If you sell to buyers in the EU you need to know how VAT impacts your business. How do you ensure you follow the rules, and what happens if you don’t?
If you sell online, you need to understand which international tax laws will be relevant to your business. Just because you sell online, this doesn’t mean your business is not governed by the normal rules of taxation.
And if you sell to buyers within European Union (EU) countries (also known as member states), even if your business is based in another part of the world, you will need to know how Value Added Tax (VAT) impacts your business.
What do ecommerce businesses need to think about? What exactly are the different rules and regulations? What do you need to do to ensure you are compliant? What happens if you don’t comply? And finally, what upcoming changes in VAT regulations should you be aware of?
As we will see below, the VAT rules you need to consider when trading within the EU are not impossible to comply with if you ask yourself the right questions.
Additionally, the EU VAT landscape is ever changing and today this is true more than ever with new parameters such as Brexit and a focused fight against VAT fraud in ecommerce by EU tax authorities happening. In this guide, we will cover the rules you should currently follow and explain to you the new legislation coming into place in the next year that may impact the way you trade in the EU.
What is VAT, then?
The Value Added Tax (VAT) applies to most EU traded goods and services. Any business which exceeds a certain threshold of turnover usually adds VAT to the price of what they sell there. For every EU country the threshold is different.
VAT is also regarded as a general levy, because it extends to all goods and services more or less. It is a tax on sales, that is, it is charged by the consumer theoretically, not the company. But by applying VAT to the price customers pay, firms are essentially raising the tax on behalf of the EU.
Is dropshipping any different from any business ?
Short answer, no.
There are however specific elements to think about. Very often, dropshipping will happen without any storage of your products. So there is a “flash purchase and sale” when the final customer buys the product. As an example, in these scenarios the flow of events would be as follows: 1) Company A advertises a product online; 2) The final client makes a purchase of this product; 3) Company A buys the product from Company B and requests this company to ship it to the address of the final client; 4) Company A issues an invoice to the final client.
In these scenarios, you should take into account where are the goods coming from and , in case of goods are originally coming non-EU countries like China or the US, who is in charge of clearing customs on these products. In case the goods come from another EU country, you will normally require a VAT number in either a) the EU country of origin or b) the EU country of destination. Contact us to get help understanding where do you need to register in case you have this activity.
Import and export
Who pays the import VAT when importing goods into the EU? What should you do about it.
When importing goods from outside the EU and selling into EU member states, the responsibility for taxes and duties depends on who is the “importer of record”.
When using non-EU marketplaces such as AliBaba, it is usually up to the consumer to pay the import charges and VAT, via the parcel carrier, before the goods will be delivered. This is often not a pleasant customer experience, especially if it is unexpected. The additional import costs may even negate the benefits of buying abroad and can result in a high number of goods returned from disgruntled customers.
To avoid this, you may want to consider registering for VAT in the first port of entry into the EU for your goods. By keeping ownership of the goods, you will be the importer of record, and VAT will be charged on the cost price of the goods on entry.
The import VAT you pay is reclaimable on your VAT return, and the customer pays the full price at checkout – including VAT – so no nasty surprises for them. You will also benefit from a reduction in the number of returned goods.
Import One Stop Shop scheme (Import OSS)
For physical goods imported in the EU, a new import scheme will be created and accessible for both EU and non-EU businesses.
From 1 January 2021, EU and non-EU businesses selling physical goods with a value up to EUR 150 to EU consumers, will be able to declare and pay the VAT due on these imported goods in a single monthly VAT return by joining the Import One Stop Shop (OSS) Scheme.
When the new Import OSS is used, VAT will have to be charged and collected when the payment for the goods has been accepted. This means that when the goods arrive at the EU border, they will benefit from a fast release at customs with the VAT already accounted for.
