Changes to value-added tax in 2021: how will cross-border trade change, waiting for VAT recovery on bad debts, etc.

In the shadow of the state of emergency caused by the coronavirus and Brexit, the amendments to the Value-Added Tax Act, which were to come into force at the beginning of the new year, were postponed and are now expected to become applicable as of 1 July 2021. Nevertheless, we would like to introduce you to the important changes that directly affect the Estonian business landscape today, as these changes were planned a long time ago and have a pan-European reach.

• The total common threshold for distance selling and digital services is 10,000 euros. Upon exceeding that, the company must register itself in the consumer's country of residence as a taxable person or apply a special scheme.

The change concerns companies that supply goods and/or digital services[1] to non-taxable persons in the EU. The current procedure sets forth the obligation to calculate the distance selling threshold when selling goods to a non-taxable person of another member state. Upon exceeding the threshold, there is an obligation to register as a taxable person liable to VAT in the buyer's country of residence. Essentially, companies currently have to keep a separate record of the goods sold to non-taxable persons for each country, monitor the thresholds of other countries, apply the country's tax rate upon exceeding the threshold and seek opportunities for declaring and meeting tax liabilities incurred in other countries. Suppliers of digital services have it easier, as they are subject to the common EU threshold and have the option to use the MOSS[2] special scheme, i.e. meet the obligation of paying VAT incurred abroad via their local tax authority.

In the coming year, distance sellers of goods will be made equivalent to suppliers of digital services, as a result of which a common threshold of 10,000 euros per year will be applied in the EU along with an opportunity to apply an essentially similar special scheme. It is important to bear in mind that the 10,000-euro threshold applies to the total turnover of goods and digital services. This means that, on the one hand, companies are no longer obliged to keep a detailed record for every country, while on the other hand, the threshold can be exceeded quite quickly. Therefore, if the change described concerns you, we recommend that you start planning your future today. If you are not sure whether this change concerns you, but the clients of your company are non-taxable persons of other member states (above all natural persons), we recommend that you contact us.

• MOSS special scheme is expanded, i.e. MOSS becomes OSS

Similarly to the right of suppliers of digital services to use the MOSS special scheme, distance sellers are granted a similar right as of next year (see previous clause). Additionally, the special scheme can also be applied by companies that provide a service to non-taxable persons and whose place of supply is another member state (i.e. services listed in subsection 10 (4) of the Value-Added Tax Act). In practice, this concerns companies that provide services related to immovable property located in a foreign country, work with movables in a foreign country, organise events there, etc., i.e. those who should likely register as a taxable person in another member state under the current rules.

A similar special scheme will also be applied to distance selling of goods imported from non-EU countries. The special scheme can be applied for by companies that have online trading platforms (more simply: e-commerce platforms such as Amazon, eBay, Etsy, AliExpress, etc.), which allow for distance selling of imported goods via their marketplace. According to the Ministry of Finance, there are no such merchants in Estonia, which is why we will not discuss this topic in detail but are happy to tell you about it should you be interested.

There is another fundamental law amendment related to the special scheme described above and e-commerce platforms in general that enters into force as of July 2021. Currently, the amendment does not concern Estonian companies, but we have to mention it to you as it will soon be reflected in the Value-Added Tax Act:

• In terms of VAT, e-commerce platforms also become a link between sellers of non-EU goods and EU consumers.

E-commerce platforms will become VAT collectors by acting as a purchaser of goods from a non-EU person and selling them to an EU consumer. The impact of this amendment may be visible to Estonian consumers upon making a purchase via an e-commerce platform, but it is likely insignificant to the consumer.

Is there anything else?

• VAT refund on bad debts?

Currently, the draft act, which is currently undergoing a second reading at the Riigikogu (parliament), also contains an amendment that should grant companies the right to ask the state for a VAT refund on invoices that are declared irrecoverable (there is no possibility to credit). Even though this law actually originates from the VAT directive and the topic has also been analysed by the European Court of Justice (link), it is likely that the amendment will not be adopted in Estonia this year. The enforcement of the amendment would mean additional expenses for the state instead of tax revenue and is therefore likely to be avoided in light of the current coronavirus crisis. As a result, we do not have any positive news in this regard, but we believe that our clients should be aware of the question of bad debts and expect a long-planned amendment from the legislator. 

• Abolition of the tax exemption of imported consignments worth up to 22 euros and simplification of the import procedures for small consignments (up to 150 euros)

As of July 2021, imported consignments from non-EU countries will become 20% more expensive for Estonian consumers (the 22-euro tax exemption threshold is abolished). This is fair to Estonian entrepreneurs, but unpleasant for consumers. In order to avoid placing too much burden on all of those concerned, two special schemes are introduced, the implementation of which is voluntary:

1. A special scheme aimed at sellers, the application of which by the seller ensures the collection of VAT and its payment to the consumer's country of residence.
2. A special scheme aimed at postal institutions and courier service providers, the application of which ensures the collection of VAT and its payment to the consumer's country of residence.

The way the end-consumer sees and pays value added tax depends on the special scheme used. Ideally, the process should continue to be smooth and almost invisible to the end-consumer in the future.

If you have any questions, contact your accountant or the Leinonen tax team.

[1] https://www.emta.ee/eng/business-client/income-expenses-supply-profit/overview-charging-value-added-tax/list-digital

[2] https://www.emta.ee/eng/business-client/income-expenses-supply-profits/overview-charging-value-added-tax/special-scheme

07.01.21