The EU reform of VAT for cross-border e-commerce is expected to lead non-EU e-commerce vendors to set up new logistic schemes.
On July 1st, 2021, the EU reform of VAT (value-added tax) for cross-border e-commerce entered into force. The reform removed exemptions for parcels of a value under 22 euros and introduced the new internal one-stop-shop (IOSS) system. The aim is to protect the European e-commerce companies by ensuring they will compete with international vendors on a level-playing field. Though applicable to all non-EU countries, the reform mainly affects the Chinese and British cross-border e-commerce vendors, two of the sector’s biggest players to the EU. In this article, we will discuss the consequences that this VAT reform may have on cross-border e-commerce logistics operations.
Impact on volumes
No doubt, a decrease of low value-added e-commerce parcels entering the EU should be anticipated, resulting from the change in consumer behavior and vendors’ business strategy.
On the one hand, ordering from the non-EU e-commerce sites may become less attractive to EU consumers. A survey by the International Postal Corporation indicates a negative correlation between the consumers’ desire to make cross-border purchases and the amount of additional cost being charged. The survey result suggests that 70% of the respondents tend to abandon the cross-border option when additional charges reach 10 euros.
The decline in consumer purchases due to an erosion in price competitiveness is particularly noticeable for Chinese vendors. The impact on consumer demand is observable in countries that introduced the policy in 2020. In the 2020 E-commerce Report published by PostNord, the share of cross-border e-commerce from China in Norwegian online purchases has dropped from 36% to 30% following the lifting of VAT exemption for products less than 350 NOK (roughly 34 euro) since January 1st, 2020. However, China remains the top source for cross-border e-commerce purchases in Norway despite this change.
On the other hand, cross-border e-commerce vendors will also need to re-evaluate the EU market and adapt their strategy to face the costs of the additional red tape.
British vendors got caught in the dual red tape costs of both Brexit and the VAT reform. According to the Financial Times, UK SME eCommerce sellers are facing 180 million pounds of additional red tape costs due to the EU VAT reform. The extra red tape costs resulted in some small vendors’ deciding to leave the EU market. At the same time, EU vendors are exposed to risks of losing their market share in the UK since it has also ended the VAT exemption for cross-border e-commerce parcels of less than 15 pounds since January 1st, 2021.
Model Shift: from International Parcel to Local Fulfillment
The VAT reform should also accelerate the transition from a B2C to a B2B2C delivery model. In this model, e-merchants engaged in cross-border e-commerce rely on EU-based fulfillment centers instead of direct international shipments for local delivery, thereby reducing disruption due to regulatory changes and shortening delivery times for final consumers. Chinese and British vendors have already adopted such a strategy. Considering that in 2020 around 37% of global cross-border e-commerce purchases were less than 25 euros, the VAT reform could generate a significant market demand for local fulfillment services from non-EU vendors. Overall, local fulfillment services can be divided into three types based on who the service provider is.
- Fulfillment service offered by E-commerce Platforms
Most Chinese vendors rely on the local fulfillment services offered by large e-commerce platforms, such as Amazon (Fulfilled by Amazon) or AliExpress. Chinese vendors are reported to account for more than half of the 10,000 top sellers on Amazon in Spain, France, and Italy, 40% in Germany.
- Self-run Fulfillment Service
Due to the significant investment involved in operating its own fulfillment centers, this option is normally only adopted by large e-commerce companies. For instance, in the light of this reform some British kitchenware and online jewelry companies are reported to have either opened or plan to build fulfillment centers in the EU, for example in the Netherlands, for European e-commerce purchases.
- Third-Party Fulfillment Service
Logistics companies also offer third-party fulfillment services. This kind of service has seen growing demand from Chinese cross-border e-commerce vendors and is the subject of strong policy endorsement from the Chinese government[1]. Developing overseas fulfillment centers is addressed in China’s 14th Five-year Plan as one of the strategies to facilitate international trade. In 2020, there were around 1,800 Chinese fulfillment centers worldwide, with an annual growth rate of 80%. The majority are in the US and Europe. The most preferred locations for fulfillment centers for Chinese operators in Europe include Germany, Spain, and Poland.
Impact on the choice of mode of transport
As a result, switching to local fulfillment will then see the demand for airfreight belly cargo for low-value-added goods decline in favor of other shipping modes. It is to be noted that as of the second half of 2020 some local Chinese rail freight operators started to offer specialized B2B cross-border e-commerce rail freight services to multiple European destinations, such as Duisburg, Hamburg, and Budapest.
A natural outcome of the shift to a local fulfillment model is also a higher demand for e-commerce data analysis applications. The model that places the fulfillment operation in the EU means that vendors need to ship potentially high-demand goods overseas in advance. An accurate forecast of overseas consumer demand is then essential to enhance the overall supply chain efficiency.
[1] In Chinese, it is called "Overseas Warehouses/Fulfillment Centers" since they are located outside of China.
