Every e-commerce business owner gets acquainted with VAT as one of the most important regulations from the very beginning of their operations. In Europe, where free movement of goods is a pivotal single market element, VAT is regulated on a national level, but certain mechanisms exist to simplify VAT accounting for companies. In recent years, there have been significant changes to those mechanisms. Below, you will find an overview of the most current and essential VAT conditions for e-commerce sellers in and to the EU.
First things first – what is VAT?
The abbreviation VAT stands for Value Added Tax – a consumption tax applied to most goods and services traded in the EU and in some other countries that belong to the VAT scheme. A similar tax in the US is called the sales tax.
Companies become required to add the VAT percentage to the prices of their goods or services once they exceed a country‘s VAT threshold – a revenue limit. E-commerce companies in Europe can now benefit from simplified VAT reporting and a threshold unification. Please find more about this below.
What VAT should I pay on intra-EU sales?
There is no one answer on how VAT applies in the EU as it mainly depends on the transaction type (goods or services) and whether the customers are business entities or individuals.
Here are the summaries of the most common scenarios of interactions:
- Selling goods B2B
Reverse charge rule is applied when selling to other EU VAT registered companies. If the buyer cannot provide valid VAT number in EU, it should be charged the VAT based on the delivery country.
- Selling goods B2C
When selling to customers in the EU, an e-commerce company has to register for VAT in the customer‘s country of residence and charge the VAT rate of that country. Another more straightforward way is to use the new One-Stop-Shop (OSS) scheme that allows for unified VAT registration and reporting. Please note that it could be done voluntarily or once a company exceeds the EU-wide threshold of €10,000. The €10,000 threshold is not applied if the company is storing the goods in more than one country inside EU.
- Selling services B2B
There is no need to include VAT on services sold to businesses in most cases. However, the purchaser pays the VAT during the reverse charge procedure at the country‘s rate, and the seller can deduct the VAT previously paid in their returns.
- Selling services B2C
The provider country of origin‘s VAT must be applied when selling most services, except for telecommunications, broadcasting, or electronic services (including the purchaser location‘s VAT rate).
New VAT rules
In June 2021, new regulations took place in Europe, allowing sellers to participate in VAT simplification schemes called OSS (One-Stop-Shop) and IOSS (Import-One-Stop-Shop). Together with the OSS and IOSS, a unified distance selling threshold of EUR 10 000 and new requirements to collect and report VAT was established for online marketplaces.
One-Stop-Shop (OSS) and IOSS schemes
Prior to 2021, a distance seller had to register at the country of sale‘s destination once a distance selling threshold of €35 000 (or more, in some countries) was exceeded. Now, companies can enroll in the OSS scheme and register for VAT at their country of origin, which then administers the unified VAT returns and distribute the collected tax to the countries of sales destinations. The OSS VAT returns are quarterly, and the unified VAT threshold is €10 000.
Similarly, IOSS can be used to account for distance sales of imported goods in shipments of under €150. Non-EU entities can also take benefit from the scheme.
Exceptions to the OSS scheme – stock in multiple countries
In some instances, the OSS scheme cannot be applied. Firstly, only transactions that took place after July 2021 can be included in the OSS reports. Secondly, companies holding stock in multiple European countries cannot use OSS for all interactions. This applies to members of Amazon’s FBA (pan-European program), Zalando, 3PL sellers, and other companies keeping items in warehouses in other EU member states.
Consequently, companies with stock in multiple countries can use OSS to report the intra-Community transactions but must register for VAT separately in the countries where their warehouses are located. For example, a seller with stock in Germany, Italy, and Portugal will have to register for VAT in the three countries but can use OSS for accounting for sales to other European states.
How to navigate VAT in the EU?
Nowadays, e-commerce is thriving globally, and it’s easier than ever to reach a broad audience of potential customers. To operate smoothly, every successful e-commerce business must have a reliable infrastructure, including accounting and tax administration. Only a dedicated and experienced partner can help avoid traps such as problems with tax authorities or situations like trading accounts getting suspended because of tax compliance problems. If you need highly skilled support in VAT compliance, please get in touch with the 1StopVAT team and let our professionals take care of your accounting while focusing on business development.