Amazon marketplace offers one of the most lucrative business growth opportunities for brands (or sellers) looking to reach new customers. It’s widely used by third-party vendors and consumers across the world.
It’s convenient and fast, regardless of whether you choose to handle operations in-house or through the FBA scheme.
And the platform offers plenty of marketing opportunities, perfect for building a recognizable brand.
However, those who’ve successfully penetrated their target markets and established their brands as go-to product distributors may be looking for a logical next step in their business growth journey.
Expansion into EU markets, through adherence to the Pan-European FBA or Amazon UK or EU registration(in one of the local marketplaces) with the right strategy, is a necessary step for each overseas vendor that seeks to expand its reach to the “old” continent.
The online sales reports extracted from the shopping habits of the EU or UK customers unquestionably show the preference for an online shopping experience over other channels for different categories of products.
As an economic region with strong financial resilience and steady growth trends, the EU can seem exceptionally attractive to Amazon sellers. But the issue is that distributing products and services in this area comes with immense regulatory complexity. And the primary reason for this is VAT, which can stall expansion or even penalize sellers.
So, how do you successfully scale your business into one or more EU jurisdictions? And what exactly do you need to know about VAT? Read on to learn more about the tax basics that’ll highly influence your expansion into new markets.
VAT Basics for Amazon Sellers
In theory, the EU VAT system is a consumption-based tax regime, similar to the Sales and Use tax in the United States.
However, what differs about the EU’s VAT system is that this consumption tax is applied at each stage of the supply chain. It’s ultimately paid by the end consumer. But it’s the seller’s job to collect and remit the payable sum.
In the EU, standard VAT rates range from 17% to 27% depending on the rates set at the level of the Member State. In the US, the variability of the sales tax rates is much more complicated, as the final sales tax rate could be a result of combining rates at the state, municipal, city, and county levels.
When it comes to the accurate determination of the tax rates for e-commerce goods, the US is unquestionably the most challenging market.
When and Where Sellers Need VAT Registration
One of the most commonly overlooked aspects of selling in the EU is that this market expansion usually requires immediate VAT registration.
If you decide to store your inventory in any of the Member States, whether through the FBA scheme or independent of it, your non-EU-based business will most likely need to get one or more EU VAT registrations.
Furthermore, the Pan-EU Amazon program means that your stock is distributed by Amazon across several EU fulfillment centers. It’s a great way to optimize shipping. Nevertheless, it also means you are legally required to register for VAT in all of these countries before you begin selling/storing your items.
What is a good thing to know is that there are certain thresholds for non-EU sellers that will ‘exempt’ you from additional VAT registrations.
Low-value B2C imports, imports of parcels(outside the EU) whose consignment value is less than €150, could be potentially processed under a single reporting scheme. A foreign third-party vendor needs to register for the Import-One-Stop-Scheme (IOSS) to be able to use this scheme.
With an IOSS VAT number, a non-resident EU vendor could collect VAT at the point of purchase for all cross-border EU imports of low-value goods. Tax could be charged at the point of sale, collected, and remitted for all EU-based imports through one online channel.
Common VAT Mistakes That Disrupt Growth
Although it may seem confusing (or plain overwhelming), scaling your Amazon business into the EU doesn’t have to be a nightmare. You just need to understand and prevent the common VAT errors that could stall your growth:
- Late registration – Your business should get VAT registered before your stock lands on EU soil. The process takes anywhere from a couple of weeks to 10 weeks. So, make sure you plan your expansion. Note that you can’t activate the Pan-EU FBA program without having at least two active VAT numbers in different EU countries.
- Product misclassification – Each product category could be taxed differently, at different VAT rates in the EU. The scope of rates is very wide; it goes from standard to reduced, super-reduced, zero-rated, and also some supplies have the potential to be tax-exempt.
- Failing to account for VAT in your pricing strategy – As mentioned, the prices you display when selling in the EU have to already include VAT. This means you can’t directly copy your US pricing strategy. Instead, you need to develop an EU-specific pricing strategy that ensures your company’s profitability while retaining price competitiveness.
- Ignoring IOSS eligibility – If the orders you ship to the EU don’t exceed €150, you are eligible for Amazon’s Import One-Stop Shop scheme. It’s a convenient, simple solution that allows your customers to prepay customs and taxes. IOSS ensures faster, smoother delivery and prevents negative customer experiences that often happen when buyers aren’t aware that they have to pay additional taxes and fees upon delivery.
- Assuming Amazon handles everything – Although Amazon does handle VAT in specific situations, it doesn’t handle everything. Specifically, pay attention to where you plan on storing your inventory. If it’s in the EU, you automatically need to register for VAT.
Other Costs and Considerations That Catch US Sellers Off Guard
Although making mistakes regarding VAT can be hugely detrimental to expanding your Amazon business in the EU, it’s not the only growth barrier you have to look out for.
- Lack of visibility – Many sellers who enter the EU do so with no search history or reviews. And this lack of social proof can make it exceptionally difficult to earn consumer trust and establish authority. To remove this challenge, you need a strong paid advertising strategy that will build visibility and ensure customer reach. But the thing is, managing campaigns across multiple countries, languages, and competitive landscapes can be a complex task. This is why sellers often turn to an Amazon PPC agency at this stage of their business expansion.
- Exchange rates – Selling in the EU, along with the FX challenges, as pricing and tax reporting in different currencies requires staying mindful of your pricing policy. Furthermore, external economic factors, such as daily fluctuations in exchange rates, can also impact your ability to make a profit. Maintaining a balance between profitability margins and consumer-facing prices can be tricky. And the simple fact is that selling in marketplaces that don’t use the Euro but local currencies can make things even more complex.
- Fulfillment and logistics costs – The EU is not the easiest place to sell physical products. Shipping often requires border crossings, import fees, and adherence to multiple country-specific tax and customs rules. It’s also worth noting that EU FBA fees tend to be slightly higher than in the US, primarily due to currency conversion.
Final Remarks
Expanding your Amazon business into the EU is not impossible. In fact, it’s an exceptional growth opportunity that could easily globalize your brand. But to make sure you don’t get tripped up, you must stay mindful of EU VAT laws.
1StopVAT offers expert support for VAT compliance, whether you need help with registration, filing, or consulting. So, don’t hesitate to reach out or schedule a free consultation.