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E-Commerce

Taxing online shopping

As of July 2021, consumers will have to pay VAT on products ordered online from outside the EU. Find out how this affects the trade of counterfeits and bad quality cheap goods on trashy marketplaces.

The rise of e-Commerce and the diminishing role of physical retail changed the shopping habits of consumers worldwide. But along with the convenience of shopping from your armchair came another, less anticipated change: with just a click, consumers ordering from abroad became importers. And with importing come customs and VAT procedures, documents, administration, and a whole lot of fees.

For people living in the EU, “abroad” means outside the EU in this case. EU residents can order from other EU countries as if they were ordering from their own. While this certainly helps Germans who love their Greek feta cheese, as well as Spaniards who can’t live without Polish wood carvings, the world is a lot bigger than the EU.

So what happens if you order from Amazon.com? Or AliExpress, Wish, Lazada, or any other marketplace that is located outside the EU? Up to now, a threshold of 22 euros applied to goods bought by consumers online, which meant that when the value of products ordered was lower than 22 euros, VAT was not charged. This, however, is about to change.

Images of different packages with goods ordered online in a delivery van
Images of different packages with goods ordered online in a delivery van

VAT and OSS

The EU decided to abolish the 22 euro limit on outside purchases as of 1. July 2021. The reason for this is mostly fraud: quite often, merchants would falsely place the value of the products sent below 22 euros, even in the case of products that were obviously above that level, like smartphones.

Yearly, around 150 million packages are imported into the EU VAT-free. How many of those are genuinely worth less than 22 euros is anyone’s guess.

As of July 2021, customers are supposed to pay VAT on any goods ordered from outside the EU. However, there is a new technical limit: VAT up to the value of one euro will not be charged. That level of tax is reached by a purchase of 5.23 euros. Any smartphones worth less than that?

Another innovation is the introduction of the One Stop Shop (OSS) and Import One Stop Shop (IOSS) concepts. The OSS is the new electronic system where businesses can deal with their VAT obligations regarding their online sales within the EU.

The IOSS creates a similar system for goods imported from outside the EU. This portal will be very useful when it comes to the collection and payment of VAT by importers of random packages ordered online, aka consumers.

No surprise fees, but higher prices upfront for consumers

Parcel carrier delivering an Amazon parcel
Parcel carrier delivering an Amazon parcel

Until now, customers were hit with surprise fees upon reception of their imported goods, provided their value exceeded certain limits (22 euros for VAT and 150 euros for customs, as mentioned earlier). Thanks to the IOSS, this is about to change.

As of July 2021, the IOSS system will allow sellers outside the EU to register and pay all their VAT obligations online and in advance.

This will enable them to charge their customers VAT at the time of purchase, eliminating unwelcome surprise fees for consumers that arrive along with the coveted package.

However, this will also raise the upfront price of products ordered from outside the EU. Will it still be viable for EU residents to order from abroad?

Wish there weren’t taxes

For several online marketplaces, this may come as a hard blow. After all, the main attraction of Wish, Airyclub, Shopee, and many others is their low price (and certainly not their high quality, authentic goods.)

But since most of these marketplaces are located outside the EU, how will this new VAT system affect their sales to EU customers? Unless they’re willing to swallow all the new costs that arise out of abolishing the 22 euro exemption (which is not very likely), these fees will somehow land in the laps of consumers.

How that affects the shopping habits of regular customers remains to be seen, but it may be safe to assume that some of them will be deterred by the rising costs.

Bad news for counterfeiters, good news for brands

The new VAT rules deliver a blow to counterfeiters and manufacturers of bad quality, cheap products typically offered via trashy marketplaces, usually situated outside the EU.

Screenshot of Airyclub offering cheap products
Screenshot of Airyclub offering cheap products

With the added cost of VAT in the mix, customers may be deterred from ordering products (often counterfeits or grey market) from these marketplaces. In fact, since many of them may not even be aware of the location of these marketplaces, the new VAT rules may also work as an alert mechanism to let consumers know where they’re purchasing from.

All that is definitely good news for brands, at least regarding the EU market.

Because if customers are not buying them, counterfeiters will have reduced opportunities to sell their goods in the EU. This can contribute to diminishing the number of counterfeits flooding the European market.

...for everything else: there’s brand protection

Although the new rules may dampen the mood of counterfeiters for a while, we can’t assume they’ll just give up and accept this turn of events. Also, there are many other markets outside the EU where the trade of fake and grey market products will continue to thrive.

Which means it’s not enough to wait for lawmakers to come up with anti-counterfeiting solutions. Instead, brands have to take active measures to protect themselves and their customers from the negative effects of counterfeits, grey market products, and much more.

Online brand protection is geared towards exactly that. globaleyez is ready to tackle any IP challenges that brands face from stolen brand imagery through misused patents to counterfeits and grey market products.

Reach out to us and tell us what kind of IP challenges we can help your brand with.

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