Dropshipping in foreign transactions and VAT

Service-Tax

Due to the increasing popularity of online sales, a new way of trading has emerged recently, consisting solely in sales intermediation. Dropshipping - because we are talking about it - is used in transactions within the country and also outside of it. Check how sales should be taxed on the basis of VAT in the dropshipping model in foreign transactions.

What is dropshipping?

Dropshipping is a logistic sales model consisting in collecting orders and transferring them to a wholesaler or supplier, which transfers the goods directly to the buyer. The entrepreneur selling in this model has no physical contact with the goods. It only organizes the delivery and watches over orders and the flow of payments. The intermediary imposes a margin on the goods, and the profit on sale is then the difference between the selling price of the goods and the wholesale price.

Dropshipping can be done in two models:

  • sale of goods on your own behalf,
  • commercial brokerage.

In the case of the sale of goods for own account, the subject of sale is the goods. The broker purchases the goods for his company and resells it to the final buyer. In this case, the wholesaler or supplier issues a sales invoice for the broker details, even though the broker is not actually in contact with the goods. On this basis, he has the right to qualify such an expense as tax deductible costs. On the other hand, the income from the sale of the goods is the amount received from the buyer, which is the income from the intermediary's activity. VAT is charged in accordance with the VAT rate for a given product.

In the commercial brokerage model, the subject of the broker sale is a service. The supplier of the goods issues an invoice for the sale of the goods directly to the buyer. The goods sold do not constitute a deductible cost for the broker, and the sales revenue is only the commission that the broker collects, i.e. the value being the difference between the amount received from the customer and the amount paid to the supplier. Such a position is confirmed, among others, by individual interpretation of the Director of the Tax Chamber in Łódź of February 11, 2016, ref. no. IPTPB1 / 4511-721 / 15-4 / MM:

"(...) if, in fact, the Applicant, as part of his business activity, will only act as an intermediary in the sale of commercial goods (he will not purchase them and will not be their owner), the income obtained on this account will be the value of the commission, which is the difference between the amount transferred to the Applicant's bank account from the customer, and the amount transferred by him to the supplier (owner of the goods) for individual transactions ".

The VAT rate on the sales invoice issued by an intermediary is determined with regard to the brokerage service.

Dropshipping in transactions within the EU

The dropshipping model often includes domestic sales, but nothing prevents you from expanding your sales area to other countries. However, this may involve additional formalities and the need to properly tax sales on the basis of VAT depending on the country of sale and the buyer.

Self-sale

An entrepreneur selling to natural persons not conducting dropshipping activities from the EU on their own account may in this situation deal with mail order sales from the territory of the country. The conditions for recognizing the transaction as mail order sale can be found in Art. 2 clause 23 of the VAT Act, under which it is a supply of goods shipped or transported by an active VAT payer or on his behalf (e.g. by a hired carrier) from the territory of Poland to the territory of another Member State, which is the country of destination for the shipped or transported goods. Additionally, this delivery should be made to

  • a taxpayer who has no obligation to settle intra-Community acquisition of goods or
  • another entity that is not a taxpayer of value added tax.

Then, the taxation of such a transaction takes place on a special basis, i.e. in the Member State to which the goods are transported. However, such a transaction should be documented with an invoice.

Art. 23 sec. 1 of the VAT Act: In the case of mail order sales from the territory of the country, the delivery of goods is considered to be made in the territory of the Member State of destination for dispatched or transported goods, subject to paragraph 2.

However, it is important in this situation to keep an eye on the limit of mail order sales after exceeding which there is an obligation to register for VAT in the country where this limit has been exceeded. Each EU country sets such a limit on its own.

Mail order sales limits to EU countries can be found in the article: Mail order sales to EU countries - can you exceed the limit?

Example 1.
Entrepreneur Jan plans to mediate in the sale of clothes over the Internet by purchasing clothes on his own. The main buyers are natural persons not conducting business activity from the Czech Republic. How is an entrepreneur supposed to document sales to Czech consumers until the limit of mail order sales in that country is exceeded?

The limit for mail order sales in the Czech Republic is EUR 35,000. Until the limit is exceeded, the entrepreneur issues an invoice to the Czech consumer subject to the VAT rate for a given product in Poland (usually 23%). After exceeding the limit, the taxpayer will be required to register as a VAT taxpayer in the Czech Republic and issue invoices in accordance with Czech regulations.

The method of settling the sale of goods to an EU company depends on where the intermediary entity imported the goods for resale from.

In a situation where an entity purchases goods in Poland and then transports them to another EU country to a contractor registered in EU VAT, an intra-Community supply of goods takes place. The tax obligation for this type of transaction arises on the date of issue of the sales document.

In the case of intra-Community supplies, it is possible to apply a preferential 0% rate, provided that the seller is in possession of the documents listed in art. 42 sec. 3 of the VAT Act confirming the export of goods from the country. If the seller does not have such documents, the transaction should then be taxed as domestic.

