Dropshipping has clearly emerged as one of the most favoured business models in the digital age of e-commerce, especially due to its low upfront costs and very minimal inventory required. One of the most critical challenges faced by a dropshipping business is navigating through diverse and complex Value-Added Tax regulations across countries. This article discusses VAT for a dropshipping business working in a global marketplace and gives relevant insight to business owners.

What is Dropshipping?

Dropshipping is one of the retail fulfilment methods whereby a store does not keep products it sells in stock. When a store sells off its product, any purchases of items from third-party sellers to the customer take place simultaneously. The item is then shipped directly to the customer, so the seller never gets to handle the product. While this model is very beneficial in keeping down the overhead costs, it also tends to complicate the VAT obligations hugely.

What is VAT?

Value-added tax (VAT) is the amount levied as a consumption tax on the value added from the production of goods and services at every successive step. It is also one of the most important sources of revenue in the world, especially in the European Union, which harmonised it in its member states.

VAT liabilities can arise in any number of countries for a dropshipping business, depending on where the supplier is based, the location of the customer, and where the goods are shipped from and delivered to.

Do I Need to Register for VAT?

Thresholds for Registration

These VAT registration thresholds differ from country to country. For instance, the threshold within the EU concerning distance sales to consumers in another EU state is that of EUR 10,000 on an annual basis. As a result, if this threshold is exceeded, a dropshipping business will have to register for VAT purposes in the destination country.

Place of Supply Rules

The “place of supply” rules are generally determinative in relation to the VAT application for dropshipping. In the case of goods transported from one EU country to another, the place of supply will normally be where the shipment originates. For goods imported from outside the EU, the place of supply is where the importation takes place.

How Does VAT Work on Cross-Border Sales?

Within the EU

Here are the considerations for EU-based dropshipping businesses selling to the other member states of the European Union:

Distance Selling: If your total sales to a given EU state go over the EUR 10,000 threshold, then you will need to get registered for VAT in that country and charge its local VAT rate.

One-Stop Shop (OSS) Scheme: This scheme has made things easier in terms of VAT compliance for businesses, as they can now report and pay all EU sales in one place through the single VAT return of the country where they reside.

Who Pays Import VAT and Duties?

Import VAT and duties on shipped products are usually payable at the point of entry to the destination country; depending on the terms of sale, these will be payable by either the supplier, the customer, or the dropshipping business.

Delivered Duty Paid (DDP) vs. Delivered at Place (DAP)

DDP: The seller takes every responsibility up to delivery to the customer, including import VAT and duties. This might simplify purchasing for customers at the cost of an additional administrative burden on the seller.

DAP: The buyer is liable for import VAT and duties once the goods arrive in the destination country. It might bring unexpected costs to customers and thus affect their purchasing decisions.

Key Strategies for Managing VAT in Dropshipping

Know Your Supply Chain

Chart your supply chain to know at which points VAT will have to be raised. This would mean knowing where all your suppliers located, from where the goods are shipped out, and where all your customers located.

Get Registered for VAT in Relevant Jurisdictions

Make sure you are registered for VAT in all jurisdictions where you exceed the local threshold or have a taxable presence. This can be done through services such as the EU’s OSS scheme, greatly simplifying reporting.

Implement Robust Accounting Systems

The investment in a good accounting system that has the capacity to do multi-jurisdictional VAT reporting will help ensure accuracy in the calculation, collection, and remittance of VAT.

Stay Informed About Changes in VAT Laws

VAT laws are changing constantly and, particularly in the area of e-commerce. Be aware of any changes in the VAT legislation of the countries in which you trade to ensure that your business remains compliant.

Seek Professional Advice

One can seek advice from VAT specialists or tax advisors who are in the best position to give insight that is often peculiar to one’s business model and, more importantly, to one’s operational footprint.

Conclusion

It can be pretty intimidating to deal with VAT in a worldwide dropshipping business. Proper understanding will, therefore, help the business a lot by keeping it free from penalties and averting fines for noncompliance. This means awareness of where thresholds of VAT registration lie for a certain country, place of supply rules, and especially how cross-border sales will affect the business. This can be in terms of tools provided, such as the EU’s OSS scheme, or even professional advice. Proactive VAT management is the key to the success of the global market.

Visit www.crossbordervat.com for in-depth advice and professional consultation on the management of your dropshipping business’s VAT. Our team of specialists will help guide you seamlessly through the intricacies of cross-border VAT so that your business remains compliant and efficient.

Frequently Asked Questions:

Q1. Do I need to register for VAT in every country I sell to?

A1. Not necessarily. VAT registration requirements depend on the threshold for sales in each country. Provided that you exceed the threshold in a country, then you would need to get registered there for VAT purposes.

Q2. What is the VAT rate for dropshipping?

A2. VAT rates range from country to country. You need to know the local VAT rates in countries where your customers are based to charge them properly and to make the remittance.

Q3. How can I simplify VAT compliance for my dropshipping business?

A3. The EU’s OSS scheme can be utilised to make intra-community selling less complicated for VAT reporting purposes. More efficient VAT compliance can also be achieved through more robust accounting software and seeking professional advice.

Disclaimer:

This blog is for information purposes only and should not be relied or acted upon when making financial decisions. Always seek professional advise prior to taking any action.