VAT calculation for dropshipping in 2024: everything you need to know!

Increasingly popular in France, dropshipping has emerged as an attractive commercial activity for generating income more easily. This modern method of managing product shipping logistics for online sales appeals to many new entrepreneurs. As a dropshipping expert, the professional acts as an intermediary between the supplier, the reseller, and the customer. However, like all commercial activities, dropshipping is subject to tax regulations, particularly VAT. What are the implications of VAT in dropshipping? How can you calculate the applicable VAT on products sold through this method? Here are some insights to help you better understand the new VAT rules and guide you in calculating VAT for your e-commerce and dropshipping business.

Taxes and different levies on your dropshipping activities

When you decide to venture into dropshipping, you will most likely choose the status of a self-employed entrepreneur. This regime is the most accessible for quickly starting your business and allows you to anticipate market changes. Additionally, it offers a notable tax advantage, with a favorable VAT regime.

As a self-employed entrepreneur, you will be required to pay all social security contributions and income tax through URSSAF, calculated as a percentage of your revenue. In addition to these taxes, you will also need to pay consumption taxes, such as those applied when purchasing a product or service.

Among these taxes is VAT, which is generally borne by the final customer. In dropshipping, however, there are exceptions. As an e-commerce seller, you can indicate on your site that you do not handle the shipping, storage, or delivery of the products. In this case, the final customer becomes the importer of the goods. Therefore, no VAT directly applies to your dropshipping activity.

The VAT system in dropshipping before 2024 

To better understand the recent changes in VAT and dropshipping, it is essential to recontextualize these developments. Before December 31, 2020, when a dropshipping seller had to make a sale of products coming from outside the European Union, it was considered an external transaction. This meant that the dropshipping business in France was not required to collect VAT from the final customer. However, a self-employed dropshipping activity had to pay VAT when the products entered the importer’s country, usually the final customer. Due to the low market value of the goods, customs and VAT fees in dropshipping were often overlooked.

Some older VAT rules within the European Union had loopholes, allowing non-European dropshipping experts to gain advantages over their European competitors. For example, there was a VAT exemption for imported items under €22, allowing non-EU e-commerce sellers to continue charging VAT. Additionally, the VAT registration threshold varied from one EU country to another, adding further complexity for sellers and companies operating remotely.

Some reforms applied since July 1, 2021

New measures have been applied since July 1, 2021, regarding dropshipping and its VAT. You should specifically be aware that:

• There are no longer any VAT thresholds:

The distance selling thresholds for the sale of products have been removed. There is now only one single threshold of 10,000 euros. A dropshipper can therefore significantly expand their sales internationally without having to worry about VAT. You will charge VAT in the same way, regardless of the buyer's country.   

• A single window for VAT declaration:

For all EU member states, there will be a single portal for VAT declaration and payment. All e-merchants can use this portal for intra-community distance sales (commercial transactions between EU member countries) and distance sales of products from a third country to the European Union not exceeding 150 €.

The reasons for these new measures 

Several objectives motivated this VAT reform for dropshipping. To ensure that the question of how to pay VAT in dropshipping no longer poses an obstacle for entrepreneurs, various measures have been implemented. They mainly aim to regularize the procedures related to importation and all dropshipping activities subject to VAT.

The main goal of these changes is to simplify the tax formalities for self-employed dropshippers, particularly those related to transactions between European countries. These reforms also aim to combat fraud related to online sales conducted between different countries. To ensure fair competition, new rules have been established.

VAT in dropshipping and customs formalities are relatively simple systems to understand, provided that time and attention are devoted to them. However, to master these mechanisms well, it may be wise to seek the guidance of an expert.

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Delving into the application details of VAT in dropshipping

How does VAT apply in dropshipping? This question is essential to address before calculating VAT in dropshipping. Understanding the connection between dropshipping and VAT can be complex. To avoid mistakes, it may be wise to consult an expert or a professional coach specialized in this area

Before analyzing the application of VAT in dropshipping, it is necessary to revisit the specifics of this business model. Dropshipping is characterized by the fact that the seller, who owns the online store, does not hold any inventory. The supplier manages the inventory and is responsible for product delivery. Thus, the dropshipper neither handles inventory purchase nor logistics.

In this context, VAT in dropshipping has certain peculiarities. It only applies when using suppliers located outside the European Union. However, when goods pass through French customs, it is the final customer who must pay customs fees and VAT. Does this mean that the dropshipper is exempt from VAT? The reality is more complex. It is crucial to choose the VAT exemption regime carefully to stay compliant with tax regulations.

Calculating VAT in dropshipping

The calculation of VAT in dropshipping is based on several essential criteria. First, the supplier must be considered: are they located in France, in a European country, or outside the European Union? These different cases directly influence the tax rules. For example, delivering a product to a customer outside the EU involves specific rules, particularly concerning VAT.

It is also important to note that VAT is not always recoverable on all purchases, which can affect the final value of the merchandise for the dropshipping business. To determine precisely the tax to be paid in 2022 and calculate the applicable rate for each product, it is strongly recommended to consult the French customs service’s tariff grid. This approach will allow compliance with current tax regulations and avoid any incorrect declarations.

Being mindful of the possibility of not paying VAT in dropshipping

A common question among dropshipping sellers is whether it is possible to avoid paying VAT. There are indeed legal strategies to minimize or avoid VAT in this activity. Consumers often prefer products sold on foreign websites, meaning outside the European Union, due to their attractive prices. However, these prices can increase significantly with the addition of various taxes like VAT and customs fees. Ultimately, the total cost may be higher than that of products purchased in France or another European country.

As an importer, it is crucial to fully understand the tax rules related to VAT in dropshipping. VAT mainly applies when ordering goods from outside the EU. However, if you choose to source from a European supplier, you will not have to worry about customs and associated taxes.

A simple and legal method to avoid customs fees is to split your orders into several small packages. Generally, low-value orders, with a unit price not exceeding 22 euros, are exempt from customs duties. However, this approach involves paying shipping fees multiple times, which can be a disadvantage.

Paying attention to the fundamental rules to follow in dropshipping and VAT

In France, a dropshipping company or any e-commerce activity is subject to VAT when the goods come from another country outside the EU. This may include China or Japan. When embarking on such a business, you must thoroughly understand the rules of dropshipping and VAT. 

• Your general sales conditions must formally stipulate the tax and customs clauses and those related to pricing and the online contract, 
• You must specify who will be the product importer, 
• You must know whether the consumer is aware of the supplier’s identity, 
• You must mention the terms related to online orders by the customer, as well as the display of prices for each merchandise. 

In terms of VAT in dropshipping in France, the most important thing to remember is that the law provides that this VAT must be paid by the recipient of the goods. The dropshipping company also does not manage the inventory or delivery. 

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Conclusion 

To better manage the rapid growth of e-commerce, reforms on VAT in dropshipping have been implemented. These reforms directly impact every company involved in the supply chain, thus influencing the sale and delivery of goods across different countries. To make your e-commerce business thrive in France or another European state, it is essential to understand these tax rules. For example, carefully choosing the appropriate VAT regime for your business can have a significant effect on the value of the products you offer to your customers. Minea is a powerful platform for sellers looking to identify the best products for dropshipping. This tool analyzes all social networks to ensure nothing is missed about the most popular items, making online sales declarations easier. Depending on your needs, Minea offers Lite and Premium registration options, ideal for optimizing your service and remaining compliant with current tax regulations.