The Value Added Tax (VAT) is an important source of revenue for governments across the European Union (EU). It is levied on the consumption of goods and services and ultimately borne by the final consumer. However, VAT collection happens through a staged process where businesses charge, collect and remit VAT during production and distribution.
For businesses, complying with VAT rules for direct cross-border sales within the EU has been an administrative burden. They need to register and account for VAT in every Member State where they have customers. This results in high compliance costs for businesses and oversight challenges for tax authorities.
To address this issue, the EU has introduced the VAT One Stop Shop (OSS) which radically simplifies VAT compliance for cross-border business-to-consumer (B2C) transactions. It allows businesses to handle all their VAT obligations for other EU countries through a single point of contact in their home country.
This detailed explainer covers the key aspects of the OSS scheme including its scope, registration process, VAT return filing, payment mechanism and other requirements. It provides comprehensive information on the OSS to help both businesses and tax authorities understand how it functions.
Why is the OSS Necessary?
Prior to the OSS, a business selling goods or services to final consumers in other EU Member States had to register for VAT in each country where it had customers. It would need to file frequent VAT returns in every Member State and comply with up to 27 different rules and languages. This complexity and fragmentation imposed high administrative costs and prevented smaller businesses from tapping the full potential of the EU Single Market.
Some key challenges faced by businesses due to not having a OSS are:
- Multiple VAT registrations: Separate registration needed in every Member State which is time consuming. Local assistance may be required given language barriers.
- Various filing frequencies: VAT return periods could be monthly, quarterly, bi-annually depending on the Member State. Difficult to keep track.
- Numerous VAT Rates: VAT rates differ widely from 17-27% across the EU. Must keep abreast of changes.
- Diverse invoicing rules: Invoicing norms like languages, templates, data fields etc. vary adding to compliance effort.
- Foreign bank accounts: Required in every Member State for VAT payments which is administratively cumbersome.
- Multitude of audits: Higher risk of being subject to tax audits in multiple Member States leading to more scrutiny.
- Delayed refunds: Receiving VAT refunds from non-home countries could take over a year affecting cash flows.
For EU governments, assessing and collecting VAT from foreign suppliers also posed challenges such as:
- Limited oversight: Difficult to monitor compliance of businesses not located in the country. Higher risks of errors and fraud.
- Language barriers: Communicating with businesses in other countries could be difficult for local administrators.
- Delayed data: VAT return data becomes available after lags making analysis difficult.
- Slow refunds: Verifying refund claims from businesses takes time due to cross border nature.
- Double taxation: Challenging to eliminate risks of same sale getting taxed multiple times across countries.
The OSS was thus needed to tackle these problems by centralizing and streamlining VAT compliance for cross-border B2C transactions. It saves costs for business and improves oversight for tax authorities.
How does the OSS Simplify Cross-Border VAT Compliance?
The OSS allows suppliers making intra-EU cross-border supplies to final consumers to account for the VAT in the customer's country through a single web portal in the supplier's home country. This dispenses the need for VAT registration in each Member State.
Some key advantages of the OSS are:
- Single VAT registration: Allows suppliers to avoid registering separately in every Member State where they have customers. Needed only in home country.
- Consolidated reporting: One quarterly (or monthly) VAT return filed covering all relevant supplies across the EU. Replaces multiple country-wise filings.
- One payment: VAT for all Member States paid in a single transaction in home country currency through local bank account.
- Home country service: OSS return submission, payments and customer service handled domestically removing language barriers.
- Faster refunds: Any VAT refunds issued directly by customer country but process likely faster than non-OSS route.
- Lower compliance costs: Greatly reduces administrative workload and costs through centralized filing.
For tax authorities:
- Enhanced oversight: Easier to monitor non-resident businesses selling locally through data sharing. Lower risk of non-compliance.
- Data availability: VAT return data on inbound B2C sales available quickly after tax period unlike previous lags.
- Cross-border cooperation: MSI and MSCs can collaborate in VAT collection using standardized electronic communication.
- Detection of fraud: Shared data helps identify suspicious transactions and fraud patterns.
