In most cases the so-called Third-party business, or commonly known as a dropshipping model takes place. For this purpose, we will firstly examine the drop shipping business model. This is a business model where the seller of the goods does not own the product and does not buy it in advance, but advertises the product on a particular online platform and, after selling it receives the money from the customer and thus buys the goods from its provider, who then in turn delivers it directly to the customer.
In view of this, the dropshipping model does not require the goods to be in stock. The dropshipping operator (e.g. Amazon) will contact the provider and will provide him with information about the delivery of a specific amount of goods. The goods are delivered directly by the provider courier to the customer, using carrier services. In this process, the role of the dropshipping operator, who is selling the goods to the customer through an online store, could be designated as an intermediary. For this purpose, the drop shipping intermediary concludes a brokerage contract with the provider. His task consists in the customer acquisition and order admission against advance payment. After payment of the entire amount by the customer, the goods are forwarded to the provider after deduction of the intermediary commission. The order is sent to the provider and the latter sends the items to the customer, i.e. the customer receives the goods from the provider and not from the intermediary. If agreed by contract, the item could also be shipped on behalf of the intermediary.
From a taxation point of view, these transactions are subject to different tax treatment depending on whether they represent deliveries inside or outside of a Member States of the European Union. In the first part of the article, we will examine such cases where a Bulgarian company sells through the Amazon platform by sending the goods from a third country outside the EU to an Amazon warehouse in the US and other third countries, and tax treatment according to the Bulgarian VAT Act. There are three different deliveries to be registered by the seller of the item - deliveries of goods from a Bulgarian company to the end user, transport service to the customer and services provision of Amazon to the Bulgarian company for the usage of the online platform. We will take a closer look at the registration of these deliveries.
I. Delivery of goods to third countries (outside the EU)
The first delivery method is the sale of the corresponding goods to the end user via the Amazon platform. In most cases users of online trading are natural persons who purchase the items directly from Amazon. It becomes difficult to determine whether the customer of the Bulgarian company (recipient of the item within the meaning of Art. 11 (2) VAT Act) is the American company Amazon (acting on his behalf and at the expense of the Bulgarian company) or the end user (usually they are natural persons). As mentioned above, this depends on who is the actual provider of the item to the end user - Amazon as an intermediary or the provider's company.
In accordance with the provisions of Article 12 of the VAT Act, taxable delivery shall be any delivery of goods or service within the meaning of Art. 6, when it has been carried out by tax liable person under this Act and has a place of performance on the territory of the state, as well as the delivery, taxable with zero rate, made by tax liable person, unless otherwise provided by this Act.
In order to clear out the tax treatment of the deliveries of goods of a company, the place of performance is to be determined according to the provisions of the VAT Act.
The place of performance for deliveries of goods is regulated under Art. 17 of the Act. Art.17 (2) of the VAT Act provides that the place of performance for delivery of a goods, which are being sent or transported by the provider, recipient or by a third person, shall be the location of the goods by the moment, when the delivery is sent, or the moment when its transportation towards the recipient starts.
As can be observed from the cited provisions, the determination of the place of performance regarding a delivery of goods depends on whether those goods are transported or not. If, at the time of transfer of ownership or shipment of the goods to the customer, the goods are located outside the country, the place of performance is also where the goods are located - outside the country.
Considering the above, there are the following options for the deliveries specified in the request and executed by the provider:
A) Delivery of goods transported from Bulgaria to a third country
In this case, it is a taxable delivery with zero tax rate, as provided for by the legislator under Art. 28 of the VAT Act for the following two cases:
- the delivery of goods, which are sent or transported from a place on the territory of the state to third state or territory by or at the provider’s expense;
- the delivery of goods, which are sent or transported from a place on the territory of the state to third state or territory by or at the recipient’s expense, if the recipient is a person, who is not settled on the territory of the state.
