Dropshipping has become a widespread method of running a retail business in recent years. Its benefits are clear: very little initial investment is needed, no storage facility is required, and an almost endless array of items can be sold this way. However, VAT accounting for dropshippers is often more complex than traditional retailers. Please learn 1stopVAT’s article and learn how to navigate the taxes for your dropshipping business.
Dropshipping vs. traditional retail: VAT perspective
Traditional retail, when an online or physical seller ships goods from its warehouses to the purchaser or sells them in a store, is the most frequent type of a subject for VAT transactions. Two parties – the buyer and the seller – are included in this process.
Dropshipping is considered a chain transaction and includes a taxable product and three or more parties. Its simplest form consists of the manufacturer, the seller who acts as an intermediary, and the purchaser. Often, more intermediaries can be involved.
Collecting and paying VAT for dropshipping
VAT rules and rates vary depending on the country of origin or destination of the sale and the types of products sold. Dropshipping is an inherently remote way of selling goods and requires additional attention to the location of the supplier of the good and the location of your buyers.
There are two main rules for deciding which VAT rate should be applied. Location rule is when the VAT is assigned based on the requirements of the location where the transportation to the customer begins. While destination rule always sets the VAT rate based on the customer’s location.
Dropshipping is more complicated, and several adjustments to these rules apply – we will explain them in detail below.
Before we begin: important VAT changes
An EU-wide law regulates B2C cross-border transactions in the EU. The most recent changes to it took place in July 2021.
Here’s what has been changed:
- Remote sellers are now subject to an EU-wide sales volume threshold of EUR 10 000 (net) and must register for VAT in all countries where their customers reside.
- There is a simplification of declaring VAT. OSS – One-Stop-Shop for remote sellers allow reporting for VAT in all EU countries via a system managed by their home country. Import-One-Stop-Shop or IOSS is a similar tool for accounting for import VAT in the EU.
- Previously applicable VAT limits were removed to unify the VAT accounting.
VAT case study 1: Dropshipping in a single country
When all parties: the manufacturer, intermediaries, and the purchaser, are based in the same country, all invoices contain the country’s VAT rates, and the dropshipper can deduct VAT in its home country’s VAT return.
VAT case study 2: Dropshipping with self-delivery
Let’s say that a French dropshipper sells goods to an Italian purchaser but acquires them from a manufacturer in France.
Two ways of accounting for VAT are possible: the classing retail or the distance selling principle.
- Traditional retail would be when items are first purchased from the manufacturer and taxed at the French VAT rate. Then, the items would be shipped, and three scenarios would be possible. If the seller’s revenue is below the EU delivery threshold – the transaction is taxed by the French VAT rate and listed in the French VAT return. If the threshold is exceeded, the seller must have registered for VAT in Italy and charge the Italian VAT rate. Upon an OSS registration, the Italian VAT rate would be used.
- A distance selling principle could be applied if the dropshipper takes over the shipping and identifies itself as the supplier of the goods.
VAT case study 3: Delivery from the home country
Intra-community shipments in Europe are tax-free. If the manufacturer sends the goods directly to the buyer in Italy, the invoice from the manufacturer to the dropshipper would not need to contain any VAT, and no input VAT deduction is possible.
Droppshipper is the intermediary in this transaction and acts as the invoice supplier to the customer and must include the Italian VAT rate.
However, the OSS can be used if the Italian purchaser is a private individual. In such a case, it would be listed as a cross-border transaction and accounted for via OSS with no Italian VAT number required.
VAT case study 4: Delivery from another EU country
If a transaction includes three different countries in the EU, a B2B sale and a B2C sale take place in this chain.
In such a case, the invoice from the manufacturer would not include VAT and would be accounted for via a reverse charge procedure.
If the manufacturer is French, the dropshipper Italian, and the buyer is German, the following will apply. The French-Itlian transaction would be subject to reverse charge while the final customer would be taxed the Italian VAT on the One-Stop-Shop.
VAT case study 5: Delivery from a non-EU country
If the manufacturer is based outside of the EU, the dropshipper might not have to pay VAT in many instances. Before receiving the items, the final customer must be made aware of the possible customs fees. The IOSS comes in handy when delivering from abroad.
Choosing the correct VAT rate
Previous VAT regulations that meant a higher VAT threshold allowed more sellers to use the domestic VAT rate. However, from July 2021, when the VAT threshold for all EU sales became EUR 10 000, many companies reach it sooner and have to start adjusting their prices.
It is because when the threshold is exceeded, the destination (country of residence of the buyer), the VAT rate must be applied. Sellers then need to consider possible VAT changes and reductions in the countries they to which sell.
Changes with OSS
Once the VAT threshold of EUR 10 000 is exceeded, the seller must register in all countries to which it sells, receiving a VAT identification from the country’s tax authority. The OSS simplifies the process, and separate VAT registration is no longer required.
Please keep in mind that selling to third countries, the OSS does not apply, and varying VAT thresholds, as well as exchange rates, must be considered.
Import VAT via IOSS
Since July 2021, import VAT rules for companies sourcing products from non-EU countries have changed too. Limits for the value of goods were removed, and now all imports are subject to import VAT.
IOSS was created to simplify this by allowing EU-wide import reporting.
The changes that took place did not regard customs duties, and different value thresholds for customs duties are still applicable in the EU countries.
Generally, the importer is the final customer when an item is dropshipped. Therefore, the buyer must be made aware of the possible duties upon receiving the goods.
More and more dropshippers sign as importers of the goods and include the import fees in the final price. However, such a procedure requires that a dropshipper first receives the items and sends them further.
Other taxes and accounting for dropshippers
Dropshippers are subject to other taxes in their country of registration, just like any other business. Impeccable accounting procedures are crucial in this type of business as the seller deals with more parties. The additional taxes include income tax and other contributions that vary across countries in the EU.
If you need help navigating your taxes, get in touch with 1stopVAT’s team and receive individual consultations.