EU E-commerce Customs & VAT Reform: Everything You Must Know

Cross-border e-commerce has experienced significant growth in recent years, prompting the European Commission to adjust the IOSS regulation and VAT rules. These adjustments aim to ensure a smooth flow of e-commerce imports and effectively combat fraud of splitting and under valuation. There are many reforms on the horizon. This article explains the upcoming and proposed changes in the customs e-commerce domain.

The current e-commerce VAT package

On July 1, 2021, the Import One Stop Shop (IOSS) system was introduced. This dedicated system for the distance selling of e-commerce goods from a third country to the EU replaces the 22 euro threshold with 150 euros. Under this scheme, e-commerce shipments are exempt from import duties but subject to VAT, which is collected at the point of sale to the consumer and remitted to the tax authorities through monthly VAT returns.

This scheme not only covers exporters but also "deemed suppliers," such as online marketplaces, platforms, and portals, which can collect VAT on behalf of distance sellers. A special arrangement allows webshops not to use the IOSS, with VAT collected by couriers, express carriers, or customs brokers from consumers. However, this option only applies to shipments under 150 euros imported through this reform.

Challenges of the current IOSS scheme

The 2021 reform brings significant benefits, such as speeding up the import process and balancing competition between third-country webshops and the EU. However, the 150 euro threshold incentivizes companies to split their shipments into smaller packages and declare them below their actual value. This leads to unfair competition, revenue loss for EU member states, a larger carbon footprint, and additional administrative work. These were also the findings of the Wise Persons Group after their investigation, recommending the removal of the 150 euro customs threshold for distance selling.

To address the challenge of growing cross-border e-commerce, the European Commission has proposed several changes. The following proposals are currently under discussion in the EU Council.

Mandatory use of IOSS from 2025

On December 8, 2022, the European Commission proposed a series of measures to modernize the EU VAT system, known as the "VAT in the Digital Age" initiative. As part of this initiative, the Commission proposes to make the use of the IOSS scheme mandatory when marketplaces and platforms facilitate certain imports of goods to consumers in the EU. This was introduced in July 2021 as an optional scheme to facilitate marketplaces and will become mandatory from January 1, 2025, for platforms facilitating B2C distance sales of imported low-value goods.

Extended liability for marketplaces

With regard to the "VAT in the Digital Age" initiative, it was also proposed that from January 1, 2025, marketplaces will be responsible for both VAT and import duties for sellers, regardless of the value of the goods. Currently, this responsibility only applies to goods under 150 euros. This means that platforms facilitating goods sales, rather than the sellers themselves, become liable for VAT. This rule applies to all sales, both B2C and B2B, and both domestic and cross-border transactions within the EU. These platforms will be responsible for collecting and remitting VAT for all B2C and B2B sales.

Abolition of the 150 euro threshold from 2028

On May 17, 2023, the European Commission proposed to abolish the 150 euro threshold by March 1, 2028. This means that the IOSS will apply to all e-commerce shipments from a third country to the EU, regardless of value. All distance-sold goods are subject to VAT and import duties, which are collected by marketplaces and platforms after the checkout process. This reform aims to reduce administrative costs for businesses, counter undervaluation, and increase VAT revenue.

Simplified tariff for distance selling

Calculating the applicable customs duties is a complex task, based on tariff classification, customs value, and origin of the goods. Applying this method in e-commerce could result in disproportionate administrative burden, both for customs and businesses. To prevent this, it is necessary to allow e-commerce operators to apply a simplified tariff treatment based on a five-tier bucket system, with each bucket associated with a different customs duty rate relative to goods sold to the end consumer. Goods currently subject to a 0% erga omnes customs duty rate will continue to benefit from duty-free treatment.

The bucketing system comprises 5 levels, with customs duty rates for imports of 0%, 5%, 8%, 12%, and 17% respectively. Goods belonging to different chapters in the nomenclature receive different customs duty rates. However, if importers wish to apply the conventional or lower applicable autonomous customs duty rates or benefit from preferential rates by proving the origin status of the goods, they can do so by applying the standard procedures, as the use of the simplified tariff regulation is optional.

Limitations on simplified tariff for distant sales

Goods subject to harmonized excise duties and goods subject to anti-dumping, anti-subsidy, and safeguard measures must be excluded from the simplified tariff treatment for distance selling of imported goods from third countries. Additionally, goods falling under Chapters 73, 98, and 99 of the Combined Nomenclature must also be excluded because the importation of such goods (iron and steel products, complete industrial installations, and goods imported or exported under special circumstances, respectively) should not benefit from any simplification.

Do you want to stay informed about the latest changes in customs and VAT legislation regarding your cross-border e-commerce activities? Keep following our blogs. If you have any questions about the IOSS or Customs E-commerce (DECO) clearance, feel free to contact us.