International dropshipping and VAT: how it works

Online shops that supply products to consumers within the EU are required to comply with VAT rules. The same goes for online shops that sell products to consumers via dropshipping. International VAT specialist Raymond Feen, has a word of warning for online shops that want to get started with international dropshipping. “It is important to realise that VAT has to be paid before consumers can get their hands on your products.”

If you sell products in the EU, you will probably have to pay VAT in the destination country. You may be able to pay VAT in the other member state under a simplified VAT scheme. This article explains the schemes and uses examples to outline how you should handle VAT as an international dropshipper.

What is drop shipping?

VAT rules and regulations

Different VAT rates

Agreements with supplier

Drop shipments and VAT

Dropshipping and platforms

What is dropshipping?

Dropshipping is where you sell someone else's products without having these products in stock. Instead, the supplier sends the product ordered on your online shop directly to your customer. Raymond Feen, international VAT specialist and owner of ALLVAT: “Selling goods to international customers or ordering products from foreign manufacturers or suppliers has VAT implications. The regulations for online shops that sell products to consumers are complex. How to pay VAT as a dropshipper varies from one situation to the next, but paying VAT in the customer’s country is key.

VAT rules and schemes

The following applies to webshops that sell products to consumers within the EU:

• Not exempt from paying VAT.
  On shipments from outside the EU, VAT always needs to be paid in the EU destination country, regardless of the value of the shipment.

• €10,000 threshold
  If you sell a product to someone in another EU country, you have to calculate the VAT rate of destination country. This transaction is called a long-distance sale,  when you ship the product to your foreign customer yourself or commission a carrier to do so. These goods are already in the EU at the time of sale to the consumer, you simply have them shipped from one member state to another. It does not matter whether you ship the goods to your EU customer from the Netherlands or from any other EU member state.

If your annual revenue from distance sales is less than €10,000, you are allowed to charge Dutch VAT. But only if the Netherlands is the country of departure. If you sell excise goods or (almost) new vehicles to consumers, the €10,000 threshold does not apply. Those goods are always subject to the VAT of the destination country. 

Distance sales

There are certain special schemes available for online shops that sell products to consumers (B2C). These make it easier to pay VAT in the EU countries where their customers reside. According to Feen, these schemes are not always suitable for dropshippers. “What matters most is if you ship the products to your customer yourself or if shipping is arranged by the supplier. If you are a dropshipper and leave shipping entirely to your supplier, the rules on distance sales do not apply to you.”

Distance sales (in Dutch) are sales to consumers in other EU member states, where you:

• transport the goods using your own means of transport;
• dispatch them yourself by mail; or
• commission and pay a carrier to transport them for you.

Feen: “If none of the above applies to you, you will not fall under the distance sales scheme and will not be able to use the Union scheme. This would let you pay the foreign VAT due in other EU countries through the Dutch Tax Administration." 

Union scheme/OSS

If you are a dropshipper and you do qualify for the distance sales scheme, you are free to decide how you pay the foreign VAT. You can register for VAT in the EU countries in question, but you can also pay foreign VAT via the one-stop-shop system (OSS) of the Tax Administration.

Feen explains: “The one-stop-shop system is based on the Union scheme. Every quarter, you report how much VAT you have to pay to each member state on the OSS portal. You then transfer the total amount to the Dutch Tax Administration, who will ensure that VAT is paid in the countries where your customers live. Distance sellers have to choose between the Union scheme or registering for VAT in the countries where they have to pay VAT. You cannot do both.”

What about dropshippers who do not qualify for the distance sales scheme? “Then you have to register for VAT in the countries where your customers live. This comes with a lot of extra administrative obligations.” 

Import Scheme/IOSS

The EU has set up an import scheme for imported goods from outside the EU with an intrinsic value of less than €150. The intrinsic value, in this case, is equal to the price the consumer paid for the product. Any additional costs such as shipping costs and insurance included in the total (not specified separately) are part of the intrinsic value of the goods. Costs that are mentioned separately on the invoice are not included in the intrinsic value of the goods.

Feen: “Dropshippers who opt to import products for their customers under this scheme do not have to pay import VAT. Instead, your customer pays VAT when they buy the product in your online shop. For this scheme, you do need an IOSS (import-one-stop-shop) number from the Dutch Tax Administration. You will have to pass on your IOSS number to the customs agent that submits the import declaration in time to avoid paying import VAT at the border.”

In addition to the portal for the Union Scheme, there is also a separate IOSS portal. “The IOSS portal lets you pay the VAT collected from your customers based on the applicable rate in the EU destination country.”

No Import Scheme

If you opt against using the Import Scheme when importing goods into the Netherlands or import goods with an intrinsic value of more than €150, you have two options: either you can import the goods or the Dutch consumer can import them.

