This post is by Claire Taylor, CEO of SimplyVAT.com – a company which helps ecommerce businesses trade across borders in compliance with complex European VAT legislation.
Amazon is steadily implementing its amazing vision to be the greatest online shopping marketplace for millions of customers across Europe. It now offers access to EU customers through five marketplaces: Germany, UK, Spain, Italy and France. It has 31 distribution centers in seven countries and is constantly looking to increase this number.
Amazon wants its sellers to access the huge mature ecommerce market within the EU, which last year grew 12% to a staggering €500 billion. There are 96 million online shoppers in the EU spending an average of €1,500 per year. It’s a great opportunity for sellers to access new markets, increase profits and ensure sustainable online retail businesses!
What are Amazon’s European Services for Sellers?
Amazon offers a variety of options for sellers to get their goods to European customers. It is important to understand these as they make a difference to the EU VAT treatment.
1. Merchant Fulfilled Network (MFN)
With MFN you use Amazon to sell your goods, but fulfill directly from your home country, or by using a non-Amazon fulfillment service in the EU to dispatch your orders.
2. European Fulfillment Network (EFN)
With EFN your goods are stored at one Amazon warehouse in the EU, and all orders placed through European Amazon sites are shipped from the same fulfillment center.
3. Multi Country Inventory (MCI)
With MCI your goods are stored in multiple Amazon warehouses around Europe, and you get to choose which fulfillment centers you use.
4. Central European FBA
Under this program, your goods are listed on the Amazon German marketplace and stored in Germany, as well as holding warehouses in Poland and Czech Republic. Stock from these warehouses is used to replenish stock on the German marketplace.
5. Pan-European FBA
The new Pan-European FBA program was launched around the middle of 2016. This EU-wide fulfillment service allows you to sell in all five marketplaces, and your goods are stored in any one of seven Amazon fulfillment centers. Amazon works hard to ensure your products are moved closer to the final buyer to ensure a better buying experience. However, you will not know where your goods are at any one time.
It sounds and is great – you get to use Amazon’s phenomenal infrastructure without having to invest in your own resources. Most of Amazon’s fulfillment services, however, trigger European Union VAT obligations.
What is VAT?
Firstly, we will look at exactly what VAT is. The tax authorities concentrate on finding non-compliant retailers, so it’s crucial to understand VAT and ensure you register when you need to.
VAT (Value Added Tax) gets charged whenever “value” is added in the supply chain. When a supplier of raw materials sells goods to a manufacturer, for example, VAT is added to the sale. VAT is added again on the sale from the manufacturer to the wholesaler, and from the wholesaler to the retailer, and from the retailer to the consumer.
This “value-added” style of tax is favored in over 140 countries worldwide – governments get revenue every step of the supply chain so it’s a really popular tax to implement.
VAT rates in the EU range from zero to 27%. However, it’s not supposed to be a burden to businesses as any VAT collected on sales is offset against VAT paid, for businesses who are VAT registered. The burden of VAT lies with the final customer.
This is why European tax authorities are focusing their attention on cross-border ecommerce. The VAT paid by the customer is revenue that the tax authorities don’t have to pay back to businesses.
The whole concept differs from sales tax as used in the US and other countries, because sales tax gets charged only once on the final sale.
Importing into Europe and VAT
If you are based outside the EU, when you send your goods into the EU, you need to get an EORI number from an EU customs authority. The EORI number (Economic Operators Registration and Identification) identifies you as the importer. If you are the importer, you will pay import VAT at the first port of entry. This can be reclaimed via your VAT return as long as you are VAT registered in the EU country of import.
This is a very important piece of VAT tax legislation that you, the online seller, need to be aware of. The movement of goods into an EU country for onward sale to private consumers triggers an immediate need for you to register for VAT there. As a non-resident, there are no thresholds to exceed.
Goods Held in EU Amazon Fulfillment Centers
Relating this back to Amazon, if you use their EFN service, say in the UK, you will only require one VAT registration in place in the UK where your stock is held.
If you are using their MCI services, whichever countries you choose to have stock in will require you to be VAT registered. If you use the Central European FBA service, you will require three VAT registrations in place – Germany, Czech Republic and Poland.
If you use Pan-European FBA, this triggers a need for seven VAT registrations, as your goods could be in any one of the Amazon fulfillment centers in France, Germany, UK, Italy and Spain and the two holding warehouses in Czech Republic and Poland.
It’s a big commitment in terms of VAT tax compliance – seven VAT registrations, 64 VAT returns, and several other reporting requirements such as EC Sales Lists. However, the exposure you get to customers is phenomenal.