The documents required by law for proof of deliveries pursuant to Art. 28 para. 1 and para. 2 are listed under Art. 21 within the Regulation of the Implementation of the VAT-Act, namely:
- customs document, in which the provider is registered as exporter of the goods, certified upon confirmed leaving of goods by the customs institution of leaving, or another document certifying the export in those cases where the customs legislation provides an option not to submit a customs document;
-invoice for the delivery;
-document for the transportation of these goods.
In the event that the goods are sent or transported to third territory, in order to prove the delivery under Art. 28, it. 1 and it. 2 of the Act, the provider shall present the following documents:
- invoice for the delivery;
- document for the transportation of these goods;
- written confirmation by the recipient, certifying that the goods have been delivered on the territory of the third territory.
For this purpose, the provisions of Art. 37 (2) VAT Act shall be taken into consideration, according to which, in case the provider does not obtain the documents under par. 1 until the expiration of the calendar month, following the calendar month, during which the tax has become exigible, the provisions of this chapter shall not apply. If subsequently the provider obtains the documents under par. 1, he/she shall correct the result of the application of this paragraph by a procedure, specified by the Regulation. Paragraph 2 shall not apply in case of received down payments.
These deliveries are to be entered in column 19 of the sales record (Appendix No. 10 to Art. 113 (2) of the Regulation).
B) Delivery of goods purchased in an EU country and subsequently transported from an EU Member State to a third country
The acquisition of ownership of an item in an EU Member State constitutes an Inter-Community Acquisition for the purposes of the Act. However, it should be noted that the place of performance of such delivery, in which the entity is the recipient, is under the Article 17 (1) of the VAT-Act and that is the place where the goods are at the time of the transfer of ownership - the Member State outside the country. This delivery is not a delivery within the meaning of Article 13 (1) of the VAT Act, provided that the acquisition of ownership of the goods takes place in another Member State and is not dispatched or transported by the Member State to the country or another Member State, as the case here is.
To determine the place of performance of the subsequent delivery of the goods from a Member State to a customer in a country outside the EU, the provision of Article 17 (2) of the VAT-Act shall apply again, with the place of performance being outside the country.
This delivery must be entered in column 23 of the sales record (Appendix No. 10 to Art. 113 (2) of the Regulation).
C) Delivery of goods purchased in a third country and then transported to a customer outside the EU
In this case, for determining the place of performance of the first delivery, whereby the company acquires ownership of the goods, the provisions of Art. 17 (1) are applied by law and, considering the above, the place of performance for such delivery is outside the country. For the subsequent delivery of the goods, which are sent from the place of his acquisition of ownership to the customer to a third country, the place of performance is in accordance with Art. 17 (2) of the VAT Act - outside the country.
This delivery shall be entered in column 23 of the sales record (Appendix No. 10 to Art. 113 (2) of the Regulation).
According to Art. 79 para. 2 item 4 of the Regulation in connection to Article 28 of the VAT Act is required the provider to issue a proper invoice, when the taxable person is not obliged to charge the tax for the delivery of goods, with the place of performance in a third country or territory; the invoice/notification shall consist the grounds for not charging tax the corresponding provision of the Act.
Transport of the goods
According to the provisions of the Regulation, the taxation of transport services, provided that the recipient is a taxable resident and the services are involved in cross-border freight transport between two third countries, is subject to zero VAT rate. If the provider (transport company or forwarding agent acting on its own behalf) is a tax liable person and is not residing on the territory of the country and the delivery has place of performance on the territory of the country and is taxable, the tax shall be paid from the Bulgarian recipient (Art. 82 (2) No. 3 VAT Act).
For the received transport invoices, the recipient of the service has to issue a protocol pursuant to Article 117 (2) of the VAT Act applying the reverse charge procedure for the transport service and stating the ground "Art. 82, para. 2, it. 3 of the VAT Act". The transport service is to be entered under column 19 of the sales records.
