Distortion of competition in the field of e-commerce in the event of exemption from VAT of imported goods, the customs value of which does not exceed the equivalent of 150 euros

Currently, in most cases, the import of goods to Ukraine is taxed with value added tax (hereinafter - VAT) at a rate of up to 20%, and sub-paragraphs 196.1.16 of clause 196.1 of Art. 196 of the Tax Code of Ukraine provides for exemption from taxation of imported goods, the customs value of which does not exceed the equivalent of 150 euros. In our opinion, such an exemption could have the effect of distorting competition in the e-commerce industry and losing government revenue, creating an uneven playing field where international e-commerce operators (such as AliExpress, Temu, Joom, etc.) can sell products that have low value without paying VAT, which leads to a significant loss of tax revenues and makes it difficult for Ukrainian platforms to compete with their global counterparts.

Exemption from payment of VAT leads to significant uncollected revenues to the state budget. To put things into perspective, here's an example of a 2020 report by the International Trade Administration, which estimated Ukraine's e-commerce market at roughly $4 billion, with cross-border e-commerce transactions accounting for more than $1 billion, or about 25% of the entire market. Coupled with the ever-increasing number of cross-border e-commerce transactions, lost government revenue from VAT-exempt packages could rise from US$200 million in 2023 to more than US$390 million by 2025.

In addition to creating an unfavorable VAT regime for local market participants, the existing regime also does not comply with EU regulation. According to the Association Agreement between the European Union and its member states, Ukraine agreed to carry out gradual approximation to the taxation structure, as provided for by the EU acquis, including the EU Council Directive 2006/112/EC of November 28, 2006 "On the common system of tax on added cost". However, currently the taxation of imported goods with a value of less than 150 euros in Ukraine and the EU is significantly different.

Although Ukraine does not tax imports with a customs value of less than 150 euros, all goods imported into the EU, on the contrary, are subject to VAT. The European Union's abolition of the previous threshold of 22 euros on 1 July 2021 through the Import Single Window System (IOSS) has streamlined the collection of VAT on low-value goods. Thanks to IOSS, sellers and trading platforms can collect VAT during the sale of goods and transfer the collected funds directly to the state budget. Thus, for goods of low value, VAT may be charged:

1. At the time of payment of the order by the seller or marketplace. To start using the IOSS system, the seller must register on the IOSS portal of one of the EU countries. Sellers located outside the EU must engage an intermediary organization to register the business and submit VAT returns on their behalf if they are not registered in the EU. In this case, they will have to provide their IOSS number to the customs declarant. As a result, sellers do not need to register for VAT in every EU country where they sell their goods. If the trading platform is registered in the IOSS system, then the trading platform itself, and not the sellers, is responsible for the collection, declaration and payment of VAT that should be charged to end consumers. This results in disproportionately higher barriers to entry for Ukrainian companies selling in the EU, rather than the other way around.

2. From the final consumer by the customs declarant (logistics company). If the seller does not work with the IOSS system, the logistics company will independently receive the amount of VAT from the consumer before the delivery of the parcel and transfer these funds to the accounts of the relevant state authorities.

Below are examples of regulation in other countries:

1. United Kingdom - Goods valued at £135 are subject to VAT, which is payable at the time of sale of the goods. Goods valued at more than £135 may be subject to other customs duties payable when crossing the border. E-commerce platforms shipping to the UK must ensure VAT compliance for orders above the threshold and proper customs processing for higher value items.
2. United States of America - Although there is no federal sales tax in the US, some states do apply a sales tax. For example, states like California, New York, among others, require e-commerce platforms to collect sales tax based on economic nexus thresholds (eg $100,000 in sales or 200 transactions). Domestic and international e-commerce platforms must follow state sales tax rules.
3. Canada - Goods and Services Tax or Harmonized Sales Tax, equivalent to VAT, applies to all goods imported into Canada. E-commerce platforms are required to register and collect GST/GST if their sales exceed CAD 30,000 per year. In this regard, Aliexpress, Temu and others must comply with Canada's cross-border sales tax laws.
4. Australia - From 1 July 2018, all goods imported into Australia are subject to VAT at the rate of 10%. This applies to low-value goods (up to A$1,000) that were previously exempt. International e-commerce platforms must charge and pay GST on all sales to Australian consumers.
5. New Zealand - All goods imported into New Zealand are subject to VAT at the rate of 15%. As of 1 December 2019, this includes low value items (under NZ$1000). E-commerce sellers shipping to New Zealand must comply with GST collection and remittance requirements.
6. Japan - Japanese consumption tax (currently 10%) applies to all goods imported into the country. As international sellers must ensure compliance with Japan's consumption tax regulations, e-commerce platforms are responsible for collecting and remitting consumption tax.
7. Switzerland - From 1 January 2019, Switzerland applies VAT to all imported goods with a minimum threshold of 5 Swiss francs for goods subject to the reduced rate (2.5%) and 60 Swiss francs for goods subject to the standard rate (7, 7%). E-commerce platforms must handle the collection and remittance of VAT in Switzerland.
8. Norway - applies 25% VAT on all imported goods, with the VAT exemption for low-value goods to be abolished in 2020. To improve customs efficiency, the Norwegian government has implemented VAT for e-commerce, whereby sellers of low value (~$275) goods have easier online registration and reduced compliance costs.
9. India - Imported goods are subject to India's GST at rates ranging from 0% to 28% depending on the type of goods. Additional customs fees may also apply. International e-commerce sellers must navigate Indian GST and customs duties for cross-border sales.
10. Brazil - Goods imported into Brazil are subject to import tax, GST and other potential taxes. The minimum gift threshold is $50. E-commerce platforms must navigate the complex tax structure for shipments to Brazil.
11. Turkey - Turkey imposes VAT on all imported goods at a standard rate of 18%. For goods worth up to €150, simplified procedures apply, but VAT is charged. A duty may also apply to goods above this threshold. E-commerce platforms must ensure VAT collection and compliance with Turkish customs regulations.

In our opinion, the current legislation of Ukraine needs changes aimed at improving taxation policies. We believe that repealing or revising the regulation that determines the payment of VAT for low-value imported goods will help strengthen the fight against distorted competition in the e-commerce sector.