The online seller will then be able to declare and pay the VAT collected to a single EU country where they decide to register for the Import OSS. The VAT returns and payments will be due on a monthly basis, and the EU country of identification will distribute the corresponding VAT amounts and information to the other EU countries.
When this special scheme is not used, for any reason, a simplified import mechanism will be introduced as well and VAT will have to be collected from the end customers by the customs broker, who will be responsible for paying the VAT amount collected to the local customs authorities on a monthly basis.
VAT on dropshipping and E-commerce: EU Companies Obligations – Treatment of E-commerce VAT (dropshipping)
Who has to pay VAT? The EU VAT Distance Selling Rules
If you are based in the European Union, or hold stock within the EU and sell to consumers within the EU, the Distance Selling Rules apply to you.
The rules apply even if:
- You are not VAT-registered.
- You are a sole trader.
- You sell through marketplaces such as eBay and Amazon
Every single EU country sets its own particular VAT rate. By regulation, for specific goods and services eligible for the reduced rate, this rate must only be greater than 15 percent, or 5 per cent. Also per regulation, there are at maximum 5 class of VAT rates, except in France and Spain, which have “legacy VAT rates“. Strictly-medical supplies (which doesn’t include masks and medical gloves) and pharmaceuticals don’t have VAT per se but pay a similar levy in a different fashion, depending on countries.
The individual rates for each country can be found on the applicable website of the tax authorities in that country. The Website of the European Commission has links to each authority.
In certain cases, however, European VAT applies and is applied directly to the price, along with an indication that the price is inclusive of VAT. VAT is not applicable in other situations, and should be left off the list.
What value added tax do I pay when I sell between EU countries?
How VAT works in the EU depends on what you sell, and who you sell to. Goods and services are perceived differently, as is the disparity between the B2B and B2C transactions.
When marketing B2B products
If you sell to someone with an EU VAT number you do not charge VAT. You also subtract any VAT you’ve paid from your quarterly return to make the deal. If the customer does not have an EU VAT number, you are applying VAT on the sale to your country.
When marketing B2C products
You should register your company in the country of the customer and apply the VAT on the sale to their country. You don’t have to do that if your sales to a given country fall below a certain amount, set separately by each country in that tax year.
When marketing B2B Services
Typically you will not charge VAT. It gets charged at the rate of your country by the customer itself via the reverse charge process. Once again, however, you can subtract the VAT you paid to make a quarter of the transaction.
When marketing B2C services
For most services you apply VAT at your own country cost. The exceptions are telecommunications, television, or electronic services which are charged according to the country of the consumer.
When you are purchasing products or services for industrial use
You pay VAT at the cost of the goods in your country as if you had sold them. Usually this can be deducted when you declare VAT yourself.
The above would apply in most situations but you will need to familiarise yourself with some exceptions. For eg, does the VAT extend to EU countries’ overseas territories? Yeah and no.
VAT does not apply to:
- The Åland Islands
- The French Overseas Departments (which have a specific VAT tax regime)
- The territory of Büsingen and Campione d’Italia (both exclave in Swiss territory)
- The island of Heligoland
- Mount Athos
- The Italian waters of Lake Lugano
- The Canary Islands
- Ceuta & Melilla
But VAT does apply to:
- Monaco (same rates of France, with a few reductions)
- UK bases in Cyprus (on the behalf of Cyprus)
The combination brings its own complications to the overseas territories straddling EU membership, as well as countries outside the EU at large.
National and intraeuro threshold
However, for small business, there are ways to not pay VAT, temporarily. For sales within the EU, if you have not exceeded the threshold in a specific country, you should apply your domestic rate of VAT to those sales – if you are VAT registered. Otherwise no VAT should be applied. Once you have exceeded the threshold in an EU country, you will have to register for VAT there, charge the country’s own rate of VAT, and file VAT returns according to the frequency and deadlines set by that country. You will stay registered as long as your sales exceed the threshold for the year. If your sales drop and you want to de-register, check the rules in that country – how soon you can de-register varies.