In order to prove the lawfulness of the application of the zero tax rate for the transport service provided, the carrier shall possess the necessary supporting documents. These include the compulsory documents according to the Regulation:
- Invoice for the delivery of the goods, issued to the name of the customer, including freight and destination;
- Transport document (CMR bill or other document, depending on the type of transport) where the sender of the goods and the customer/receiver of the goods are specified;
- Copies of import and export customs declarations in which he should reasonably be registered as an importer or exporter of the goods; he can also be specified as recipient or sender of the goods;
Provision of intermediary services by Amazon
At the end of the month, Amazon will issue an invoice/letter, consisting data about the sales concluded and the fees accrued, as well as invoices for the fees being invoiced. According to Art. 82 (2) of the VAT Act, the tax is due by the recipient, if he is a tax liable person, provided that the supplier is not a tax resident person and the place of performance of the taxable delivery is in the country. If the company does not have a VAT number, it is assumed that the place of performance is where the provider of the service is located. According to Art. 97a (1) of the VAT Act, registered under this Act shall be every tax liable person under Art. 3, Para. 1, 5 and 6, who receives services that have place of performance on the territory of the country, which are taxable and for which the tax is due from the recipient under Art. 82, Para 2. For the corresponding fees, the Bulgarian company uses the billing received to issue a protocol within the meaning of Art. 117 (2) of the VAT Act, where the recipient of the service applies the reverse charge method to the net invoice amount and should state the reasoning, "Art. 82 para. 2 no. 3 of the VAT Act ".
II. Delivery of goods within the EU
In the second part of this article, we will look at the cases where a Bulgarian company trades online using the Amazon platform by moving or storing the goods within the EU.
Depending on whether the recipient of the goods is the Amazon or the end user - natural persons, there are two options:
1. Amazon as the recipient of the goods
In this case, Amazon will be the recipient of the goods through the relevant branch in an EU Member State. Under Article 7 (1) of the VAT Act, an “Inter-community delivery of goods shall be the delivery of goods, transported by or at expense of the provider – a person, registered under this Act, or of the recipient from the territory of the state to the territory of another Member State, when the recipient is a tax liable person or a tax non-liable legal person, registered for the purposes of VAT in another Member State”.
Under Article 53 (1), inter-community deliveries shall be taxed with zero tax rate under Article 7. The provider of the goods shall issue to Amazon a zero-rate invoice stating the reason for not collecting the VAT (Article 53 (1) and the indication "Reverse Charge". Regarding the transport of the goods, the rules for registration already mentioned in this article apply. These also apply to Amazon's intermediary service, since for non-resident beneficiaries the law does not implement delimitation between EU Member States and third countries.
2. Natural persons - end users - as recipients of the goods
Most goods, sold through the online stores, are purchased by individuals. These deliveries are, by nature, remote sale of goods and are subject to the provisions of Article 14 (1) of the VAT Act, namely:
Remote sale of goods shall be the delivery of goods, for which the following circumstances are simultaneously present:
- the goods are sent or transported by or at expense of the provider from the territory of an EU Member State, different from this, in which the transport ends;
- Provider of the goods is a person having VAT registration in a Member State, different from this, in which the transport ends;
- Recipient of the delivery is a person who is not obliged to charge VAT at inter-community acquisition of the goods in the Member State, where the transport ends;
- the goods:
a) are not new vehicles, or
b) are not mounted and/or installed by or at the provider’s expense, or
c) are not subject of special order of charging the margin of the price for second hand goods, works of art, collections articles and antique articles.
