarz, a spokesman for the Federation of German Wholesale, Foreign Trade and Services (BGA), mentioned another aspect in the Süddeutsche Zeitung: “All products must be marked with the tax rates of the countries of destination – and this involves a significant amount of manual work. He is concerned about orders that have already been placed: “The great danger here is having to pay outstanding VAT out of one’s own pocket.”
Changes also apply to third countries: Amazon and others pay VAT
Since July 1, platform operators like Amazon and eBay have been required to withhold VAT for their merchants from third countries such as China, the USA, or the United Kingdom and pay it directly to the tax authorities in the destination countries. This means that platform operators are liable for the tax, not individual small retailers.
Since July 1, logistics companies have been charging a flat-rate handling fee (this now applies to shipments with a value of less than EUR 22, which were previously declared tax-free with a verbal, and generally no-cost customs declaration). Deutsche Post currently charges EUR 6 plus the import VAT amount. This also applies to goods ordered before July 1 but did not arrive at German customs until later. Major logistics companies like Deutsche Post or DHL warn consumers to be prepared for unpleasant surprises. If the value of a goods shipment exceeds EUR 150, import duties and higher customs clearance fees will be incurred in addition to taxes and service charges that will have to be paid by the consumer.
What seems like a bargain can become an expensive trap
Bargain items such as mobile phone covers from China could get up to 80 per cent more expensive. An example calculation: For a product costing 10 euros, the 22-euro threshold does not apply. It becomes taxable at the German rate of 19 per cent when imported into Germany, so it costs the buyer 11.90 euros. To this must be added the new service fee for the digital customs declaration, such as 6 euros for DHL. Makes a final consumer price of 17.90 euros.
As a result of the tax and fee chaos, the prices for products in online shops may be displayed incorrectly or incompletely. This is because the shops can only show the extra charges and thus the final price after the delivery address is provided. The additional costs are, therefore, anything but transparent. According to the businessinsider.de portal, consumer advocates are warning of confusion for buyers.
Possible effects of the VAT digital package
The new tax rules for platform operators could cause many small retailers from third countries to turn their backs on Amazon and eBay and switch to low-cost product platforms that are difficult to control – like Wish in the U.S. or Joom in Eastern Europe. The industry is also concerned that these companies will promote their products on social media channels like Facebook or Instagram and sell their goods through web stores outside the EU. This could neutralize the impact of the VAT digital package.
Birgit Janik from the German E-Commerce and Mail Order Association (bevh) spoke to WirtschaftsWoche magazine: “Consumers are price-driven.” She went on to say that when a product from a third country is cheaper without taxes, the winners, and losers are usually clearly defined. As an expert, she believes the losers will be the online shops in the EU.