- Revenue certainty: OSS ensures VAT on cross-border B2C transactions is declared and paid correctly.
Thus, by providing a centralized route for compliance and data sharing, the OSS eases administrative burdens for businesses and authorities involved in intra-EU B2C e-commerce. It is a win-win initiative for both sides.
Brief Background on the OSS
The OSS initiative has evolved over multiple stages since its inception:
In 2008, the EU adopted Directive 2008/8/EC which first introduced the concept of the OSS. However, it took until 2015 for the electronic registration and return systems to be developed.
A Mini One Stop Shop (MOSS) was launched in January 2015 limited to telecommunications, broadcasting and electronic services sold by EU businesses to non-business customers in other EU countries.
The MOSS was seen as successful with over 26,000 businesses registered by 2019. But it was limited only to e-services and EU-based suppliers.
Through Council Directive (EU) 2017/2455, the MOSS was expanded substantially starting July 2021 to cover:
- All cross-border B2C services (not just electronic services)
- Intra-EU distance sales of goods
- Imported goods sold from outside the EU
- Goods sold via online marketplaces
- Simplified registration for non-EU businesses
The expanded schemes were collectively termed as the 'One Stop Shop' or OSS. The earlier MOSS for e-services is now the 'Union scheme' of the OSS.
Along with the legal provisions, the EU also adopted extensive technical specifications and guidance for uniform implementation of the expanded OSS.
In essence, the OSS operationalizes the VAT reforms undertaken through EU Directives 2017/2455 and 2019/1995 to tackle e-commerce compliance burdens. It is the centerpiece initiative to ease VAT compliance for EU and non-EU businesses transacting cross-border with final consumers in the Single Market.
Overview of the OSS Schemes
The OSS brings together three schemes catering to different business types and supply circumstances:
- Non-Union Scheme: For non-EU businesses supplying digital services to EU consumers
- Union Scheme: For EU businesses supplying digital services or goods to EU consumers in other countries
- Import Scheme: For any business selling low value imported goods (up to €150) to EU consumers
The schemes allow businesses to avoid VAT registration in each customer country by designating one Member State as the point of contact for VAT compliance across the EU.
Let us understand the schemes in more detail:
1. Non-Union OSS Scheme
The Non-Union OSS scheme is targeted at suppliers of digital services established outside the EU. Using this scheme, they can account for the VAT on their sales of electronically supplied services to final consumers located in any EU Member State through a single online portal.
- Available only to businesses established outside the EU
- Covers digital services sold to final consumers (B2C) located in the EU
- Applies when the place of supply as per VAT rules is where the customer belongs
Examples of digital services are streaming services, apps, e-books, software, web hosting etc. Essentially supplies delivered online without physical goods.
2. Union OSS Scheme
The Union scheme allows EU-established businesses to report and pay VAT in other Member States through a simple online procedure in their home country. It consolidates the compliance for B2C sales of electronic services, other remote services and also intra-EU distance sales of goods.
- Available only to businesses established in the EU
- Covers B2C supplies of digital services to EU consumers in Member States where the supplier does not have an establishment
- Also includes intra-EU distance sales of goods from one EU country to final consumers in another
- Place of supply is where the customer belongs (for services) or where transport ends (for goods)
Intra-EU distance sales of goods refers to mail order type sales - where goods are transported from one EU country to customers in another EU country.
3. Import OSS Scheme
The Import scheme facilitates declaration and payment of VAT on low value commercial goods (up to €150) imported from outside the EU and sold to EU consumers. It avoids VAT being collected on importation.
- Available to any supplier, whether based in the EU or outside, selling imported goods
- Covers only goods in consignments up to €150 in value dispatched or transported from outside the EU
- Excludes excise goods like alcohol, tobacco, fuel etc.
- VAT is payable in country where customer receives the goods
A unique feature of the Import scheme is the 'deemed supplier' concept where the marketplace facilitating the sale becomes responsible for charging and accounting for VAT rather than the actual seller.
In summary, the expanded OSS schemes provide centralized VAT compliance in intra-EU B2C e-commerce for EU and non-EU suppliers across a wide range of goods and services.