1. If the goods were purchased by a Dutch consumer and are imported into the Netherlands, the importer will have to pay the Dutch import VAT ànd regular Dutch VAT. You can reclaim the import VAT paid at the border through your regular VAT return. Do you have been an Article 23 permit (in Dutch) from the Dutch Tax Administration? Then you do not have to pay import VAT at the time of import. You can reverse charge it along with your domestic VAT instead.
   If the goods were purchased by a consumer in another EU member state, for example France, and the supplier sends the goods straight to the French consumer, you will have to pay French import VAT and regular French VAT. This means you will have to register for VAT in France. In the VAT return you file in France, you pay the VAT on your sales and reclaim the French import VAT you paid.
2. You have the postal or courier service collect the VAT due, along with any handling charges for customs clearance when the goods are delivered to the consumer. With this approach, the consumer effectively imports the goods. Inform your customer about the import process before they place an order on your online shop. Also make sure that the price they pay on your site is exclusive of VAT, as you do not want them to pay VAT twice.

For goods with an intrinsic value of more than €150, you may have to pay import duties on top of VAT. If and how much import duties are due, differs from one product to the next. Do you want your customer to pay import duties, VAT, and handling charges for customs clearance upon receipt? Mention this explicitly before they add the product to their shopping cart. Again, it is important to make sure that the price the consumer pays on your site is exclusive of VAT. This prevents them having to pay VAT twice.

Adapting the webshop

Feen stresses the importance of using the correct method to pay VAT in the destination country: “Unfortunately, dropshippers do not qualify for the OSS if they do not arrange the transport of goods themselves.” And if you find yourself in a position where you have to charge different VAT rates for different EU countries, you will have to update your online shop and your records.

Learn more about VAT rules for e-commerce businesses. 

Different VAT rates

Feen points out that dropshippers should carefully keep track of their revenue per member state and the VAT rate they charge on their products. “You can find the VAT rates in different member states on the website of the European Commission.”

Hungary has the highest basic rate within the EU, at 27%. “If you sell goods to consumers in Hungary and various other EU member states, you could base your selling price on this high 27% rate in order to harmonise prices across all member states. If you sell the product to a consumer in another EU country, you will have to pay less VAT and end up with a bit more profit.”

Agreements with suppliers

Making clear agreements with your suppliers is absolutely essential. “In addition to making agreements about delivery times, warranty terms, and returns, make sure that your supplier tells you where they ship their products from,” Feen recommends. “If they ship products from outside the EU, agree on who is responsible for customs clearance: you, the supplier, or the consumer. If the supplier imports the products in your name or in their own name, they need to know what the consumer paid. Then they can state the correct intrinsic value on the import declaration.”

The shipping country is important

Feen stresses that dropshippers need to know exactly where their products come from. “You need to know the exact location from which your supplier ships the goods. This is important for the correct declaration of the VAT due.”

Feen explains with an example: “Suppose a Dutch supplier delivers to your Dutch customers from its Dutch branch. Then, a Belgian consumer orders a product from your online shop. You order the product from your Dutch supplier, who ships it to Belgium. Since Belgium is the destination country, you must charge your customer the Belgian VAT rate of 21%.

There are several options for the delivery by the supplier to you. If the goods leave from the Netherlands, the Dutch supplier can send you an invoice with 21% Dutch VAT. But what if the supplier also has stock in Belgium and sent the product from this warehouse straight to your Belgian customer? This is then a local Belgian delivery, as the product would not physically cross any borders. The supplier will send you an invoice with Belgian VAT. The VAT rate is 21% in both cases, but you can only reclaim Dutch VAT by submitting a Dutch VAT return.

You are not allowed to report this shipment to the Belgian consumer in the Dutch OSS portal, as transportation was arranged by your supplier. In this case, you should have requested a VAT number with the Belgian Tax administration and should have declared the local delivery to a consumer. In that return, you would also be able to claim a refund for the 21% Belgian VAT invoiced by the supplier.

Misuse of IOSS number

According to Feen, dropshippers should be very careful about sharing their IOSS number with suppliers. “Make clear agreements about using your IOSS number. With this number, importers do not have to pay VAT when they import goods. Do you allow your supplier to use your number when importing goods you ordered? Then make clear they are not allowed to use the number to import goods ordered by other buyers.

Abuse of your IOSS number will be charged to you. You will then be held liable for the import VAT on goods that you never bought.” 

Drop shipments and VAT

Countless different situations are possible in the logistics chain between supplier, dropshipper and consumer. Every situation may have different consequences for VAT. In the simplest situation, everything happens in the Netherlands and only  Dutch VAT applies.

Things become more complicated when consumers and/or suppliers from other countries get involved. Feen discusses three cases. In all these examples, the dropshipper’s online shop is not registered for VAT abroad. The online shop’s revenue exceeds the €10,000 threshold and the goods leave the country of the supplier.