It is exceptionally easy to sign up to Pan-European FBA. In your Seller Central account, there is only one check box between you and a seven-country VAT registration obligation with 64 VAT returns per year and other VAT reporting requirements.
If you are a smaller seller, or a more cautious seller, and want to find your feet in Europe first, we don’t recommend you jump into the Amazon Pan-EU service straight away – there are other options that are not so heavy on compliance!
Fiscal Representation in Europe for Non-EU Companies
Please be aware that some EU countries – Italy, France and Poland among others – require “fiscal representation”. A fiscal representative is jointly and severely liable for VAT owed, and because of this bank guarantees are often required.
One way to avoid this is to set up a local company. That does come with its own costs of annual reporting and accounts, but it is a matter of doing the math and choosing the most cost-effective option.
The EU VAT Distance Selling Rules
Once your goods are held in an Amazon warehouse in the EU, sales from that warehouse come under the EU VAT distance selling rules. These rules apply to you even if you are not a registered business. The rules apply to your sales to EU private consumers only; they do not apply to any sales you make to non-EU consumers, or to businesses.
The rules state that VAT should be charged locally, until you exceed the VAT registration thresholds set by each EU tax authority in that country in a calendar year. In most EU countries, the threshold is set at €35,000 (or the equivalent).
The only countries where the threshold differs are Germany, Luxembourg, and the Netherlands – where it is set at €100,000 (or equivalent). If you have stock listed on Amazon.de, for example, and you are fulfilling UK orders from the German warehouse, the distance sales threshold in the UK is £70,000.
In other words, you can access all 28 EU countries just from one location with one VAT registration in place. We usually tell sellers that this is the best way to start – test the EU markets without a heavy cost of compliance in terms of resources or cost.
Tax Authorities are Clamping Down on Non-Compliant Sellers
The EU lose a massive amount of revenue from undeclared VAT – in the UK alone it is reported that £10 billion is lost each year.
To stop the hemorrhaging, special measures have been put in place across the EU. The EU tax authorities set up “mutual co-operation” in 2012, and has special units focused on ecommerce. Countries talk to each other and share data. Now they are going direct to the marketplaces, like Amazon, and asking for seller data. If they discover sellers who are non-compliant, they will issue penalties and interest charges.
As online retailers selling cross-border, you need to be very aware of your tax obligations in the countries where your customers are. Ignorance is no defense. Staying ahead of the game and registering on time will avoid a lot of headaches in the future.
Due to a big lobbying campaign for the UK government to take action, last year the UK tax authority (HMRC) was given new powers to combat non-compliance with VAT regulations by non-EU businesses. Firstly, they are making the marketplaces such as Amazon and eBay liable if sellers are non-compliant in the UK. If sellers do not correctly collect VAT within 30 days, eBay and Amazon can be held liable for the missing tax.
If the seller continues to be non-compliant, HMRC can make a seller appoint a tax representative. This will probably require an appropriate form of security, and increase costs for the seller, as the tax representative won’t want to be exposed themselves.
The UK is also looking to make fulfillment centers responsible for their customers’ VAT compliance. New “fit and proper” tests are being introduced, for warehouse operators dealing with goods shipped to the UK for sale online. Warehouses and fulfillment centers will be required to be registered by 2018. They will have to prove they have checked that sellers are legitimate, and have dealt with their VAT obligations correctly.
It is no longer possible to ignore your VAT compliance obligations, especially in the UK, and throughout the EU. A “head in the sand” approach may work for a while, but it is not a permanent solution.
Calculating the VAT on European Amazon Sales
It is very important to think about your pricing and margins. Please remember the price shown in the European Amazon marketplaces includes VAT – it is not added afterwards.
If you haven’t done the math inclusive of VAT, you may not have room in your margins to accommodate the amount you may owe once VAT registered. Standard VAT rates vary across Europe from 17% to 27% – can the margins you have set for your products absorb those variations? We highly recommend you do the calculations and make sure you stay in profit.
It’s also a good idea to do some market research in your chosen countries. Find out how you compare to local suppliers, and how much room for movement this gives you.
Don’t Let VAT be a Barrier to Your Plans
Planning and preparation is the key. Adding the cost of VAT compliance into your cashflow, along with other costs such as Amazon fees, is a must if you are selling internationally to the EU.
But don’t let VAT be a barrier to your international expansion plans – we are here to help. In the meantime, we wish you every success with your international online sales.