Member State Terminology in the OSS
The OSS involves suppliers filing VAT returns and payments in a country other than where its customers are located. Certain key terms are used to refer to the countries involved:
- MSI = Member State of Identification - This is the country where the supplier registers for the OSS to handle VAT compliance for other countries. Also called home country.
- MSC = Member State of Consumption - This is where the final consumer is located and where VAT on the sale is ultimately due.
Under the OSS, businesses declare and pay VAT for other MSCs through via the MSI. The MSI forwards the VAT due to respective MSCs under internal settlement procedures.
The MSI and MSCs could also be called:
- Country of registration vs country of supply
- Country reporting VAT vs country consuming VAT
These terms can be used interchangeably. But MSI and MSC are the standard terminology used in the EU's OSS legal texts and guidelines.
Is Registration in the OSS Mandatory?
Using the OSS is optional - it does not become compulsory just because a business makes intra-EU B2C supplies eligible for the scheme. The normal national VAT compliance continues to remain an option.
However, if a business does opt to register under the OSS, then it becomes mandatory to declare all relevant B2C supplies through the OSS VAT Returns. The business cannot selectively report some supplies via OSS and some via national VAT procedures.
Advantages of OSS Registration
While OSS registration is optional, it brings major compliance cost savings and is recommended for businesses making regular intra-EU B2C supplies.
- Avoid multiple VAT registrations in each Member State
- Handle all VAT compliance in the home country under familiar procedures and language
- Submit one consolidated electronic VAT return covering all Member States
- Make a single domestic VAT payment in home currency
- Minimum VAT reporting frequency of quarterly returns, unlike monthly or bi-monthly needs in some countries
- Keep invoices and records at headquarters instead of in each Member State
- Undergo a single VAT audit by home country tax authority if needed
- Gain reputational benefit of demonstrate full EU VAT compliance
Thus, while OSS registration requires some effort initially, it leads to substantial savings in the long run for businesses by centralizing and streamlining VAT obligations.
OSS Registration Process
Registration under the OSS schemes is fully electronic and needs to be done directly on portals set up by Member States. The key steps are:
a) Identifying the Member State of Identification (MSI)
The first step is identifying the home country which will be the MSI. The rules differ slightly for each scheme:
- For the Non-Union scheme, any EU Member State can be chosen as the MSI
- For the Union scheme, it will be the country where the business is established
- For Import scheme, MSI will be where the company is established or has appointed an EU-based intermediary
If establishments exist in multiple countries, one can be selected as MSI.
b) Submitting Registration Information
The business then provides prescribed details to the MSI electronically which include:
- Business identification and contact information
- Bank account details for VAT refunds
- Declaration that eligibility conditions are met
- Information on establishments in other EU Member States if any
- VAT compliance history in EU if any
The MSI verifies the application and will issue a unique OSS VAT identification number. This number must be used in all future OSS VAT filings. Existing VAT numbers continue for domestic obligations.
c) Effective Date of Registration
Once approved, registration takes effect from the following tax period i.e. next calendar quarter or month. However, if supplies are already taking place, registration can commence right away provided the MSI is informed within 10 days of the first supply.
If established outside the EU, registering with an EU intermediary may take longer due to additional appointment formalities.
OSS VAT Return Filing
Under the OSS, suppliers must continue to charge VAT on B2C supplies as per normal VAT rules. The OSS impacts only the VAT return filing and payment process.
Instead of separate returns in each Member State, VAT is reported through periodic OSS VAT returns submitted to the MSI. Key aspects are:
a) Return Periods
OSS returns are filed either quarterly or monthly.
- Quarterly returns – Needed for the Non-Union and Union schemes covering calendar quarters.