However, if the goods are imported from one EU country and sold to another, provided that each entity is an EU VAT taxpayer, the broker will have contact with an intra-Community triangular transaction. The method of settling trilateral transactions depends, among others, on from which actor in the supply chain organizes the transport.

Detailed information on clearing chain transactions can be found in the article: Tripartite transactions in foreign trade [alert-info]

Commercial brokerage

In the case of sales in the commercial brokerage model, due to the fact that the subject of the agent's sale is only a commission, a service export transaction will take place. The place of taxation of the transaction depends on whether the counterparty is a taxpayer in his country or not.

Art. 28d of the VAT Act, according to which the place of taxation of services provided by intermediaries is the place where the main transaction takes place.

Article 28d of the VAT Act:
The place of supply of services to non-taxable entities through intermediaries acting in the name and on behalf of third parties is the place where the principal transaction takes place.

In practice, this means that VAT on sales of services to natural persons not operating in the EU is subject to the country where the transaction was finalized.

Example 2.

Entrepreneur Marcin provides brokerage services in the trade of car parts. In the near future he will act as an intermediary in sales for a natural person from Slovakia. However, these parts will be sold in Germany. Where should such a transaction be taxed?

If the actual sale takes place in Germany, the service should be taxed in Germany in accordance with German VAT regulations. Due to the fact that the buyer is a natural person, the entrepreneur will be required to register for German VAT and settle the transaction on the basis of these rules.

If the sale is made to a company (taxpayer), then the taxation of a given service occurs in the country where the taxpayer who is the recipient of the service has its registered office or permanent place of business. Thus, the broker issues an invoice with the VAT rate "not subject to", while the buyer of the goods is then obliged to settle VAT. Such invoice should bear the annotation "reverse charge".

Dropshipping in foreign transactions outside the EU

Sales in the dropshipping model does not have to be limited only to sales within the European Union. Sellers can expand the sales market to other countries, going beyond the territory of the EU. How to settle this type of transactions for counterparties outside the EU?

Self-sale

Sales of goods to natural persons who do not conduct business from outside the EU may benefit from a preferential tax rate of 0%, as in the case of sales to companies. The condition for its application is to have documents confirming the export of goods before the deadline for submitting a tax declaration for a given accounting period. If the taxpayer does not obtain the documents within this period, he has the right to apply the preferential rate in the next period. However, after two settlement periods, the lack of the required export documents will result in the obligation to tax the sale with the domestic VAT rate for a given product. It is assumed that under Art. 41 sec. 6a of the VAT Act, documents confirming the export of goods for export transactions outside the EU may be, for example:

  • electronic documents from the ICT system used to handle export declarations or a printout of this document confirmed by the customs office, or another document that does not raise any doubts as to its authenticity,
  • SAD or PZC document.

[alert-info] As a rule, sales to natural persons who do not conduct business activities from outside the EU should be recorded on the cash register in the same way as domestic transactions, unless the seller benefits from the cash register exemption.

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Example 3.

The entrepreneur Leszek settles VAT on a monthly basis and exported goods to a company from China on November 19, 2019. The right to apply the 0% rate will be in JPK_V7M for November 2020 (until December 25, 2019) and in JPK_V7M for December 2020 (until January 25, 2021). If the entrepreneur does not obtain the required documents by January 25, 2021, he will lose the right to the preferential 0% VAT rate and will be required to show this transaction at the 23% rate.

Commercial brokerage

If the seller is only an intermediary, then the same rules will apply to sales to natural persons from a third country as for natural persons from the EU, i.e. Art. 28d of the VAT Act.

In this situation, the place of taxation of the brokerage service will also be the place where the sale took place, i.e. the country where the transaction was finalized.

When acting as an intermediary in the sale for the company, the commission received should be taxed in accordance with Art. 28b paragraph. 1 of the VAT Act, i.e. in the country where the customer is established. Therefore, it is then necessary to determine from whom the commission is due - from the supplier or the buyer (usually it results from the concluded contract).

If the commission is due from a third country contractor, then the service is taxed in that country. The seller issues an invoice with the rate "not subject to". The invoice should bear the annotation "reverse charge".

Example 4.

Maciej, an entrepreneur, acts as an intermediary in sales for a Chinese supplier. Its task is to organize deliveries, collect orders and collect payments from Polish buyers. The Chinese entity issues an invoice for the sale of goods directly to the final buyer. How should the entrepreneur issue a sales document regarding the commission charged?

The broker commission is the difference between the amount received from the buyer and the amount transferred to the supplier. In a situation where it appears from the brokerage agreement that the broker is acting on behalf of a Chinese counterparty, then the commission for the services provided by the broker will be taxed in China by the supplier. The taxpayer on this account issues an invoice to the Chinese counterparty at the "undelivered" rate. Such invoice should additionally bear the annotation "reverse charge".

Dropshipping in foreign transactions can be used in two models: commercial brokerage or own-account sales. The method of taxation in both the first and the second model will differ depending on the subject of taxation, because in the first case it will be a service, and in the second case it will be a good.When deciding to make such a sale, the VAT regulations should be carefully analyzed due to the different ways of taxing transactions depending on the country and the status of the contractor.