In view of the correct billing and registration of the deliveries carried out, their place of performance must also be determined according to their classification. For the remote sale of goods there are special rules according to which the providers are separated depending on whether they domicile or not in the country. In the current case, we deal with the regulations for a provider of goods whose company is in the country. These regulations can be found under Art. 20 para. 1 of the VAT Act:
The place of performance of delivery of goods under the conditions of remote sale under Art. 14 shall be on the territory of the Member State, where the transport ends, when the following circumstances are simultaneously present:
- the provider is a person, registered under this Act on the grounds, different from this for registration for inter-community acquisition;
- the deliveries of goods under the conditions of remote sale, carried out by the person under it. 1 for a Member State exceed for the current calendar year or have exceeded for the previous calendar year the sum, provided by the legislation of this Member State;
- the goods are dispatched or transported by or on behalf of the provider on the territory of the country.
According to Article 20 (5), when the circumstances under Par. 1, item 2 are not provided, the place of performance shall be on the territory of the state, except for the cases, when the provider has notified the territorial directorate of registration, that he/she wants the place of performance to be on the territory of another Member State, where the transport ends, and he/she is registered in this other Member State for the purposes of VAT.
In other words, until reaching the lower limit of registration in the state where the recipients of the goods are located, Bulgaria is the place of performance of the remote sale transactions and the delivery is subject to 20% taxation. If shipping transactions are carried out and VAT of 20% is charged, the invoices must contain the information required under Art. 114 (1) of the VAT Act. It is important for taxpayers to know that the remote sale of goods should not be included in the VIES declaration.
When the lower limit for remote sales for the relevant EU Member State is reached, the place of performance will be in that State, and the provider is now subject to the mandatory declaration in that Member State and the deliveries are taxed and documented in accordance with the legislation applicable in that Member State (Art. 79 para. 3 no. 1 of the VAT Act).
All registered persons, who carry out deliveries of goods under the conditions of remote sales, shall be obliged to specify currently the total sum of the deliveries of goods under the conditions of remote sales separately for each concrete Member State and to specify for each of the two calendar years prior to the current one the sum of the tax bases of the deliveries carried out under the conditions of remote sales separately for each concrete Member State.(Art. 73 para. 3 of the Regulation).
By complying with this requirement, providers will have the necessary information to better track the corresponding turnover, which requires mandatory registration in the Member States of their deliveries.
III. Renting a storage area of Amazon
A common case when working with Amazon is renting a storage area as a service offering. It should be noted that in this case, Amazon's US or third-country storage space will be considered a permanent location for the Bulgarian company in accordance with the General Terms and Conditions of the Online Platform. According to the Bulgarian VAT Act, Directive 2006/112 /EU and the VAT Regulation, the place of performance of the named delivery will not be in Bulgaria. According to Article 21 (2) of the VAT Act and Article 44 of the VAT Regulation it is in the USA (or in the state where the permanent establishment of the provider is located, provided that the goods are transported in another state). Accordingly, the provider is the one who calculates the tax in accordance with the legislation applicable in the country of delivery.
Should the provider rent a storage space from Amazon within another EU member state, this is a domestic sale. This does not count as a distance business, but as a taxable delivery with place of performance in the respective state. The fulfillment of such deliveries is subject to VAT registration in the Member State where the storage area is located, regardless of the turnover achieved. After the registration, the prior transport of goods is deemed to be goods transfer and must be noted as an Inter-Community delivery with the Bulgarian VAT ID of the supplier and as an Inter-Community acquisition with the VAT ID of the supplier in the Member State.
The subsequent sales to persons resident in the Member State are taxed at the appropriate rate. Should a Bulgarian company for example rent an Amazon storage area in Germany, it is subject to the registration according to the VAT Act in Germany. The delivery of goods from the Bulgarian to the German warehouse is reported by the Bulgarian company as an Intra-Community delivery with his Bulgarian VAT ID number and as an Intra-Community acquisition with his German VAT ID at the receipt of the goods in the warehouse. The registration of the domestic sales takes place via VAT-protocols for the Intra-Community delivery in Bulgaria and for the Intra-Community acquisition in Germany. The Bulgarian provider calculates VAT with his German VAT ID number for the next sale to final consumers according to local tax regulations.