Taxing the online haven: Impacts of the EU VAT reform on cross-border e-commerce

To reduce tax losses online, starting from July 2021, the EU mandates value-added tax (VAT) payment for all imported small parcels and requires platforms to collect and remit tax. Using data from China Customs and orders from an AliExpress store, we document that due to the reform, China's online exports to EU countries dropped by nearly 50% and EU consumers mostly bore the increased tax burden instead of online sellers. Furthermore, there was a decrease in orders previously exempted from VAT and those previously required to pay VAT upon delivery, with the former showing a greater reduction. This study demonstrates that while the EU reform has improved online tax compliance, it has negatively affected consumers to a great extent.