If you sell online you need to understand which international tax laws will be relevant to your business. Just because your business is online, doesn’t mean it isn’t governed by the normal rules of taxation.
And if you sell to buyers in European countries, even if your business is based in another part of the world, you need to know about VAT.
So 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? And what happens if you don’t comply?
There are some fundamental questions which need to be asked:
- Where are you based? Inside or outside the EU?
- Where are your customers? Inside or outside the EU?
- What are you selling? Goods or services?
- Who are you selling to? Businesses or consumers?
This post is going to focus on B2C sales – the online retailer selling either goods or services directly to private consumers.
Non-EU businesses selling goods into Europe
Who is the importer of record?
For businesses outside the EU selling into Europe, the responsibility for taxes and duties depends on who is the “importer of record”.
It is usually the consumer who will be asked 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 returns 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, for example, in the UK. 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 returns.
Where is your stock held?
You may decide you want to house your stock in a fulfilment centre or warehouse in an EU member state, in order to fulfil your European orders more cheaply and efficiently. Be aware – as the stock is now held within the EU, and is still owned by you, this has created a “taxable supply” and raises the immediate need for a VAT registration. There is no threshold to exceed. (See below for more about fulfilment centres).
If you decide to use a distributor or agent, the same VAT liability may not apply – it will depend on your contract with them and who has ownership of the goods. To find out check your contract and speak to an expert.
On a positive note, once you have registered here in the UK or another EU member state, you become governed by the VAT “distance selling” rules – the same rules which apply to EU businesses selling within the EU.
The distance selling rules
These rules stipulate that VAT registered businesses can supply goods to consumers in EU member states without having to register for VAT there, until they exceed the set thresholds. The thresholds vary, and in most EU member states are set at €35,000 (or equivalent). However for Germany, Luxembourg and The Netherlands, it is €100,000 (or equivalent), and in the UK it is £70,000 (or equivalent).
It doesn’t take much to breach the lower thresholds. To put it in perspective, if you sell medium or high-value goods, fifty luxury branded hand bags can easily carry you over.
EU-based businesses selling goods within Europe
If you are based in Europe, and sell to consumers within the EU, the distance selling rules also apply to you.
The rules apply even if:
- You are not VAT-registered.
- You are a sole trader.
- You are only selling through marketplaces such as eBay and Amazon – the marketplaces do not take responsibility for VAT at all.
The rules only apply when you are selling to EU consumers.
For sales within the EU, if you have not exceeded the threshold for the buyer’s 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 for another EU member state, you will have to register for VAT there, charge the country’s own rate of VAT, and file returns according to the frequency and deadlines set by that country. You will stay registered as long as your distance 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.
Selling to non-EU customers
If you 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.
Penalties and fines
In 2011 the EU reported a loss of €193 billion from undeclared VAT. To stop the haemorrhaging, special measures have been put in place across the EU.
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. The data-sharing and co-operation initiative may even be extended to non-EU countries, with interest shown from Norway, Russia, Canada, Turkey and China.
Online retailers selling abroad need to be very aware of their tax obligations in the countries where their customers are. Unfortunately ignorance is no defence. 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.
If you opt to use a fulfilment centre in the EU, where you hold stock and retain ownership of it, you have an obligation to VAT register in that country. There is no threshold to exceed. If you are currently using a fulfilment centre in Germany, for example, without being VAT registered there, check your contract with the fulfilment centre and seek expert help if you are not sure if you should be registered there.
Here are some tips to help keep you in compliance with the practicalities of VAT in Europe:
- First, make sure you have the systems in place to capture accurate sales information including which countries your customers are in.
- 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 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.
- Know which VAT rates apply to your goods or services. If you are in the EU, you may be familiar with the classification system in your own country, but it can vary elsewhere within Europe. 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 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.
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. So 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 member state?
Is your ecommerce system set up for multi-currencies and multi-VAT rate application? If not, how easy is it to update?
It’s always a good idea to do some market research in your chosen markets and find out how you compare to local suppliers and how much flexibility this gives you. Planning ahead avoids a lot of future headaches and can even mean the success or failure of your business.