Example 1: goods sold in the Netherlands and purchased in another EU country

Order: Consumer (NL) - Dropshipper's online shop (NL) - Supplier (EU).
Transportation: Supplier (EU) - Consumer (NL).

In this situation, a Dutch consumer buys a product from the dropshipper's online shop. The dropshipper then orders the product from its supplier in another EU country, such as Germany. Then, the supplier sends the goods straight from Germany to the consumer in the Netherlands.

If the dropshipper gives its VAT number to the German supplier, the supplier can charge 0% VAT on its invoice. The supplier is making an intra-community supply (ICS) to the dropshipper's shopping site, while the dropshipper is making an intra-community acquisition (in Dutch). This means that the latter has to charge Dutch VAT on its acquisition and declare it in its Dutch VAT return. The dropshipper is also allowed to deduct this VAT as input tax in the same return.
This is followed by the delivery made by the Dutch dropshipper to the Dutch consumer. For VAT purposes, this delivery is local and therefore subject to Dutch VAT. The dropshipper must also declare this VAT in its Dutch VAT return.

Example 2: goods sold in the Netherlands and purchased outside the EU

Order: Consumer (NL) - Dropshipper's online shop (NL) - Supplier (China).
Transportation: Supplier (China) - Consumer (NL).

In this situation, a Dutch consumer buys a product from the dropshipper's online shop. The dropshipper then orders the product from its supplier in a country outside the EU, such as China. The supplier sends the goods straight from China to the consumer in the Netherlands.

The Import Scheme

If the retail price (excluding shipping and insurance) is less than €150 and the dropshipper imports the goods, the dropshipper qualifies for the Import Scheme and will get an IOSS number from the Dutch Tax Administration. If the customs agent states the IOSS number in the import declaration, Dutch customs will not levy Dutch import VAT because it assumes that the consumer has already paid VAT to the shopping site. The delivery made by the Chinese supplier to the dropshipper's online store is not subject to VAT.

The Chinese supplier can also import the product into the Netherlands in the dropshipper's name and use the dropshipper's IOSS number. The supplier will then pass on this number to the customs agent responsible for submitting an import declaration to Dutch customs. In this case, the dropshipper will not pay Dutch import VAT either.

Alternatively, the supplier can also import the goods into the Netherlands in its own name and pay import VAT to customs. In this case, the delivery to the Dutch dropshipper falls under the reverse charge mechanism, which means that the supplier will not include VAT on their invoice to the dropshipper. Instead, the dropshipper will declare the purchase in their VAT return.

Finally, the dropshipper can choose to have the consumer pay for VAT and handling charges for customs clearance upon delivery, provided it notifies the consumer before the order is finalised. In that case, the mail or courier company will collect the VAT due from the consumer.

Supplies that do not qualify for the Import Scheme

Dutch VAT is due on goods sold to Dutch customers. If the dropshipper in this example does not choose the Import Scheme or the value of the goods exceeds €150 and it chooses to import the goods, it will first have to pay Dutch import VAT. The delivery to the consumer is also subject to Dutch VAT. The dropshipper can claim a refund of the import VAT in its Dutch VAT return.

If the Chinese supplier imports the goods, it will have to pay Dutch import VAT. In this case, the delivery to the Dutch dropshipper falls under the reverse charge mechanism, which means that the dropshipper will have to declare the purchase in a Dutch VAT return and pay Dutch VAT on the goods sold in the Netherlands.

If the consumer imports the goods, they pay for the import VAT, the handling charges for customs clearances, and import duties (if applicable) upon delivery. In this case, the dropshipper will not owe VAT on the goods sold.

Example 3: goods sold in another EU country and purchased outside the EU

Order: Consumer (EU) - Dropshipper's online shop (NL) - Supplier (US).
Transportation: Supplier (US) - Consumer (EU).

In this situation, a consumer from another EU country, such as Spain, buys a product from the dropshipper's shopping site. The dropshipper then orders the product from its supplier in a country outside the EU, such as the United States. The supplier sends the goods straight from the U.S. to the consumer in Spain. 

If the Spanish consumer pays less than €150 excluding shipping and insurance, the dropshipper can use the Import Scheme. The dropshipper can also choose to import the product, but this will usually be done by the supplier. If the U.S. supplier imports the product in the dropshipper's name, the supplier is allowed to use the dropshipper's IOSS number, which means the dropshipper does not have to pay any Spanish import VAT. The dropshipper pays the Spanish VAT, which the consumer has paid on his shopping site, to the Dutch Tax Administration through the IOSS portal.

