Dropshipping Vat Taxes to Sell in European Union Discussed

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VAT for eCommerce Companies Selling in the European Union, in Simple Terms

The European Union’s eCommerce revenues hit €621 billion in 2019, and VAT fraud costs EU Member States as much as €50 billion annually.

The reason? While the EU has standard VAT rules, each country may apply them differently—and international eCommerce only complicates matters.

If you’re worried that tax legislation can be complicated then don’t be afraid! For eCommerce companies that sell in the European Union, we are taking a dive into everything you need to know about VAT, in simple terms.

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.

How is value added tax calculated and charged in the EU?

VAT is charged as a percentage of the price of a product; how big a percentage lies with individual EU countries.

Businesses work out the VAT they have earned per fifth, and take off the sum they have spent on their own sales. Everything that remains goes to the revenue authorities.

This ensures that VAT is applied fairly and neutrally across the supply chain, rather than overburdening those in pecking order downwards.

Why are EU countries all applying the same tax?

The six founders state all taxed exports differently when the EU was created. Since taxes were applied at every stage of the production process, it became very difficult to figure out how much of the final price of a product was tax.

VAT fixes this, providing for a transparent, neutral tax structure that prevents EU countries from unfairly subsidising exports. Clearly we can work out how much tax at the export point gets rebated.

Of course, with only six countries to be accounted for that was nice and simple. Nowadays, applying VAT across EU borders with dozens of countries still takes a bit of brainwork.

Why are EU countries all applying the same tax?

The six founders state all taxed exports differently when the EU was created. Since taxes were applied at every stage of the production process, it became very difficult to figure out how much of the final price of a product was tax.

VAT fixes this, providing for a transparent, neutral tax structure that prevents EU countries from unfairly subsidising exports. Clearly we can work out how much tax at the export point gets rebated.

Of course, with only six countries to be accounted for that was nice and simple. Nowadays, applying VAT across EU borders with dozens of countries still takes a bit of brainwork.

How does value added tax work in the EU?

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.

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
  • The territory of Büsingen
  • The island of Heligoland
  • Mount Athos
  • Campione d’Italia
  • The Italian waters of Lake Lugano
  • Livigno
  • The Canary Islands
  • Ceuta
  • Melilla
  • The Channel Islands
  • Gibraltar

But VAT does apply to:

  • Monaco
  • The Isle of Man
  • UK bases in Cyprus

The combination brings its own complications to the overseas territories straddling EU membership, as well as countries outside the EU at large.

If I sell from outside Europe, do I pay VAT inside the EU?

Whether VAT applies to transactions from a non-member state that you make in the EU depends on whether the consumer has a VAT registered number (VRN). If your client does not have a VRN, they are a normal user and you are charging VAT.

If your customer has a legitimate VRN, they are an entity and you do not charge VAT. This is because through the reverse charge process, they ‘re basically responsible for their own VAT.

EU VAT registration

You will have to register for EU VAT anyway, charge it where appropriate, keep records and request a quarterly return. The VAT mini one stop shop (MOSS) makes this simpler.

Using the MOSS, you choose which EU country you would like to have a VAT base in. That is giving you a VRN to your company. When it’s time to file your return, this is what you do to the MOSS in your country of choice.

The MOSS then figures out how much tax is due on your behalf to the authorities in all the EU countries where your company is involved, and ensures that everyone gets paid.

Your main responsibilities, other than record keeping and filing reports, are to know who the clients are, and where they are.

Businesses will be issued with a European VAT number, private individuals will not. Buyers may in some cases request a fake number to avoid paying tax, so you should check the VAT number on the EU Commission site.

As for where they are, you can ask for the following two pieces of evidence:

  • Billing Address of the Customer
  • Their bank’s address
  • Country that issued its credit or debit card
  • An IP address for your laptop
  • Their SIM card number, if they purchase with mobile

You must also document this information and hold it for ten years, for each customer.

Anything else to say?

You will also need to be aware of EC Sales Lists (ESLs) if you are shipping into or around the EU. These track B2B sales and transfer in stocks, managing taxable supply through EU countries. They are charged with returning your VAT.

You will also need a European Operator Identification Number (EORI) if you’re shipping goods to the EU from outside. This recognises shipments along with your VRN, and helps you to recover VAT charged at customs.

What happens if I don’t pay European VAT?

EU crackdowns are now widespread on eCommerce websites and on individual sellers. Failure to comply with the law will leave you with:

  • Penalty fines
  • Demands for backdated payments
  • Loss of account with Amazon or eBay seller
  • Investigations into your company

That really should go without saying, but just don’t commit tax fraud, complete stop.

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