Drop shipping is a popular business model under which a retailer sells products online without owning physical inventory. The retailer acts as an intermediary between the (drop ship) supplier and the customer. When a customer makes a purchase from the retailer’s online store, the retailer places the order with its supplier, who then ships the product directly to the customer, so there may be more than one “sale” but only a single delivery. Even though there is only one movement of the goods, for VAT purposes, each link in the chain constitutes a supply of goods. In the EU context, only one of the supplies—the supply where the party arranging the transport is involved—qualifies as an intra-community supply and thus can benefit from the VAT exemption for such supplies. The other supplies are domestic supplies subject to local VAT either in the EU member state of dispatch or the member state where the transport of the goods ends. The situation becomes more complicated when the supplier is located in a third country.
The Dutch tax authorities’ knowledge group on VAT recently published a position paper on the VAT treatment of drop shipping. Unexpectedly, the group concluded that the transport in drop shipping should be attributed to the supply from the online retailer to the customer. This article takes a look at the position of the VAT group and its implications for the VAT treatment of drop shipping.
One transport – two supplies for VAT
In the case of drop shipping, there are two supplies for VAT purposes, but only one transport:
- A supply from the supplier to the online retailer; and
- A supply from the retailer to the customer.
VAT is due on both supplies. If all parties are in the same country (i.e., the supplier, online retailer and customer are in the same EU member state), VAT will be applicable to both supplies at the local VAT rate. The situation becomes more complicated when the goods are sent to or from another EU member state or when they have to be imported. It is important to determine to which of the two supplies the transport should be attributed to determine the VAT treatment.
Position of Dutch Tax Authorities
The case presented to the knowledge group involves a situation where a Dutch individual placed an order with a Dutch online retailer who then ordered the goods from a Chinese supplier. The Chinese supplier shipped the goods directly to the residence of the Dutch individual. The goods were imported into the Netherlands via a postal or courier company, as arranged by the Chinese supplier.
The knowledge group takes the position that, in this situation, the transport is attributable to the supply from the Dutch online retailer to the individual customer, rather than the supply from the Chinese supplier to the online retailer. As a result, the supply from the online retailer to the private consumer is subject to VATin China. The individual is responsible for paying Dutch import VAT, which the postal or courier company settles with customs on the customer’s behalf. Notably, the consequences would be different if the Dutch online retailer used the EU import scheme; in that case, the retailer would charge Dutch VAT to the individual and an exemption could be applied at import.
The knowledge group sets out four arguments in support of its position that the transport is attributable to the supply from the online retailer to the customer:
- Any other interpretation would not be in line with the intent and purpose of the e-commerce rules that apply as from 1 July 2021. According to the knowledge group, if the transport is attributed to the supply between the Chinese supplier and the online retailer, the supply between the retailer and the customer would be taxable in the Netherlands and the VAT could not be reported via the One Stop Shop (OSSS) scheme, which is designed to ease administrative burdens.
- The broad interpretation of the concept of distance selling of goods originating from outside the EU would favour considering the supply of the online retailer to the customer as a distance sale. This requires the transport to be attributable to that supply.
- The rule relating to the attribution of transport under the “platform fiction” indicates that the EU legislator intends to attribute the transport to the supply between the entrepreneur and the consumer. (Under the platform fiction, the platform, rather than the seller, must declare VAT on sales to end consumers in EU member states. Sellers that use the platform only have to declare deemed sales to the platform on which no VAT is due.)
- Attributing transport to the supply of the online retailer to the consumer is also in line with how customs deals with imports. The import, in fact, does not take place in the name of the Chinese supplier or the Dutch online retailer.
BDO Perspective
The knowledge group’s conclusion that the transport is attributable to the supply of the online retailer to the customer is surprising, in particular, because the Chinese supplier in this case contracted with the post or courier company to import the goods and the Chinese supplier actually shipped the goods.
We do not think that the knowledge group’s rationales for their conclusion is convincing because, in our opinion, the most important factor is who actually transports the goods. The sole purpose of the OSS and other rules (other than the rule that determines to which transaction the transport is attributed) cannot be decisive. However, the published opinion of the knowledge group can be relied on, and this view has also been adopted in Dutch literature. In our opinion, there is a viable argument for both attributing transport to the supply from the supplier to the online retailer and the supply by the online retailer to the end customer, depending on the desired outcome and the facts of the case.
We also do not share the knowledge group's view that where transport is attributed to the supply from the supplier to the online retailer, the second supply (i.e., that of the online retailer to the end customer) is taxable in the Netherlands. In our opinion, that supply is also taxable in China because the goods are imported in the name of the customer.
The position paper of the VAT knowledge group is only relevant in the Netherlands; other EU member states may have a different view.
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We are happy to assist you with an assessment of your VAT position. Please contact one of our VAT advisors.