If the dropshipper or supplier opts against using the Import Scheme or if the intrinsic value of the goods exceed €150, the party importing the goods (either the U.S. supplier or the dropshipper) must register for VAT in Spain. In this situation, all transactions will be subject to Spanish VAT. As in example two, the shopping site can choose to have the consumer pay Spanish import VAT, any import duties, and customs clearance fees upon receipt. This is also possible for goods with an intrinsic value below €150. For goods valued at less than €150, consumers do not have to pay import duties, but they will have to pay import VAT and any customs clearance charges to the postal or courier company. 

Supplier and customer outside the EU

If both the customer and the supplier are based in a non-EU country, read up on the rules of the customer’s country. Feen explains why. “There may be import bans in place or the country may have other product requirements. Look into liability and find out what happens if your product causes damage or injury. Explore if goods up to a certain value are exempt from import tax. It is important to realise that VAT and customs legislation can differ from one country to the next. The U.S., for example, does not have import tax and each state levies its own Sales Tax instead. Finally, agree on who is responsible for customs clearance: the dropshipper, the supplier, or the consumer.”

If both the supplier and the consumer are based outside the EU, the product does not physically enter the EU. Feen: “As a result, you do not have to declare the goods to Dutch customs and Dutch VAT rules do not apply. This also means that the Dutch Tax Administration can provide little information on your VAT obligations in the country of arrival, so hiring a VAT expert may be an interesting option.” 

Dropshipping and platforms

Earlier, we outlined how VAT is applied when a dropshipper buys goods from a supplier and sells them to consumers. Feen explains: “Some dropshippers and websites argue that they do not buy or sell goods themselves and should therefore not have to pay VAT. There are now rules for those dropshippers too. In fact, for platforms, there is platform fiction."

Platform fiction

Platform fiction means that if they only facilitate the sale of goods from a supplier to a consumer in the EU, they are responsible for the collection and payment of VAT on those goods. Platforms or websites can be considered the ‘deemed’ supplier in two situations:

1. The platform or website facilitates the sale of goods with an intrinsic value below €150 that are imported into the EU by a business owner and are delivered straight to a consumer.
2. The platform or website facilitates the sale off goods already present in the EU and sold by a non-EU supplier to consumers in member states other than the member state of departure. These are distance sales where a non-EU supplier delivers from stock in an EU country directly to consumers in other member states.

If an online shop facilitates the sale of goods by a German supplier to a Dutch consumer, it is not considered a deemed supplier if the goods are transported from Germany to the Dutch consumer. Because the goods will not have to be imported from outside the EU. “The online shop is considered the deemed supplier if the German supplier has to import the goods from Russia, if the goods have an intrinsic value of less than €150 and if they are shipped straight from Russia to the Dutch consumer,” Feen explains. “In that case, the facilitating online shop is responsible for collecting and paying VAT in the Netherlands.”

Feen cites Bol.com as an example. “Lots of different businesses sell goods on the platform. Bol.com facilitates the transactions by taking care of order processing, payment processing, returns, and more. If Bol.com facilitates a transaction in such a way that they can be considered a deemed supplier, they will be responsible for collecting and paying VAT. In all other cases, the supplier selling its products through Bol.com is itself liable for VAT on the goods sold to the consumer.”

“Because of this rule, the websites of many dropshippers are still considered a platform, if they do not buy and sell the goods themselves”, Feen continues. “This means they are responsible for collecting and paying EU VAT for all sales made via their website provided they meet one of the two sets of criteria outlined above. As a result, they will also have to register for VAT in any country where they are responsible for VAT, unless they opt to use the IOSS and/or OSS scheme.” 

Dropshipping through AliExpress

Some dropshippers sell products from non-EU platforms on their shopping sites. Does this also make them deemed suppliers? If the dropshipper buys goods on platforms that sell goods to consumers in the EU like AliExpress or Amazon, the question is: is AliExpress responsible for VAT or is the dropshipper’s website?

Although AliExpress is a platform, it is not necessarily responsible for paying VAT. “After all, a platform only becomes a deemed supplier if it facilitates the transaction between the supplier and the consumer”, Feen explains. “Facilitating the transaction between the supplier and the dropshipper does not make the platform the deemed supplier. But the website of the dropshipper may be, if it facilitates the transaction between the dropshipper and the consumer.” Take the following situations, for example:

• The consumer orders the goods on the dropshipper's website.
• The dropshipper arranges for the orders to be forwarded to the supplier (possibly through a platform such as AliExpress).
• Payments are processed via the dropshipper's bank account.

“In those cases, the dropshipper’s website will be considered the deemed supplier, not AliExpress. Although it is a platform, AliExpress is not responsible for paying VAT in this case. AliExpress is only the deemed supplier if the consumer places an order directly with AliExpress.” 

Support

Dropshipping involves several situations. Goods are sent from different countries to customers in different countries. This has implications for VAT. Each situation requires customisation. Get help from a VAT specialist so that you comply with the VAT rules.