There are however two different kind sales regarding EU VAT threshold: national, and at distance or intraeuro
National thresholds indicate threshold meant for companies registered in the same territory they pay VAT to : for instance, a Polish tax-registered company paying VAT in Poland. National threshold differ by country. The selling threshold only apply to national sellers: for instance, if you have a French tax-registered company, you will NOT benefit from the threshold of Belgium or the Netherlands. In most EU member states the threshold is set at Euros 35,000 (or equivalent). For Germany, Luxembourg and The Netherlands, however, it is Euros 100,000 (or equivalent), and 85,000 euros in Ireland.
It is worthy to not that as multiple tax-registration is possible in the EU, so is the multi-VAT national threshold benefits, under very specific condition.
Since the 1rst January 2021, a new set of rules apply to infraeuro threshold due to the introduction of the 2021 EU VAT Ecommerce Package. The terms generally used by authorities is “Changes to the EU VAT Distance Selling thresholds”, mainly due to the old regime name. The directive is a series of measures applicable from 1st January 2021 which will aim to simplify the VAT rules for online sellers, while, in fact, mainly complicating the rules.
In 2015 VAT-MOSS (Mini-One-Stop-Shop) was introduced to facilitate the sales of digital services to private consumers within the EU. As VAT MOSS proved a real success in respect of the collection of VAT on digital services, this scheme is now being extended into a One Stop Shop (VAT-OSS) from 1st January 2021 to cover the supply of goods.
The new VAT-OSS rules stipulate that if you sell goods to private customers located in the EU, local VAT must be accounted (and paid) for based on where the customer is located, once you have exceeded a threshold of €10,000, which is now the rule. Please note that this rules DOES NOT apply to services.
For instance, if you have an Austrian company (which a threshold of 35k for VAT years), but which has a 15k turnover in Czechia, you’ll have to pay VAT through the OSS, even you don’t pay it in your own country.
Another example : The distance sales threshold in Germany is €100,000 and the German VAT rate is 19%. As long as the total value of annual sales in Germany is below €10,000, an Austrian business can avoid VAT allover. Between 10,000 and 10,000, the company will have to pay VAT through the OSS-VAT. Over 100,000 a VAT registration may be required in Germany.
To avoid multiple VAT registrations in different EU countries, the OSS (One Stop Shop), allows the seller to register for VAT in one single country and submit quarterly VAT returns. The host country collects and pays the VAT due from the seller’s EU sales in one VAT return instead of the seller having to register for VAT in every EU member state where they have customers.
The VAT-OSS is an optional scheme. You can still become (or remain) VAT registered in any EU country where you have customers through a voluntary VAT registration in that country.
It is worth specifying that VAT-OSS covers private consumer supplies only, not sales to other businesses, which means you would need to be able to identify who your customers are – businesses or private consumers – and apply the relevant VAT rules accordingly.
The rules now also applies to sellers that were previously exempt thanks to the extension of their national threshold, under the previous regime.
Why am I paying VAT on Amazon products I’m selling, even if I’m not liable for VAT?
The French and German tax authority have already introduced measures that now make the marketplaces liable for the VAT owed by the third-party sellers, instead of the sellers themselves. This has, in turn, made the marketplaces insist that a seller must have a VAT registration in place prior to being able to use a marketplace in either of those countries.
The last new rule coming into force from 1st January 2021 (effective in early March) stipulate that digital marketplaces such as Amazon and eBay will be, under certain circumstances, deemed for VAT purposes to be the supplier of the goods imported from non-EU territories and sold to EU customers.
Under the new 2021 rules the responsibility of charging, collecting, and remitting the VAT due to the national tax offices will shift in certain cases from the seller to the marketplace itself. This is a major change as for the first time, digital marketplaces are given a significant role in the fight against VAT fraud.
New selling proof – 1st January 2021
In order to understand which EU country’s VAT rate to apply, you will need to collect evidence of where your customer is based.