- Monthly returns – For the Import scheme given more frequent imports and the €150 threshold.
b) Contents of VAT Return
The OSS VAT return contains:
- Supplier identification and period details
- Total VATable amounts and VAT amounts payable per Member State
- Corrections to adjust previous periods if any
- Total VAT to be paid
Under the Union scheme, B2C services and intra-EU goods supplies are reported separately. Services are split between MSI and other establishments. Goods are split by dispatch origin.
c) VAT Rates
The standard and reduced VAT rates applicable in each Member State must be used. These keep changing and the latest rates are available in the Taxes in Europe database.
d) Deadline for Filing
The OSS VAT return must be filed electronically by the end of the month following the end of the relevant quarter or month. Reminders will be issued if returns are delayed.
e) Correcting Past Returns
Previously filed OSS VAT returns can be corrected electronically on subsequent returns within 3 years. Corrections approved by MSCs will lead to refunds if VAT was overpaid.
OSS VAT Payment Mechanism
The total VAT amount for all Member States covered in the OSS return must be paid to the bank account of the MSI. Key aspects are:
a) Single Payment in Home Country
VAT payable across the EU is consolidated into a single payment transaction in the home country currency and paid into the MSI's designated bank account.
b) Deadline for Payment
Payment deadline is same as the VAT Return filing i.e. by the end of the month following the return period. The payment reference should reflect the specific return it relates to.
c) Penalties and Enforcement
If payment is late, reminders are first sent by the MSI. Subsequent action lies with individual MSCs for enforcing payment from businesses in their country as per local procedures.
d) Refunds of Excess Payments
Any VAT refunds arising from overpayments or corrections are directly issued by the respective MSCs to the business bank account in that country. Refund processing should be expedited by MSCs under OSS wherever feasible.
In summary, the OSS allows suppliers to minimize VAT payment administration by submitting a single payment covering all Member States. However, enforcement remains decentralized at MSC level.
Other Key Aspects of the OSS
Apart from registration, reporting and payment, some other aspects of operating under the OSS are:
a) Record Keeping
Businesses must maintain detailed records of all transactions covered by OSS returns for at least 10 years. This includes evidence of customer location and how VAT amounts were calculated. Records should be in electronic format and uploaded to tax authority online portals upon request.
Normal VAT invoicing rules continue to apply including supplying invoices to B2C customers unless exempted. Specific requirements like language and data fields depend on MSI rules even for supplies in other countries.
c) VAT Groups
Businesses registered as a VAT Group in their home country are also recognized as a single entity under the OSS but with limitations. The VAT group cannot include fixed establishments in other Member States which must be treated separately.
d) Currency Conversion
Where allowed by the MSI, returns can be filed in a non-Euro currency but will be converted to Euro using European Central Bank rates before forwarding to MSCs.
e) Non-Submission of Returns
If OSS returns are not filed on time, reminders are first sent by the MSI and followed up by national remedies of respective MSCs. After 3 successive reminders, continued non-compliance can lead to forced exit from the OSS scheme.
In summary, the OSS does not override all domestic VAT obligations and businesses need to comply with MSI guidelines for various operational aspects.
Implications of OSS Registration
Registering under the OSS, whether mandated or out of choice, has wide ranging implications for businesses:
a) Wholesale Change in Compliance
It necessitates a complete shift to centralized VAT accounting and reporting through the MSI. Requires investments in updated accounting software, ERP systems and internal processes.
b) Handling Queries in MSI-Country Language
As administrative assistance will be provided by the MSI, sufficient fluency in the language will be essential to understand queries
c) Interaction with Customs
Use of OSS does not alter import VAT rules. Customs procedures for imported goods will continue unchanged and require separate compliance.
d) Managing Exclusions
Once registered under OSS, businesses must comply fully with scheme rules. Stringent actions like forced exit can happen in case of continuous non-compliance. Requires dedicated OSS compliance oversight.
e) Loss of VAT Registration
Opting for OSS may require businesses to deregister for VAT in Member States where they retain no fixed establishment or taxable transactions besides B2C online sales.
f) Coordinating Audits
Any VAT audits for OSS transactions will be initiated and conducted by the MSI tax authority. However, MSCs may also request information or participate. Requires managing audit requests from multiple countries.
g) Handling Domestic Obligations
Opting into OSS does not eliminate VAT obligations for domestic supplies or B2B transactions which will continue normally.
h) Tracking VAT Recoveries
OSS facilitates passing on VAT to MSCs where it is due. However, most B2C supply transactions do not allow sellers to recover the input VAT paid. Only expenses from B2B supplies will be deductible.
