Note: This blog post was created with the collaboration of Fernando Matesanz of Spanish VAT Services Asesores
The fact that the One Stop Shop did not bring the hoped-for simplification for every online trader is now visible to everyone. A discussion is currently developing that deals with the following question, which is of the utmost importance and needs to be dealt with by the EU government soon. How and where must returns or credit notes be reported for VAT purposes that occur after the OSS cut-off date of 1 July 2021 but concern deliveries that were made before 1 July 2021?
Opinions range from "via the OSS" to "still local". The letter one would have huge implications for online traders, but more on that later.
Before we lose the VAT literate reader at this point due to the terms returns, credit notes, ... Let's briefly put our thoughts in order and create a VAT framework so that we can better understand everything else.
Returns, credit notes and co. versus reversed deliveries
What is colloquially referred to in online trade as a return or credit note is, from a VAT perspective, the reversal of a delivery.
This means that the customer returns the goods because he does not like them or they are damaged in order to get his money back.
In such cases, if the trader refunds the payment received, he can also recover the VAT from his tax office, insofar as it has already been paid. The delivery is thus reversed for VAT purposes.
In these cases and others, VAT lawyers generally speak of a change in the basis of assessment.
What exactly does the process look like?
Question: What happens if the customer returns the goods, e.g. in June, that you sent him in February? In this case, do I have to correct the already submitted advance VAT return for February in order to get the VAT back?
Answer: No, because the law states that the so-called change in the VAT basis of assessment must be made in the tax period in which it occurred or within one year after the return - in this example, therefore, in the context of the advance VAT return between June 2021 and May 2022.
But what about the following case, for example?
You sold a jump rope to a customer in Austria. This happened in June 2021. In July 2021, he sends the skipping rope back to you and you refund the purchase price.
At first glance, there are two options:
- 1. you report the reversed delivery in the OSS return for the 3rd quarter of 2021
- 2. you report it locally in Austria via the advance VAT return for the month of July 2021
Is one of the two procedures wrong? No, because there is no binding EU decision!
OSS for distance sales - i.e. also for reversed distance sales
One thing is clear: You can use the OSS to report all distance sales and thus also the distance sales that were later reversed.
However, are you also allowed to report reversed deliveries via the OSS that were not yet distance sales at the time of delivery because they took place before 1.7.2021?
The short answer to this is: There is no direct legal wording or other written statements from the tax authorities on this.
Resulting from that returns can either be reported through local VAT registrations or the One-Stop-Shop, as no clear guidance is available as of now. But the uncertainty can cost an online trader thousands of Euros. In the following, we will explain the two options and list arguments for each option.
Option 1: Reporting of returns through local VAT registrations
What would be the effects if reversed supplies concerning the old distance sales - i.e. supplies before 1 July 2021 - still have to be declared via a local registration in the EU foreign country?
This would mean that online traders would have to maintain their registrations in other EU countries for several months or even years - in addition to the OSS registration.
Pro Argument for this option:
One-Stop-Shop only allows reporting of distance sales in accordance with the new regulation, which is in force since 1st of July 2021. Indeed, the concept of “Intra Community distance sales of goods” did not exist as such before July 1st 2021. Therefore, one could argue that returns of cross-border B2C sales are no distance sales in accordance with the new law which would be why there may be the view that returns of sales before 1 July 2021 may not be reported through One-Stop-Shop.
Another argument for this option can be found when looking at the way how Spain was dealing with digital services provided to private customers before the 1 July. These were previously declared in the 368 form via the mini one stop shop. As of 1 July, they can be declared in form 369 along with distance sales of goods. In the event of having to rectify transactions consisting of digital services occurring before 1 July 2021, the corrections must be declared by means of a rectification of the form 368 already filed.
Contra Arguments for this option:
OSS and local reporting for refunds contradict the purpose of the law.
This view clearly contradicts the purpose of the law, according to which the so-called e-commerce package - which also regulates the OSS - should significantly reduce the compliance burden in cross-border online trade in the EU, because this burden has been identified as the biggest hurdle for the electronic single market.
To put it even more bluntly: If one follows this view, VAT compliance in cross-border online trade would be even more burdensome and cost-intensive for a certain period of time (one year or more) than before the legislative reform.
Option 2: Reporting of returns through One-Stop-Shop
Pro Arguments for this option:
Option 1 contradicts the purpose of the law, i.e. leads to enormous increase of complexity. Sellers would have to maintain registrations for years.
Calculation of the new binding EU wide 10k threshold takes also B2C cross-border sales from 2020 and first half of 2021 into consideration, even if new legal definition of distance sales only came into force on 1 July 2021. Therefore, one could also argue that this logic can be applied when it comes to the reversal of sales, i.e. returns for sales before 1 July 2021 fall under the definition of the “new” distance sales and can therefore be reversed through OSS.
The returns of product are very common practice in the e-commerce sector. According to the above, it is not yet clear how these returns shall be declared. Therefore, a precise guideline from the Lawmaker is urgently needed. This will give legal certainty to the e-commerce industry.