How is VAT handled with dropshipping?
This guide is for retailers who use Dropshipping by Orderchamp to sell to customers.
Ultimately, you as a business are responsible for consulting with your local tax authorities and/or a tax professional to verify that you charge your customers the correct tax rates, and to ensure that you file your taxes correctly. The below explanation shows general tax guidelines, but may depend on your unique circumstances, and so does not constitute definitive tax advise. Please refer to your tax authorities or advisor for definitive guidance.
In principle, all countries charge a value-added tax (‘VAT’), whereby businesses can declare this back from tax authorities. In addition, where businesses buy/sell cross-border within the EU, they can shift the VAT (0% rate), which is not possible for sales to consumers.
When you buy goods from brands via Orderchamp
Orderchamp is formally the Merchant of Record, so when you select products to sell to your customers, you will buy these from Orderchamp (who in turn buys these from the Brands).
The VAT rules and rates on the invoice will depend:
- If the Orderchamp legal entity is in your home country, you should receive an invoice from Orderchamp with local VAT.
- If the Orderchamp legal entity is in another EU country, you should receive an invoice from Orderchamp where VAT is shifted (0% rate).
- If you are selling to a customer outside of the EU, the entire ‘transaction chain’ can be considered as ‘Export’, and all invoices should have ‘export VAT’ (0% rate).
When you sell goods to customers via Orderchamp
VAT is based on the destination country of an order, which means that VAT is charged to a customer based on their location.
The VAT rules and rates on the invoice will depend:
- If you are selling to a customer in your home country, the invoice to your customer should have local VAT.
- If you are selling to a customer outside of the EU, the entire ‘transaction chain’ can be considered as ‘Export’, and the invoice should have ‘export VAT’ (0% rate).
- If you are selling to a customer in the EU, who is a business (i.e. has a VAT number, and is allowed to shift VAT), then the invoice should contain ‘VAT shifted’ (0% rate).
- If you are selling to a non-business customer elsewhere in the EU, it depends:
D1) The One-Stop Shop scheme (OSS) allows retailers to collect and remit VAT for sales in all EU member countries, rather than registering for each member country individually. Under current EU tax guidelines, the use of OSS for Dropshipping is however limited to those cases where you as a Retailer and Orderchamp/Brand are in the same country. See below for more on OSS.
D2) There is a ‘distance selling threshold’ for the entire EU (since July 1 2021). If your combined sales to all other EU countries are less than 10,000 EUR in total annually, then you can choose to charge your home country’s VAT rate in other EU countries and report the sales below this threshold in your regular domestic VAT return with your home country’s tax authorities.
If you choose to charge your home country's VAT rate for all EU sales, then you might need to apply for the micro-business exemption with your local tax authority. If you're not sure whether you need to apply, then consult with your local tax authority or a tax professional.
D3) If your combined sales to all other EU countries are equal to or greater than 10,000 EUR in total, then you have to charge the VAT rate in your customer's location for all sales to other countries. This may require you to get a VAT registration in the relevant EU member country, similar to if you have a significant business presence there, such as a physical store or a fulfilment centre. If you already have a VAT registration in different/multiple EU countries, please update this information in your Orderchamp back office. (This option is currently unavailable, please contact support for additional help)
Based on the specific order - and the location of Brand, Orderchamp, Retailer and Customer - Orderchamp will select the relevant tax rules and apply these to the invoices created.
For sales to customers in other EU countries where OSS is not possible (i.e. scenario’s D2-D3), in those cases where you as a Retailer accept the order, Orderchamp will assume you are below the ‘distance selling threshold’. If this is not the case, please do not accept the order.
If you aren't sure whether your presence requires you to register, then you should contact local tax authorities or a tax professional.
Further details on the One-Stop Shop scheme (OSS)
Starting July 1st, 2021, One Stop Shop schemes are available that allow retailers to simplify charging and remitting VAT for sales to EU member countries.
- The One-Stop Shop (OSS) scheme, also called the Union OSS, is for retailers within the EU whose sales to other EU member countries require them to charge and remit VAT based on destination countries. After July 1, 2021, you can use the OSS scheme if your annual sales to all other EU member countries are equal or greater than 10,000 EUR.
- If your annual sales to all other EU member countries are less than 10,000 EUR, then you can either use the micro-business exemption to charge your local VAT rate, or register for the OSS if you want to charge VAT based on the location of your customers.
- The Import One-Stop Shop (IOSS) scheme, also called the Non-Union OSS, is for retailers outside the EU that sell to customers located in any EU member country. After July 1, 2021, you can use the IOSS scheme if you are located outside the EU and sell to customers located in an EU member country, and you don't want your customers to be charged tax upon delivery.
- Using IOSS, you can choose to collect VAT on orders equal to or less than 150 EUR at checkout so that your customers don't pay taxes upon delivery.
Note: Tax laws for selling to EU member countries changed on July 1, 2021.
- Register for the OSS with the tax authority in your own country.
- Update your tax registrations.
- Report sales and remit VAT to the OSS, instead of registering for a VAT number with individual EU member countries.
Registering for the OSS is optional. If you don't register for the OSS, then you will have to continue to register for VAT in individual EU member countries.
Further details on Tax reference for EU member countries
Caution: The following reference guide is for informational purposes only, and is not intended to replace professional tax advice. If you have further questions about whether tax legislation applies to you, then you should contact local tax authorities or a tax professional.