Thus the move to OSS necessitates significant changes to a business's VAT operations. The transition needs to be planned and managed carefully to integrate OSS compliance seamlessly.
Benefits of the OSS
The OSS brings a range of advantages for both businesses and tax authorities:
- Avoid multiple EU VAT registrations and related administrative work
- Reduce compliance costs through centralized filing
- Minimize foreign language barriers by interacting only with home country
- Undergo fewer VAT audits - one per country instead of multiple audits
- Consolidate VAT reporting for EU through quarterly or monthly filings
- Make single domestic VAT payment in one currency through local bank account
For tax authorities:
- Provide good services to foreign suppliers and incentivize OSS uptake
- Improve oversight over cross-border transactions through data sharing
- Reduce risks of VAT loss on B2C transactions with non-established suppliers
- Lower administrative costs through streamlined reporting under OSS
- Detect fraud more easily through integrated analysis of supplied OSS data
- Enhance cooperation with other countries for VAT collection via a standardized electronic system
- Receive VAT on imports at point of sale rather than through customs processing
Thus, by centralizing previously fragmented compliance processes, the OSS enables easier management of VAT for cross-border B2C transactions both businesses and authorities. It is a gain for all involved parties.
Challenges in the OSS Model
However, the OSS also brings some challenges that suppliers and countries need to watch out for:
- Adjusting operations and systems to move reporting completely to the MSI
- Meeting tight deadlines for quarterly/monthly reporting
- Keeping up with varying VAT and invoicing rules across 27 Member States
- Tracking corrections and refunds from multiple tax authorities
- Coordinating VAT recovery under partial deduction rules
- Managing foreign language queries and audits by cooperating countries
For tax authorities:
- Developing compatible electronic systems and interfaces for data exchange
- Agreeing on standardized reporting formats and security protocols
- Monitoring and enforcing timely reporting by foreign suppliers
- Processing VAT refunds quickly
- Analyzing submitted data meaningfully to unearth non-compliance
- Getting accustomed to VAT collection shift from customs to point of sale
While the OSS brings efficiency, businesses and authorities face transitional challenges in moving to the new framework spanning multiple countries having different IT systems and laws. Procedural gaps can also lead to tax leakage and fraud if not managed diligently.
Future of the EU VAT OSS
On the whole, the OSS is seen as a game-changer initiative to modernize and unify fragmented VAT compliance systems for intra-EU cross-border B2C transactions. Significant progress has already been achieved since its precursor MOSS was first launched in 2015.
The European Commission and Member States are likely to build further on the OSS foundations to widen its scope as well as address any shortcomings that may emerge.
Possible future directions could include:
- Lowering the import scheme threshold from €150 or removing it altogether
- Adding more types of transactions like chain supplies
- Higher reporting frequencies than quarterly/monthly
- Further product and service classification standardization
- Closer harmonization of compliance practices across Member States
- Moving to greater automation in audits, fraud detection and recovery
- Expanding OSS to cover B2B supplies as well in the long run
As VAT reforms and digitalization continue across the EU, the importance and reach of the One Stop Shop for centralized reporting, payment and reconciliation of VAT on cross-border trade will only increase further over time.
In a nutshell
The VAT One Stop Shop represents a landmark initiative by the EU to tackle the complexities of compliance for businesses involved in intra-EU cross-border B2C e-commerce. By allowing suppliers to account for VAT in multiple Member States through a single electronic portal in the home country, the administrative burden is significantly reduced.
For suppliers, implementing the new OSS framework necessitates updating internal systems and processes. But it brings huge gains through consolidated reporting and payments. For tax authorities also, benefits of lower compliance gaps counter the transitional challenges in moving to the new framework.
Despite some teething issues, OSS is already proving to be a game changer in reducing VAT compliance hurdles in the EU Single Market.Harmonized electronic reporting and payments are preparing the ground for more ambitious initiatives like broader automation, blockchain-based systems and unified rates. The one stop shop concept is likely to continue expanding and evolving in the coming decade.