What U.S. E-Commerce Businesses Should Know About New GST/HST Rules in Canada and New VAT Rules In the EU
What U.S. E-Commerce Businesses Should Know About New GST/HST Rules in Canada and New VAT Rules In the EU
Major changes are coming to Canada’s Goods and Services Tax/Harmonized Services Tax (GST/HST) and EU VAT laws on the online supply of goods and services. Both sets of rules, which apply as from July 1, 2021, will affect U.S.-based businesses selling or facilitating sales to private individuals in Canada and EU member states, respectively. With just over a month remaining before the rules become effective, such businesses should begin immediately to prepare for their new GST/HST/VAT registration and collection responsibilities.
What are the GST/HST changes in Canada?
Currently, only nonresidents that carry on business in Canada are generally required to register for and collect GST/HST (levied at the federal level in Canada) on taxable supplies of goods and services made in Canada. If the nonresident does not conduct business in Canada, it need not register for or collect GST/HST.
The impending rules aim to level the playing field between Canadian businesses (which must charge GST/HST on the supply of goods and services) and foreign suppliers by ensuring that GST/HST applies to all goods and services used in Canada, regardless of how they are supplied or whether the supplier is Canadian or nonresident. The rules will significantly impact nonresident vendors and online platform operators, in that foreign businesses will be required to register for GST/HST, collect GST/HST from customers, and report and remit tax to the Canadian tax authorities. Three types of supplies by foreign businesses will be affected:
- Supplies of digital services;
- Supplies of accommodation made through an accommodation platform (AP); and
- Online supplies of goods through a fulfilment warehouse.
Foreign businesses and platforms that do not have a physical place of business in Canada but that supply goods and services online to Canadian consumers and/or non-GST/HST-registered businesses (i.e., B2C transactions) will be required to register for GST/HST, resulting in an obligation to collect, remit and report tax. The tax rate will be the rate applicable in the province where the consumer is resident.
Nonresident businesses will have to register for GST/HST purposes when their sales exceed CAD 30,000 (approximately USD 25,000) over a 12-month period or they may register voluntarily where the threshold is not exceeded. A simplified online registration will be available for these businesses, but it will not be possible for the nonresident business to reclaim GST/HST incurred on its own purchases. If nonresident businesses wish to recover GST/HST paid on business expenses, they may be able to register under the regular GST/HST regime.
An AP is a digital platform that facilitates the supply of short-term rental accommodations (i.e., rentals for less than one month) to private customers for a price of at least of CAD 20 (approximately USD 16) per day (e.g., Airbnb, VRBO, etc.).
Nonresident APs will be required to register for GST/HST, and to collect, remit and report tax on the rental charges in cases where the owner of the property is not GST/HST-registered. Where the property owner is GST/HST registered, the AP will not be responsible for GST/HST; instead, the property owner will be required to collect/remit GST/HST on the rental charges. The GST/HST rate will be the rate applicable in the province where the property is located.
APs subject to these changes should register for GST/HST under the simplified online registration.
Fulfilment warehouses and websites
GST/HST registration will be required for the following types of transactions in cases where the nonresident business’ sales to consumers exceed, or are expected to exceed, CAD 30,000 over a 12-month period:
- Direct sales of goods by a nonresident business directly (i.e., not via a distribution platform) through its website to Canadian consumers: In this case, the nonresident business will have to register, charge and account for GST/HST.
- Sales of goods by a nonresident business through a distribution platform to consumers in Canada: The distribution platform operator will be required to register for GST/HST and account for GST/HST in Canada. It should be noted that no GST/HST will be due on the service fee charged by the distribution platform operator to nonresident businesses.
- Online sales of goods by a nonresident business (but not through a distribution platform) to customers, where the goods are located in a Canadian fulfilment warehouse: The nonresident business will be required to register for GST/HST and will need to keep records on its foreign vendors and submit these to the Canadian tax authorities. These information returns will give the tax authorities insight into which nonresident businesses need to be GST/HST-registered.
Nonresident businesses that carry out the above transactions will have to register under the standard GST/HST rules rather than under the new simplified regime and will generally be able to reclaim GST/HST incurred on their purchases.
Potential Provincial Sales Tax (PST) implications
In addition to having GST/HST registration and collection obligations, nonresident vendors also may be required to register for PST. Currently, British Columbia, Manitoba, Quebec and Saskatchewan impose a PST, and three of these provinces (i.e., British Colombia, Quebec and Saskatchewan) have introduced rules requiring nonresident vendors selling to customers in these provinces to register for PST purposes. The rules vary by province and will need to be considered in addition to the new GST/HST rules.
What are the new EU VAT rules?
The EU VAT rules applicable to cross-border B2C e-commerce activities are undergoing a major “refresh”—or modernization—as from July 1, 2021 (postponed six months from the originally planned effective date of January 1, 2021). From July, updated VAT rules will apply to online sales (including online marketplaces) to EU private consumers and to the import of low value goods. (The European Commission published explanatory notes on the rules on September 20, 2020, which include clarifications, FAQs and examples.)
