Implementation of VAT rules and legal framework for non-EU e-Commerce

Discover how Advocate consultants helped tackle the challenges of the new VAT e-commerce obligations.

From 1 July 2021, the EU has introduced the new VAT e-commerce rules to ensure fair competition for EU businesses and reduce the VAT losses resulting from the importation of the so-called low value consignments from third countries. The new VAT e-commerce regime aims to increase the compliance of e-commerce stakeholders by simplifying the collection of import VAT when consumers buy goods online. New obligations will be introduced both for marketplaces and online retail platforms facilitating the online supply of goods regarding distance sales of goods imported from non-EU in consignments of an intrinsic value not exceeding EUR 150.  

Challenges of the VAT e-commerce rules

The previous customs legislation was modified in order to adapt to the new rules:

  • A new form of customs declaration was introduced for release for free circulation of goods in consignments not exceeding EUR 150 (reduced dataset declaration).
  • This customs declaration will only require a minimum number of data elements, mainly concerning the exporter, importer, instrinsic value of the parcel and the Harmonized Subsystem code.
  • The smaller number of data elements are meant to facilitate and speed up the process of the high volume of parcels.
  • Both customs administrations and economic operators (particularly postal operators and couriers) have to adapt their IT systems to allow for the declaration of low value consignments.

Postal operators, couriers and logistics firms are obliged to declare the new customs declarations to the national customs authority. Because of the large and always growing number of packages ordered via non-EU based online platforms, the obligation to declare the new declaration (even with the reduced dataset) posed a great challenge to all actors in the industry. One of Hungary’s biggest player in the industry turned to Advocate consultants to tackle the challenges of the implementations.

Enabling automated frictionless customs declaration

With the help of the super-reduced customs declaration form, EU legislators made it possible to implement a fully automated, frictionless solution which would be responsible for the end-to-end process of customs declaration, VAT collection and parcels delivery.

In order to design and implement the necessary solution, Advocate consultants were participating in and facilitating many in-house workshops, where one of the main issues became evident: tariff classification. Even in the super-reduced customs declaration, correct classification is still a mandatory task that needs to be done.

Tariff classification is the process of determining the correct code number for the goods in order to have them accurately declared. The classification mechanism is used by Customs worldwide to clearly identify products without the problems inherent in translating descriptions into different languages. It is the Tariff Number, also known as a Commodity Code, which identifies goods for Customs purposes. Tariff Numbers are based on the internationally agreed system of classification known as the Harmonised Commodity Description and Coding System of the Customs Co-operation Council.

Unfortunately, non-EU online platforms are not using Tariff Numbers in their submitted parcel data, therefore it has to be classified in an automated manner (with today's volumes it would be impossible the manually classify parcels based on the description). Hurricane LLC provided a cloud-based service that could be used for this purpose, tkaing the parcel description as an input and providing the Tariff Number as the result.

After many workshops, Advocate consultants have provided a solid IT architecture blueprint that could easily accomodate the Hurricane e-Commerce solution and integrate it into the newly implemented software architecture landscape.

How it was achieved - from requirements analysis to roll-out

Advocate consultants performed the task of analysing the current business processes, and come up with a solution that will optimise the future workflow. After several interviews to the main stakeholders, understanding the requirements, the concept of the new automated frictionless customs declaration system for low-value consigments was conceived, allowing the client to streamline and renew its processes regarding the new VAT e-commerce rules starting to be effective on 1st July 2021.

Working in an Agile project framework, a detailed software requirements specification was written in an iterative manner and was handed out to the outsourced development company who were responsible for the implementation. The specification contained the following:

  • detailed specification of the to-be implemented workflows, processes
  • UI wireframes for all screens and processes
  • authentication/authorisation rules
  • service operation mapping for accessing and using the Tariff Number providing service
  • data and process models

With a carefully planned project plan, a multi-phased introduction was planned by providing usable software versions from the first time, the project team was able to deliver solutions a few months after the project kick-off.

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