One piece of evidence per sales is required if your VAT sales are below €100,000 and two pieces of evidence are required if the value of your sales are over that threshold. This evidence can include the billing address, the IP address of the device used to make the purchase, and the customer’s bank details.
Which VAT rate applies to your goods or services?
It is important to know which VAT rates are relevant for the goods you are selling. Please note, these may differ between countries. The European Commission (EC) have published information relating to VAT rates and specific country rules.
Selling to non-EU customers
If you are an EU-based business and are selling to consumers outside the EU, the supply of goods is usually zero-rated provided strict rules are followed, including providing evidence of the export within three months of the sale.
It is, however, important to check the local rules and regulations of the country you are importing into.
VAT Fines : the cost of compliance: penalties and fines
In 2018, the European Commission reported that EU countries were losing €150 billion each year from undeclared VAT. To stop the hemorrhaging, special measures have been put in place across the EU in the last few years.
First, in 2012, member states set up a “mutual co-operation” initiative, with special units focused on ecommerce. The authorities in each country now communicate regularly and share data.
More recently, the formal adoption of new regulations and data-sharing tools to strengthen cooperation on VAT fraud between national tax authorities means that EU countries are becoming much more pro-active and effective in identifying and dealing with online retailers avoiding their VAT obligations.
Online retailers selling abroad need, more than ever, to be aware of their tax obligations in the countries where their customers are. Unfortunately, ignorance is no defense. The “head in the sand” approach can work for a while, but it’s not a long term solution.
Tax authorities have the power to levy penalties and interest charges, which can be as high as 120% on top of the unpaid taxes in some countries.
Other general Rules
Are your invoices compliant?
Find out if you will need to raise an invoice and what information needs to be on that invoice – again different rules apply to different countries. Also consider whether your billing system can cope with the potential variations.
Here are some tips to help keep you in compliance with the practicalities of VAT in the EU:
First, make sure you have the systems in place to capture accurate sales information including which countries your customers are in, and where stock is located for onward sale to your customers.
Make sure you include shipping/delivery costs as these are included in the final sums when calculating if a threshold has been exceeded.
When charging your customers, make sure you add VAT to the shipping cost as well as the product price on your invoices.
Keep up-to-date with the current VAT registration thresholds and where relevant, monitor currency fluctuations. Know when you are about to exceed a threshold including when the local currency is not in Euros. This is important even though the rules will change in the future as tax authorities are combating VAT fraud more than ever.
Know which VAT rates apply to your goods or services. If you are based within the EU, you may be familiar with the VAT rates in your own country, but they can vary elsewhere within the EU. Children’s clothing is a good example – it is zero-rated in the UK and Ireland, but attracts VAT everywhere else in the EU.
Once registered in another country, do not charge VAT for your own country as well as the buyer’s country. VAT should only be charged once.
It can take approximately 6 – 8 weeks to obtain a VAT registration, depending on the country that you are registering in.
Once registered you need to make sure your invoices comply with local regulations
Prepare for Brexit! So far there are no changes in the way UK companies can trade in the EU. However, you need to prepare for every possible scenario after the end of the transition period which is 31st December 2020.
Finally, anticipate the upcoming VAT regulation changes we have covered in this article, whilst staying compliant in respect of your current obligations.
Pricing is a big issue. Unlike the USA, where it is customary to quote prices without sales tax, VAT should always be included in the price shown to consumers. It is important to understand the impact of VAT on your profit
Should you charge different prices in different EU countries or does one price fit all?
How badly will your margins be affected by the different VAT rates if you don’t differentiate price in each EU location?
VAT rates vary across Europe from 17% – 27%. Can the margins you have set for your products absorb the variations?
Will you stay competitive once you have VAT registered in another EU country?
Is your ecommerce system set up for multi-currencies and multi-VAT rate application? If not, how easy is it to update?