Various governments are abolishing low-value exemptions. What are they, what is behind this move, and what are the practical consequences?
Low-value exemptions are the waiving of import duties when shipments below a specific value are imported. With global e-commerce on its way to reaching $1 trillion by 2021 (per OECD estimates), governments are re-assessing their earlier exemptions, which came into play long before buying fancy baseball caps from a random online seller became cool.
The low-value exemption threshold is different for each jurisdiction. For example, it’s €22 ($24.52) in the European Union and $800 in the United States. (Both Canada and the U.S. might further increase the threshold). This might seem like a big difference, but it’s relevant to note that (1) the U.S. does not levy value-added tax (VAT, or sales or consumption tax) upon import, which is between 15% and 25% in the EU depending on the country, and (2) the U.S. currently has a trade-weighted average import tariff rate of only 2% on industrial goods. Today, for U.S. authorities, this makes handling low-value shipment differently more of a burden than it’s worth.
Not so much for the EU where, with the ending of the low-value exemption on January 1, 2021, it’s expected that €7 billion ($7.8 billion) will be collected in 2021 (versus 2015 projections of just only €500 million, or $557 million). This will only be in VAT, as the exemption for customs (tariff-based) duty remains in place.
Besides the financial injection, the main reason provided for abandoning the exemption is that online vendors have an unfair advantage over local vendors. Shipping costs do not nearly add up to the tax advantages that buying from foreign e-commerce vendors offers, and ever-growing online businesses will now be on a more level playing field with local stores.
The EU isn’t the only jurisdiction throwing the exemption overboard. Australia went first, in July, 2018, and required non-Australian vendors to register for goods and services tax purposes (the local equivalent of VAT); New Zealand followed in 2019; and various others (including Indonesia, Norway, and Israel) either have or will soon implement new rules.
What does all this mean for non-resident online vendors and for the buyer? For the buyer, it simply means higher prices. VAT will be charged upon checkout, and the buyer will pay local VAT (the rate applied in the buyer’s country of residence) directly to the vendor. Farewell to great deals!
For the vendor, there’s more in play. The seller will charge and collect the VAT, which means the vendor is also responsible for submitting it to the relevant local authorities. And so the fun starts. The vendor will have to register and submit taxes in each jurisdiction where its buyers are located. (Note: on-line marketplaces aren’t exempt.) The vendor will need to determine which VAT rate to apply, as it’s different for each country, and some products could be subject to a lower VAT rate. Additionally, the vendor will need to keep track of VAT charged, submitted, and refunded through VAT returns, increasing the compliance burden.
Beyond this, the vendor could get into a situation where local authorities might argue that just submitting VAT isn’t enough — a local corporate tax presence could be assumed when sales exceed certain thresholds. This would result in even more paperwork, and possibly a local corporate tax burden as well.
All in all, it’s expected that due to various authorities scratching the low-value exemption, there will be more revenue for said authorities, fewer deals for the buyers, more paperwork, and less market for the vendors. For smaller vendors especially, it appears that the “going global” slogan might have to be put on ice a little longer.
Anne van de Heetkamp is vice president of product management and global trade content at Descartes Systems Group.
