What are the benefits and drawbacks of the EU VAT reform? Everything that merchants need to know about the One Stop Shop.
The European Union created the One Stop Shop (OSS) to merge bureaucratic processes and simplify VAT for intra-EU distance sales. Companies only need to register in a single EU country, which makes many processes easier. But the OSS comes with some of its own challenges and risks too.
The One Stop Shop is part of an EU-wide VAT reform, which aims to simplify VAT payments in the EU. It is also meant to facilitate communication between the tax authorities of EU member states (to avoid tax evasion, for example). Under the One Stop Shop, VAT is applied in the country where the consumer is located. Reform was needed: the rapid growth of e-commerce led to an increase in digital and decentralised sales. This meant that many VAT laws were no longer suitable. The reform was decided upon in 2017 and was supposed to be ratified on 1 January 2021. However, because many EU member states, including Germany, struggled to meet the necessary technical requirements in time, ratification was postponed to 1 July 2021.
The One Stop Shop is intended to represent the tax offices of other EU countries in Germany through German Federal Central Tax Office (BZSt). In the One Stop Shop’s electronic tax return, online retailers declare what proportion of their B2C sales were made outside the national borders their company’s headquarters. The retailers can then calculate their taxes based on the current VAT rate of the countries to which the goods were sent. They then pay the amount to the tax office in their home country (e.g. the BZSt in Germany). That tax office then settles the balance with the tax offices in the other EU countries where VAT is due. This saves all merchants a considerable amount of work. It’s also important to remember that some EU countries have zero-tax rates, but these are not the same as a tax exemption.
Our partner CountX can help you find out whether the OSS is relevant for your business.
The OSS makes paying VAT considerably simpler for all companies and merchants who send their goods from a central warehouse to end consumers in the EU. Using the OSS eliminates the risk of becoming liable to pay tax in various EU countries due to exceeding distance selling thresholds. There is a unified distance selling threshold of EUR 10,000 for all sales in the EU, which means participating businesses only have to pay their VAT to a single tax office.
At first glance, the One Stop Shop sounds like a blessing for every merchant who has intra-EU sales and VAT obligations. However, there is added complexity for ecommerce business who use Amazon FBA or who have warehouses abroad. Companies that ship products from foreign warehouses are still liable to pay VAT in those countries. It cannot be paid through the One Stop Shop and has to be reported locally. Here are two examples:
For example, if a warehouse in Italy supplies an end consumer in Italy, there is a local reporting obligation in Italy. Therefore, merchants who store goods abroad and make distance sales must follow two VAT paths:
Another drawback of the One Stop Shop is the lower distance selling threshold of €10,000. Before the OSS, the usual threshold was €35,000 – and for some countries such as Germany it was as high as €100,000. This means that many merchants who were previously below these thresholds are now confronted with new tax obligations.
The change in distance selling thresholds causes a risk for many online retailers. Under the EU VAT reform, every delivery to another EU country automatically incurs a tax liability once the distance selling threshold of €10,000 has been exceeded. This lower threshold means that merchants could suddenly become liable to pay VAT in the countries they are selling to. And in some cases, they might not even be aware of this obligation. As a result, merchants could make errors in their tax return and pay the wrong amount of tax. This could become a serious problem, as the tax offices are likely to take action against incorrect OSS tax returns, even if it is a first-time offence. Invoices that were issued incorrectly result in faulty reports submitted to the respective tax authorities. This means that payments made to the tax office are based on these false reports. This can cause massive problems in the future!
Participation in the One Stop Shop is voluntary. Online retailers can choose between using the OSS or registering in the countries they sell to. However, companies using warehouses abroad always have to register in the countries where the goods are stored, even if they are already registered with the OSS. This is also relevant for businesses using the Amazon FBA program, as goods may be stored in warehouses in other EU countries.
While companies and merchants that only make distance sales can benefit from the One Stop Shop, it does have some drawbacks. Merchants that store goods abroad face major challenges due to the EU VAT reform. When it comes to tax, not understanding the rules can be costly. If you are not sure how the OSS affects your business, you can contact our partner countX to discuss your current VAT setup.