Depending on a country’s threshold, big E-Commerce companies like eBay and Amazon could ship low-value goods across several borders without having to collect taxes on them. But as sales of low-value goods are increasing exponentially, such freedom will soon be restricted as more and more countries are starting to require remote sellers to collect taxes on all sold products. An end to this exemption means a significant gain in revenue for the governments.
These adjustments require online marketplaces and offshore sellers to collect and submit appropriate VAT to the countries they sell into. Failure to adjust to these changes will result in penalties. Some might even need to employ VAT consultants to help with taxation matters for specific states due to these new requirements. Some tax advisors believe that this will increase costs for companies: online marketplaces don’t know what the buyers are shipping even though they are collecting payments from customers.
In 2018, Australia become the first country to tax low-value products and New Zealand followed it in 2019. Israel, Norway, and the European Union are going to join them in the next few years. Terminating this exemption could also help countries stop remote sellers from purposefully labelling their goods as low-value and not having to pay additional taxes.
The European Union will nullify this tax break law on products valued under 22€ by the 1st of January 2021. According to the European Commission, the EU has lost approximately 5 billion Euros just annually because of the abuse of the tax exemption.
A profitable change
Forgoing taxing low-value goods was understandable for when E-Commerce just began – the administrative costs were just not worth it. Now, countries are realizing the value of abolishing this law as they could collectively gain millions of Euros from such goods. About 60% of such products valued less than 50 Euros were purchased by more than 33,000 buyers in 41 countries just in 2018 alone.
Annually, Israel plans to raise 700 million shekels by ending exemptions and the U.K. expects at least 7 billion Euros. New Zealand, which already implemented these changes on the 1st of December 2019 estimates an increase in revenue by 126 million dollars. In the first 9 months, Australia has already surpassed the expected 70 million dollars estimate and collected about 250 million dollars, according to the Australian Taxation Office.
The low-value goods taxation threshold is different from country to country, but as more states are changing the regime, each country can equally benefit and raise their revenue.
Australia’s case
The first country to tax low-value goods is also the best example of how to do it properly and what companies have to do to adhere to the new rules. If a buyer from Australia purchases a low-value product from another country, for example, a 20$ bracelet, the online marketplace where it was sold at has to do several things:
- Make sure that the product is registered with the government.
- Track the transaction.
- Collect the GST tax.
- Report this tax and pay it to Australia.
By following this scheme, buyers not only pay tax for their locally bought goods but their online purchases from remote sellers as well. Of course, this plan initially received a push back by the multinationals. They reasoned that online marketplaces would have to implement this gradually because of the increased compliance burden, considering the daily transaction volumes of some E-Commerce websites.
At first, Amazon, an E-Commerce giant suspended all exports from international stores to Australia and redirected Australian customers to amazon.com.au, their domestic site, instead. They did this to by-pass GST compliance burdens but after receiving customer feedback, they started working on properly applying the new law concerning low-value goods exported to Australia. Exports were quickly resumed.
After the 1st of July 2020, the Australian Treasury plans to conduct a two-year review to see how to improve areas that can’t be handled just through the administration. Further information is yet to be provided. The Australian Taxation Office hosted webinars and helped the top 100 non-resident businesses to adjust to the change. Although there were concerns about the impossibility of the task, all the major platforms are now registered. They collect the necessary tax and the business report their VAT every quarter.
For example, Etsy regularly updates its systems as new requirements develop to ensure that VAT is being properly collected and remitted. The sellers are informed about these changes through the Seller Handbook and posts in the help center page.
Other countries will soon follow
Starting from the 1st of December 2019, New Zealand requires offshore sellers to remit 15% on goods and services valued below 1 000 dollars. The country is also taking some examples from Australia and has incorporated similar rules. They now apply flexible conversion rules for the value of products and are providing safe harbours to protect marketplaces from liability in case VAT is filed incorrectly.
But there’s still lots of work to do. New Zealand only has the U.S. version of Amazon available as its U.K. counterpart still doesn’t comply with the rules. Some businesses aren’t sure how this country’s tax authorities will properly deal with and enforce compliance on sellers as these laws concern only non-residents.
Israel was supposed to enforce VAT collection on imported goods starting the 1st of April 2020, but the law is currently on hold. The country is about to have its third general election and no policy decisions will be taken until a new government is in place. VAT exemption has been a long-standing issue for Israeli retailers as it was granted to products valued less than 260 shekels. This essentially encouraged Israel’s residents to purchase goods from foreign stores instead of their local suppliers.