Intrastat Declarations are mandatory statistical returns which allow the tax authorities to monitor the movement of goods within the EU. Each country has its own reporting thresholds, which differ from the registration threshold.
A list of the thresholds (PDF) can be found in our booklet which you can download for free from SIMPLYVAT.com. Intrastat declarations will need to be submitted once thresholds are exceeded.
Selling services within the EU – rule changes from January 1st 2015
On January 1st this year, the European Commission changed the new VAT place-of-supply rules for EU suppliers of electronic, broadcasting and telecom services to consumers. These include digital downloads such as e-books, software, music and films. A full list can be found on HMRC’s website.
The fundamental change is that VAT on digital services is no longer accounted for where the supplier resides, but where the customer is. To reiterate: these rules only apply to the supply of electronic, broadcasting and telecom services to consumers – not to businesses – and not to the supply of goods or other types of services.
The new rules means that as the supplier, you will have to gather and report information on where your customers across all 28 EU member states. This puts a huge compliance burden on your business. Not only do businesses have to make sure the right processes, checkout software and accounting packages are in place, but they also need to take into consideration how the new rules will affect prices and margins.
There has been intense lobbying from the UK on these changes, and some progress has been made because of the negative impact on micro-businesses. As the UK has such a high local VAT registration threshold of £81,000, HMRC is allowing businesses below the UK threshold not to have to account for VAT in every EU member state, when they register for a scheme called Mini One Stop Shop (MOSS).
There was not the same success in lobbying for a minimum threshold to be set on e-service sales. A number of UK Members of the European Parliament made a request to the European Commission which was rejected by the EC on the 20th January 2015.
Is your customer a business or a consumer?
Usually a VAT registration number will determine whether your customer is a business or not. If they are not VAT registered other evidence, such as a link to their website or commercial documents, will suffice to show they are a business.
Where is your customer located?
Two pieces of evidence are required to show where your customer is located. This 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 service?
The EC have published information relating to VAT rates (PDF) and specific country 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.
Where to submit the information?
The VAT can either be accounted for through local VAT registrations in each country where your customers, or via VAT MOSS (Mini One Stop Shop).
You can register for MOSS in one member state, and that tax authority will collect the information and payment from you and distribute it to the relevant tax authorities where your customer are. VAT MOSS has been introduced to make it easier for the seller, so they only have to deal with one EU tax authority.
Selling both physical goods and digital services
If you register for VAT MOSS and sell physical goods as well as digital services, those sales will still need to go through the distance selling VAT accounting process, whilst sales of digital services need to be accounted for via VAT MOSS.
A really effective solution to help online retailers has been produced by Taxamo. This solution recognises the location of the customer at checkout and applies the correct country VAT rate. It can collect up to six pieces of information for a single transaction, and prepare the data for the quarterly EU MOSS VAT return. It also stores the data for the mandatory 10 year period.
Non-EU businesses selling digital services to EU Consumers
Since 2003 non-EU sellers have already had to account for VAT based on the customer’s location, via the VoES (VAT on Electronic Services) scheme. This has now been incorporated into the new 2015 reforms. Non-EU companies can register with one of the 28 member states’ tax authorities, and submit all filings and payments to that tax office via VAT MOSS.
Non-EU providers have been repeatedly told that they would be automatically transferred from VoES to VAT MOSS. However, a number of tax authorities have indicated that this will now not happen, and these businesses will have to apply separately for a new registration with MOSS. Any EU country can be chosen unless you already have a permanent establishment in one county – if you do, this is where you need to be registered for MOSS.
The Cost of Compliance
Preparation and planning are a vital part of the cross-border trade journey. Make sure you factor in the expense of complying with local taxes like VAT, including the cost of translation, software, and expert advice. It should sit alongside other regular expenses such as web hosting and accountants’ fees.
Circumstances unique to your business will dictate which VAT rules are relevant to you. Do your homework and your sums. Many businesses who have already made the leap to international expansion find the cost of compliance is far out-weighed by the increased sales and profits.
I wish you all the best with your international expansion plans!
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