Publicity photo
Mārtiņš Zemītis, “Latvijas Avīze”, JSC “Latvijas Mediji”
On 1 July, new rules on value added tax (VAT) on online shopping came into force throughout the European Union, including in Latvia. The changes particularly affect the growing share of consumers who order and pay for purchases abroad online.
Modernization causes temporary inconvenience
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While the new rules may cause temporary inconvenience to some taxpayers at the beginning, like any change in taxation, in general the new rules help modernize VAT, create a level playing field for EU and third country businesses, simplify cross-border e-commerce transactions and make commodity prices more transparent, better understandable and comparable. Key benefits: Business simplification, fraud reduction and an improved consumer shopping experience.
The European Union’s VAT system was last thoroughly overhauled in 1993, well before the digital economy. Since then, total global trade has more than doubled and the share of trade in the world economy has risen from 40% to 60%. Over the last decade, cross-border e-commerce has grown particularly rapidly, creating a real revolution in retail. During the virus pandemic, change has taken the speed of light, with total digital purchases increasing by as much as 70-80%. Amazon’s global trading platform’s revenue has grown by more than 40% in the past year alone, making the company the fourth most valuable company in the world.
The old system has become unsuitable for the new reality. Global internet giants such as eBay, Amazon and AliBaba no longer found it easy to locate their business by “spreading their wings” and countries lost much of their revenue as giants noticed paying taxes where they were. the lowest.
It is worth mentioning that VAT is the basis of tax revenue in all EU countries. Consequently, the old rules were no longer appropriate and valid in a context where most cross-border trade takes place on the Internet. The coronavirus pandemic has exacerbated the need for reform so that VAT on online sales is paid in the country where the consumer is located, rather than where the seller or intermediary is located.
Applies to online marketing
The new rules will apply to online sellers and platforms (or trading sites) inside and outside the European Union, to postal and courier operators, customs and tax authorities, and consumers. They will provide a simpler system for both buyers and sellers, regardless of whether consumers have purchased the product from a trader in the European Union or from a third country such as the United Kingdom, the United States or China.
In practice, the main changes will concern small purchases, which have so far been exempt from VAT. Under the previous system, goods up to € 22 imported from outside the EU by third-country companies were exempt from VAT. This exemption will be revoked in the future.
From now on, you will have to pay full VAT on all goods entering the European Union, regardless of whether the seller is a company inside or outside the European Union. Various studies and experiences show that the pre-existing VAT exemption for “small purchases” has been used fraudulently. Often unscrupulous sellers from third countries incorrectly labeled or reduced the price of various goods, such as smartphones or electronics, in order to avoid paying VAT. This trick allowed the companies concerned to offer a lower price than their competitors in the European Union. It is estimated that EU Member States lost around € 7 billion a year due to fraud, increasing the tax burden on taxpayers.
Easier seller registration
The second change will concern registration as a taxpayer. The current e-commerce rules required the seller to register for VAT in any Member State where the importer’s turnover exceeded a certain threshold. From now on, a single, uniform threshold for VAT registration will be set in all EU countries, ie € 10,000.
To make life easier for companies that supply goods to several EU countries, online traders will now be able to register on an electronic portal or so-called one-stop shop (OSS). You will be able to settle all VAT obligations on this portal.
The threshold of € 10,000 has also been applied to online electronic services since 2019. Once registered, the online trader will be able to report and pay VAT to a one-stop shop for all products sold in the European Union by submitting a quarterly electronic tax return. The one-stop shop will ensure that VAT is credited to the Member State to which it is due.
One stop shop
The new one-stop shop for imports (IOSS) will work in a similar way. Third-country traders will simply be able to register for VAT in the EU, and the import agency will ensure that the Member State liable for VAT receives the correct amount at the end.
If the consumer purchases the goods from an IOSS-registered trader or non-EU platform, the price paid to the trader will include VAT. Consequently, customs or courier will no longer have to separately demand payment of VAT after the arrival of the consignment in Latvia. Similar VAT reforms with one-stop shops have already been implemented and are working well in Norway, Australia and New Zealand. Now these countries are joined by the 27 EU countries. The new system will create more clarity for both buyers and sellers and reduce tax evasion. The new system after the adjustment period will benefit us all.
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