The objectives of the new EU VAT rules are to: (i) simplify compliance obligations for vendors that potentially have to comply with the VAT rules in the 27 EU member states; (ii) increase VAT revenue for the individual member states by bringing more transactions within the scope of the EU VAT net; and (iii) reduce VAT fraud.
Any business making or facilitating online sales or deliveries of goods to consumers in the EU will likely be impacted in some way by the changes.
The EU VAT law changes are as follows:
Intra-EU sales to consumers
All B2C sales of goods will be taxed in the country of destination, meaning that sellers will need to collect VAT in the EU member state to which the goods are shipped.
The existing thresholds for distance sales in the EU will be abolished and replaced by an EU-wide registration threshold of €10,000 (approximately $12,000). This is an important change and potentially could create considerable EU VAT registration and reporting obligations for U.S.-based businesses selling goods from warehouses located in the EU if not proactively addressed.
To reduce the administrative burden and simplify VAT reporting, a new reporting system, called the One-Stop Shop (OSS) will be expanded to include the distance sale of goods. U.S. businesses can register for the OSS scheme in the EU member state of dispatch and can report and remit the VAT due via a pan-EU VAT return instead of having to VAT register in each EU member state.
Sales via online marketplaces
In certain circumstances, businesses that operate an online marketplace (known as an “electronic interface” in the EU) or that facilitate the sale of third-party goods through an online marketplace will be considered the “deemed supplier” of the goods sold to EU customers and will be required to collect and pay VAT on such sales. As a result, businesses that sell via online marketplaces (e.g., Amazon, eBay, etc.) will not be required to account for VAT on such sales.
Imports of low value goods
The VAT exemption for “low value imports,” i.e., goods coming from outside the EU that do not exceed a value of €22 (approximately $26) will be abolished. Instead, the sale of low value goods (not exceeding €150 (approximately $180)) to consumers in the EU through the business’ own website will be subject to VAT at the applicable rate in the destination country. The VAT due on low value goods can either be collected at the point of sale by the seller or collected from the consumer before the goods are released by the customer broker/delivery service. Where the seller opts to collect VAT at the point of sale, it can VAT register under the new Import One-Stop Shop (IOSS) system to account for and remit the VAT due.
VAT registration under the IOSS has several benefits, including:
- Transparency to consumers: The customer will not be faced with any unexpected VAT costs since the total amount paid for the goods is VAT-inclusive;
- Reduced compliance burden: Sellers can use a single IOSS registration to report and pay the VAT due on all sales covered by IOSS. Otherwise, if the seller acts as the importer (e.g., sells goods under delivered duty paid terms), it may need to register for VAT in multiple EU member states;
- Quick customs clearance: IOSS is designed to enable goods to be cleared through customs quickly as no VAT is due at the time of importation, thus facilitating the speedy delivery of goods; and
- Flexible logistics: IOSS simplifies logistics since goods can be imported into the EU in any EU member state. If IOSS is not used, goods can only be imported and cleared for customs in the destination EU member state, which may result in delays and additional costs.
How will the changes impact nonresident sellers?
As noted above, the Canadian and EU rule changes will significantly affect U.S.-based businesses selling or facilitating the sale of goods and services online to consumers located in Canada and the EU, respectively. With just over a month left before the rules become effective, any U.S.-based business that may be impacted should take immediate steps to:
- Understand the Canadian and/or the EU rules and how they will apply;
- Assess the impact of the rules on supply chains;
- Consider the impact on pricing due to different GST/HST/VAT rates applying in different jurisdictions;
- Identify any adjustments that can be made (where possible) to mitigate the impact of the rules;
- Be prepared to comply with new GST/HST/VAT obligations, including additional registrations, charging and collecting GST/HST/VAT, filing tax and/or information returns, etc.;
- Update and adapt accounting and billing systems and master data records to identify when GST/HST/VAT should be applied and the appropriate rates in multiple jurisdictions; and
- Cancel existing EU VAT registrations for distance sales that may be replaced by the OSS registration.
Failure to comply with the rules could result in the imposition of interest and penalties on the historic GST/HST/VAT liability. In addition to the GST/HST implications in Canada and the EU VAT consequences, business selling goods that are imported into these jurisdictions must also take into account any customs implications because any compliance deficiencies could result in imported goods being delayed in customs, causing customers to be frustrated by shipping delays.
How can BDO help businesses comply with the new rules?
Our U.S.-based VAT team can assist businesses:
- Assess the impact of the changes and assess the readiness of the business to deal with the changes, including identifying potential GST/HST/VAT collection and reporting obligations in new jurisdictions;
- Determine the GST/HST/VAT rates for products in relevant jurisdiction;
- Evaluate new or updated GST/HST/VAT compliance tools to deal with additional and more complex GST/HST/VAT reporting obligations;
- Work with finance and IT teams to help them adapt and update financial and reporting systems to facilitate compliance with the rules;
- Review existing contracts to help manage GST/HST/VAT risks associated with the new requirements; and
- Provide tools, etc. to help manage compliance obligations (e.g., GST/HST/VAT return preparation).