E-commerce VAT and dropshipping: what changes from July 2021 onwards

Discover in this article the evolutions induced by this new regulation and the implications for your e-commerce.

Why a reform?

This new VAT regulation has multiple objectives:

• First of all, a simplification of VAT formalities at the European level.

• Better fight against VAT fraud, which is widespread in the world of dropshipping

• Ensure fair competition between companies within and outside the European Union, which is currently not the case since companies exporting parcels of negligible value (less than 22€) to the European Union are not subject to VAT, which creates a distortion of competition with European companies.

Who is concerned?

From July 2021, two types of distance sales will be distinguished :

• Intra-community Distances Sales: BtoC sales of goods dispatched by the seller or on his behalf from an EU Member State to another EU Member State.

• Distance Sales of goods imported from third countries: B2C sales of goods dispatched by the seller or on his behalf from a third country in the EU directly to the final customer in an EU Member State, which is dropshipping.

As soon as the reform comes into force, platforms (dropshipping sites as well as marketplaces) will be presumed to have acquired and delivered the goods if they facilitate distance selling (which is the case in practice) and will therefore be liable for import VAT instead of the final consignee.

This directive only applies to sales to non-professionals and therefore concerns exclusively B2C matters.

For auto-entrepreneurs whose turnover does not exceed €85,500, the rules remain the same. As soon as your turnover exceeds €85,500 though, these new rules will also apply to you, which is why we recommend that you anticipate the new rules to make sure that you are fully aware of the new specificities.

What changes in practice

1. The end of the "distance sales" regime for EU companies

Previously, there was a turnover threshold depending on the countries below which the dropshipper had to collect and remit VAT in France for its sales in the EU. Let's take the example of a French dropshipper shipping to Belgium: above a threshold of €35,000 of turnover made in Belgium, he had to register for Belgian VAT, and collect and remit Belgian VAT on his sales in Belgium. And so on for all other EU countries, with thresholds varying from one country to another (€35,000 in Belgium, Spain or Italy versus €100,000 in Germany), which could make the rule complex, especially for players shipping to many EU countries. From now on, the threshold will be lowered to €10,000 for all EU countries, a standardization allowing for more simplicity for the e-merchant. ➡️ Hence, if your annual turnover is less than €10,000, the sale will be considered to be located in France and will therefore be subject to VAT at the rate of 20%. ➡️ If your annual turnover exceeds €10,000: the distance sale will be localized in the State of residence of the final recipient and will be subject to the VAT applicable in that country.

💡 However, the dropshipper has an "option" and will be able to request that his sales be subject to VAT in France (VAT at the rate of 20%) if his company is established in France.

2. The "one-stop shop" system

This one-stop-shop system (also called Mini One-Stop-Shop) has been extended to distance sales within the European Union and concerns cases where VAT is due in a state other than that of the dropshipper. It allows companies to pay VAT in a single Member State, regardless of the country of taxation: it is therefore no longer necessary to register for all European countries in which one sells. Thus, if VAT is due, for example, in Belgium, the dropshipper will be able to identify himself at this counter to declare and pay VAT from France, which greatly simplifies the procedures for e-merchants.

3. Removal of the VAT exemption on imports for parcels of negligible value

In practice, this means the end of the "22€ exemption rule". Until now, many suppliers or agents, especially located in China, used to send products with a very low value (less than 22€) or declared a very low value for these shipments and thus avoided any customs declaration. As of July 1, 2021, all goods will have to be declared to customs.

However, it will be possible to benefit from an exemption from import VAT on products with a value of less than 150€ thanks to the IOSS (Import One-Stop-Shop). To be able to benefit from the IOSS, the seller must have a VAT identification number dedicated to this regime and if the latter is established outside the EU, it is required to appoint an "intermediary" who will act on its behalf and will be liable for VAT under the IOSS to the tax authorities. For information, packages with a value not exceeding 150 euros will also remain exempt from customs duties. Beyond 150€, the VAT will be charged to the customer: remember to inform the customer well in advance to avoid any unpleasant surprise upon receipt of the package.

⚠️ Finally, and in order to verify that the VAT will be correctly paid, the dropshipper will have to keep a record of the transactions, which will have to be kept for 10 years in case of control by the tax authorities.

What this means for dropshippers

In practice, for professional dropshippers, whose businesses are already profitable with the current VAT regulations, this new directive represents an opportunity: it indeed implies a simplification of procedures, a reduction of compliance costs in Europe and therefore more profitability.

For dropshippers who are not profitable or for whom increasing the selling price of their products to include VAT would undermine their profitability, this new directive makes things way more complicated. Indeed, the regulation that will come into force in July 2021 will constitute a barrier to entry for these profiles, in particular because it no longer allows "small arrangements" to avoid paying VAT. Moreover, these new VAT rules could result in increased competition on the market, with the arrival of international players (USA, China), for whom selling on the European market will now be simpler. The main consequence of these evolutions will therefore be a professionalization of the dropshipping world.

The solutions for those more amateur dropshippers are however multiple: better select their products, better identify their niche, increase the selling price when possible, spend less on advertising to turn to better targeted advertising etc... To limit the hassles related to import VAT and scaling, using a Fulfillment company can also be a solution.

Ship with Cubyn and improve your sales!

Contact us