As if government tax regulations are not already complicated enough, the new EU VAT changes are adding another layer of confusion for online sellers and marketplaces across the globe. Many analysts fear the new policies will hurt smaller eCommerce brands and add administrative burden to online marketplaces.
But regardless of the criticism, the new regulations are here to stay. eCommerce brands simply cannot avoid the effects of the policy, and it is crucial that they understand how these rules apply to their businesses.
So, what exactly is the EU VAT tax, and which policies have changed? And — most importantly — how will the changes impact DTC luxury eCommerce companies?
What Is the EU VAT?
The EU VAT is a value-added tax implemented across the European Union, from Denmark and Sweden to England and Croatia. Every country has their own VAT rate, ranging from 17% to 27%.
These taxes are assessed at every stage of production when a good or service is made, with the businesses receiving a tax credit for the VAT paid previously. EU consumers pay the final tax when purchasing the item — but travelers making purchases from outside the country can get a rebate on this tax. (Except in the UK, which recently did away with tax-free shopping in light of Brexit.)
Why Were These Changes Made?
As of July 1, 2021, the European Commission changed numerous aspects of the VAT, including the introduction of a new eCommerce VAT package.
These changes are meant to accommodate the growth of eCommerce and cross-border, digital sales. The policy adjustments will ensure VAT is paid wherever consumers are living — meaning local businesses are no longer penalized.
VAT changes are also meant to:
- Simplify the VAT obligations of companies selling goods or services internationally
- Reduce fraud
- Ensure proper VAT is paid to the proper country
- Level the competition for EU businesses
The European Commission believes that these changes will reduce VAT compliance costs for businesses, increase cross-border trade and allow EU businesses to compete with non-EU businesses, which previously were not required to charge VAT. They estimate that EU countries will gain EUR 7 billion annually due to the VAT changes.
Which VAT Policies Have Changed?
There are many changes to VAT policies in the EU, but one change stands out for its big impact on DTC luxury eCommerce brands, who will now be required to charge an import VAT when selling to consumers in the EU.
The changes have an even greater effect on eCommerce platforms (such as online department stores and marketplaces), which will be responsible for charging and collecting VAT on behalf of their sellers. (Sellers themselves will not collect VAT. Instead, the platform they sell from will be responsible.)
eCommerce platforms that must adhere to the new policy include:
- Non-EU platforms that ship within the EU or import low-value goods out of non-EU countries and into the EU
- EU platforms that import low-value goods from non-EU countries and sell them to customers based in the EU
Of these two categories, some will be deemed as suppliers required to collect VAT. Platforms will be considered a supplier if they:
- Are based outside of the EU and import goods (under €150) to consumers within the EU
- Are a non-EU business selling goods (of any value) from within the EU to consumers in the EU
DTC Luxury eCommerce platforms that meet these requirements must charge VAT from customers and report the tax to authorities.
How Will These Changes Affect DTC Luxury eCommerce?
The new EU VAT changes will certainly increase the burden of responsibility on eCommerce brands and platforms exporting goods to the EU. Let us dive deeper into how these changes will affect the world of DTC luxury eCommerce.
1. DTC Luxury Brands Must Work Closely with Their Online Marketplaces
While the EU VAT changes have a big effect on eCommerce platforms, brands that are not deemed as suppliers will need to alter their processes, too.
Here are a few ways DTC luxury brands can smoothly transition under the new EU VAT policy:
- Clearly differentiate between sales made on their own eCommerce website and sales made on other online platforms
- Keep open communication with any online marketplaces where their goods are sold
- Analyze mapping transactions, invoicing and billing to ensure compliance with the new EU VAT changes
2. A Streamlined VAT Return Process
Although the VAT changes are creating more work for DTC luxury brands, there is one silver lining: Brands can opt to streamline the VAT return process by filing under the Import One Stop Shop (IOSS), rather than registering and paying tax in every country individually.
IOSS also simplifies the process for buyers, since they only pay VAT at the time of purchase (rather than getting surprise fees when they receive the goods.)
3. DTC Luxury Brands Will Face Increased Competition with EU Brands
As the European Commission states, the changes to VAT are designed to benefit EU businesses, giving them a competitive edge against non-EU businesses that previously have not charged VAT. The policy changes streamline the VAT collection process for EU brands and remove bureaucratic red tape that has left them at a disadvantage against non-EU brands.
This means non-EU luxury brands will face increased competition with brands based in the EU. Many brands may be limited by constraints in pricing or supply chains and even may be incentivized to form a company within the EU to avoid the burdens of the new policy.
Safeguard Your Cross-Border Sales
Here at Scalefast, we believe eCommerce cross-border sales should not keep brands up at night. The new EU VAT changes can feel overwhelming, but we offer a streamlined, intuitive solution to help eCommerce companies adhere to global tax compliance policies and avoid fraud.
Our Merchant of Record and Seller of Record software minimizes headaches by taking on the risk of international business compliance. We handle every aspect of financial and legal obligations, from tax registration to payment processing. We are held liable by all government and legal institutions, keeping eCommerce brands free of administrative burdens.