Dropshipping is a sales technique involving three economic actors - a supplier, a distributor and a customer - and consisting of four steps:
- A customer places an order on the distributor's online shop;
- The shop automatically sends the order to the dropshipper (the supplier);
- The dropshipper prepares the customer's order;
- The dropshipper sends the order directly to the customer.
Dropshipping thus consists of selling products to customers using the services of a third party who takes care of storing and managing the stock and shipping the orders.
What is the problem ?
Many companies have launched their online shops using this model in recent years. And some of them quickly realised that they could exploit a loophole in the VAT legislation to avoid paying VAT. In a nutshell, they could simply declare to customs that the value of the imported goods was less than €22 and they would not have to pay VAT. By doing this, these businesses were - sometimes unwittingly - breaking the law. But this VAT avoidance technique, coupled with an exemption from customs duties for "small consignments" worth less than €150, could make the business very lucrative, especially as customs controls in this area were virtually non-existent.
New legislation to combat VAT fraud
To combat this type of tax fraud, the European Commission has proposed to change the rules of the game. From 1 July 2021, the VAT exemption for imports of small consignments of goods worth up to €22 will be abolished altogether. As a result, all goods imported into the EU are now subject to VAT in the country of arrival of the goods.
Illustration:
You are a Belgian e-seller and you sell your products (shipments up to €150) which are transported directly from China to Belgian, French and Dutch individuals. You make extra-Community distance sales of goods. You must therefore declare and pay VAT in the country of arrival (Belgium, France and the Netherlands).
European businesses engaged in dropshipping will now have to use one of the following VAT schemes:
- For imported goods worth less than €150, they will be able to use the One-Stop Shop for Imports (IOSS) and declare the VAT on their sales through this shop. At the same time, the import of goods will be exempt from VAT.
- If the e-seller does not register in the IOSS, he will alternatively be able to use the declaration and payment mechanism provided for postal operators and transporters.
- For goods up to a value of €150 that are sold through an electronic interface (marketplace, platform), the sale itself will not be subject to VAT. It is the interface that will have to declare and pay the VAT.
- For goods with a value of more than €150, the business will not have to charge VAT. These goods will be taxed on import and the end customer will have to bear this cost and the additional customs clearance charges of the carrier.
To keep in mind
The new VAT legislation puts a serious brake on dropshipping. There is no longer a way to avoid VAT. It is either the distributor, the electronic interface that facilitates the sale, or the customer himself that will pay VAT on all goods coming from a third country. This will result in customs duties being calculated on the basis of the real value of the goods, since it is the sales invoice that must be presented to customs.
The new VAT regime for e-commerce may be criticised, but the European Commission must still be given credit for this.
How to manage new ecommerce's VAT rules?
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