It is possible for individuals to import high-volume but low-value products such as printer cartridges, DVDs, contact lenses, electronic gadgets and other such repeat order items through the postal system from the Channel Islands (e.g. Jersey or Guernsey) or even from Switzerland to the Member States of the EU free of VAT where the value of the shipment is under 22 euros. Thus benefits will accrue to retailers, who set up companies (and websites) offshore, enabling them to increase market share compared to their European competitors whose products will be priced higher due to the VAT element.  This is possible because the Channel Islands and Switzerland are outside the VAT territory of the EU and imports from these locations into the EU qualify under the Low Value Consignment Relief (LVCR) provisions.   In an EU context the relief is also known as the Imports of Negligible Value Relief (INVR). In respect of the UK the equivalent low-value relief is for shipments under £18 in value.  Offshore fulfillment thus offers opportunities to these retailers, but also poses certain challenges from the VAT risk point of view. The regulations, VAT risks and opportunities surrounding this important tax-break in the e-commerce world are explored in this brief article.

EC Directives and local rules

Under EC VAT Directives, Member States must provide exemption from VAT on shipments valued under 10 euros.  Member States may exempt shipments of more than 10 euros but less than 22 euros.    However, Member States may exclude mail-order goods from this exemption.  Although most Member States do honour the 22 euro exemption in respect of internet sales, this cannot be taken as read as local conditions can change.  Also different countries can interpret the exemption differently and can put their own spin on issues surrounding valuation of goods and documentation requirements. Therefore it is important to take professional advice before implementing a European fulfilment strategy.

Community Transit Procedures

An understanding of the Community Transit procedures is critical as far as fulfilling to Europe is concerned because the chances are the shipment of goods will transit through one or more EU Member States before reaching their final destination .  It is imperative to know whether internal transit or external transit should be applied otherwise incorrect documentation may lead to goods being held up by Customs or even returned to the retailer. 

The Community transit procedure is managed by the customs administrations of the various Member States via a network of customs offices, known as offices of departure, offices of transit, offices of destination and offices of guarantee.  The Community transit procedure starts at the office of departure and ends when the goods and transit declaration are presented at the office of destination, in accordance with the transit provisions.  An officially receipted copy of the transit declaration is returned by customs to the office of departure (or a central office in the country of departure).  On receipt of that copy, customs in the country of departure will discharge the transit declaration and the principal’s liability, unless an irregularity has been noted.

In making a transit declaration at the office of departure the principal requests the placing of the goods under the transit procedure.  As holder of the transit procedure the principal is, after the goods have been released for transit, responsible for the presentation of the goods intact (with seals intact where appropriate) together with the transit declaration at the office of destination within a prescribed time limit.  He is also responsible for the payment of any duties and other charges which may become due in the event of an irregularity occurring.  The principal is responsible for the provision of a guarantee to cover the amount of duties and other charges suspended during the movement of the goods (when he has not been exempted by law or by authorization).  The guarantee can be a cash deposit or an undertaking furnished by a financial institution acting as a guarantor.

There are two categories of the Community transit procedure which generally reflect the status of the goods being moved:

1.  T1  (external transit)

2. T2  (internal transit)

External Community transit (T1)

The external Community transit procedure (T1) applies mainly to the movement of non-Community goods.  It suspends the duties and other charges applicable until the goods reach their destination in the Community.

Internal Community transit (T2)

The internal Community transit (T2) procedure applies to Community goods where they are consigned from one point in the customs territory of the Community to another through the territory of one or more EFTA countries.  This procedure does not apply when the goods are carried entirely by sea or by air.

The internal Community transit procedure T2F applies to the movement of Community goods, which are consigned to, from or between the non-fiscal areas of the customs territory of the Community.  The non-fiscal areas are those jurisdictions outside the VAT territory of the Community such as the Channel Islands (However, the Channel Islands are within the customs territory of the EC).

Therefore goods dispatched from Jersey bound for Germany and transiting the UK and/or France would be subject to T2F procedures unless they were flown directly to Germany.

Postal packages

Where non-Community goods are carried by post (including parcel post) from one point to another in the customs territory of the Community, the package and any accompanying documents should bear a yellow label.  In the absence of a yellow label or other evidence of non-Community status the goods will be treated as Community goods.

If the package contains both Community goods and non-Community goods, the Community goods should be covered by a Community status declaration (T2L).  A status document may either be sent separately to the addressee for production to the customs authority or it may be enclosed in the package.   In the latter case, the exterior of the package should be clearly marked to show that the status document is enclosed.

Where Community goods are carried by post (including parcel post) to or from the non-fiscal areas of the Community, the package and any accompanying documents should bear a yellow label. 

Abuses and goods seizure

Although there is a Single Market without borders as far as the movement of goods within the EC is concerned, Member States do carry out audits and spot checks, particularly where they consider abuses are taking place. Either through ignorance of the procedures outlined above or otherwise, some retailers may try to clear their goods in a Member State of transit for convenience sake  when clearly the Member State of ultimate destination is quite another.  The authorities regard such practices as smuggling and retailers may have their goods held up or seized under such circumstances.  Retailers are therefore advised to consult their postal operator to obtain a clear idea and road map of the fulfillment route and the documentation requirements along the way.  Retailers should remember that it is they and their customers who will be ultimately liable for any VAT, duties, fines and penalties which may be levied for improper procedures being followed, so the responsibility is entirely theirs.

Conclusions

This article is not meant to include an exhaustive discussion of all the VAT issues of fulfilling to Europe, but a flavor is given below.   Local practices vary regarding returns of goods such as authorized and unauthorized returns and how these may be consolidated.  Also relevant are general VAT issues concerning valuation of goods and free circulation of goods as per EC regulations.

Collection or pre-payment of import VAT on goods valued at 22 euros and above poses an interesting challenge in a European fulfillment context as the pre-paid VAT scheme MOU, which HMRC of the UK has in place with Jersey / Guernsey Customs, generally does not exist with the VAT authorities of the other Member States.  It is therefore important that a clear web-site policy exists and is explained to the end-users so that a pleasing customer experience takes place.  Customers not warned about import VAT may be presented with unexpected VAT bills on their doorstep and might return the goods leading to expensive credit card “charge-backs” for the retailer. 

Lastly but equally important is that the retailer must have proper substance in the offshore jurisdiction that he claims he is a resident of.  This means that the bulk stock must be purchased by the Jersey or Swiss company, broken down into customer orders and picked and packed there and the sale contract must be concluded in the offshore jurisdiction.  It is vital to have proper customer terms and conditions on the website reflecting the actual operation of the business.  Day to day administrative activities may be outsourced back to the home jurisdiction subject to proper and arms-length outsourcing agreements.  However, the offshore retail business must remain under the effective control and management of suitably qualified and experienced directors resident in the relevant offshore jurisdiction. Therefore for VAT and corporate income tax reasons proper attention must be given to the setting up of an appropriate corporate structure well in advance of implementation.

Article written by Raj K. Ganguly AIIT, Fellow IBFD International Tax Academy

Raj Ganguly is Managing Director of RKG Consulting Limited, a tax consultancy firm established in 1985 in Piccadilly Circus, central London.  Raj specializes in providing VAT advice to internet retailers and the media, telecoms, entertainment, software/IT and financial services sectors.  Raj has been specializing in the internet tax sector since 1996 when he completed a Fellowship Program at the IBFD majoring in the VAT aspects of internet / telecoms transactions.