eCommerce sales in the European Union reached €717 billion in 2020, yet VAT fraud costs EU member states as much as €50 billion each year. The reason? While the EU has standard rules on VAT, they may be applied differently in each country—and international eCommerce only complicates matters.
If you’re worried that tax laws can be complicated then fear not – we’re taking a dive into everything you need to know about VAT for eCommerce companies selling in the European Union, in simple terms.
What is VAT?
Value Added Tax (VAT) is applied to most goods and services traded in the EU. Any business whose turnover is above a certain threshold generally adds VAT to the price of what they’re selling there. That threshold used to be different for each EU country. Since July 2021 a EU-wide VAT threshold of €10,000 dictates VAT-subjectivity.
VAT is also known as a general tax since it applies to more or less all goods and services. It’s a consumption tax, meaning it’s technically paid by the customer, not the business. But by adding VAT to the price paid by consumers, businesses effectively collect the tax on the EU’s behalf.
How is VAT calculated and charged in the EU?
VAT is charged as a percentage of a product’s price; how large a percentage is up to individual EU countries.
Every quarter, businesses work out the VAT they’ve collected, then take away the amount they’ve paid on their own business purchases. Whatever’s left goes to the revenue authorities.
This ensures VAT is applied in a fair and neutral manner across the supply chain, rather than overburdening those lower down in the pecking order.
Why do EU countries all use the same tax?
When the EU was created, the six founder states all taxed exports differently. Since taxes applied at each stage of the production process, it became very difficult to work out how much of a product’s final price was tax.
VAT fixes this, providing a transparent, neutral tax structure which prevents EU countries subsidising exports unfairly. We can clearly work out how much tax gets rebated at the point of export.
Of course, that was nice and simple with only six countries to account for. Nowadays, with dozens of countries, applying VAT across EU borders still takes a bit of brain work.
How does VAT work in the EU?
Each individual EU country sets its own specific rate of VAT. By law, this rate only has to be higher than 15%, or 5% for specific goods and services which qualify for the reduced rate.
You can find the individual rates for each country on that country’s relevant tax authority website. The European Commission site has links to each authority.
However, European VAT applies in some cases and gets added to the price directly, along with an indication that the price is VAT inclusive. In other cases, VAT does not apply and should be left off the price.
What VAT do I pay when selling between EU countries?
How VAT applies in the EU depends on what you’re selling, and to whom. Goods and services are viewed differently, as is the distinction between selling B2B and B2C.
If you’re selling goods B2B
You don’t charge VAT if you’re selling to someone with an EU VAT number. You still deduct any VAT you paid in order to make that sale from your quarterly return. If the customer doesn’t have an EU VAT number, you apply your country’s VAT to the sale.
If you’re selling goods B2C
You apply their country’s VAT to the sale and you should register your business for VAT in the customer’s country or register for the One-Stop-Shop (OSS). You don’t need to do this if your sales to other European countries in that tax year fall below the EU-wide threshold of €10,000.
If you’re selling services B2B
You typically wouldn’t charge VAT. It gets paid by the customer themselves at their country’s rate via the reverse charge procedure. Again though, you would deduct the VAT you paid in order to make the sale each quarter.
If you’re selling services B2C
You apply VAT at the rate of your own country for most services. The exceptions are telecoms, broadcasting, or electronic services, which are taxed as per the customer’s country.
If you’re buying goods or services for business purposes
You pay VAT at your country’s rate as if you’d sold the goods. This can then usually be deducted when you declare your own VAT.
The above will apply in most cases, but there are some exceptions which you may need to familiarize yourself with. For example, does VAT apply to overseas territories of EU countries? Yes 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
Overseas territories straddling EU membership, as well as countries outside the EU altogether, add their own complexities to the mix.
Do I pay VAT in the EU if I sell from outside Europe?
Whether VAT applies to sales you make in the EU from a non-member state depends on whether the customer has a VAT registered number (VRN). If your customer has no VRN, they’re a regular consumer and you do charge VAT.
If your customer does have a valid VRN, they’re a business and you don’t charge VAT. This is because they’re effectively responsible for their own VAT via the reverse charge mechanism.
EU VAT registration
Either way, you’ll need to register for EU VAT, charge it where applicable, keep records, and submit a quarterly return. This is made easier by the VAT One-Stop-Shop or OSS.
When using the OSS the EU country in which you business is registered will be responsible for all VAT payments.
You still have to add the country-specific VAT rates on each sale. However you can pay all VAT to your home country, which means you no longer have to register for VAT in other European countries.
The OSS then works out how much tax is due to the authorities in all the EU countries in which your business is active, and makes sure everyone gets paid on your behalf.
Your main responsibilities, other than keeping records and filing returns, consist of making sure who and where your customers are.
Businesses will have a European VAT number, private individuals won’t. In some cases, buyers might submit a false number to avoid paying tax, so you should validate the VAT number on the EU commission site.
As for where they are, you should request two pieces of evidence from the following:
- The customer’s billing address
- The address of their bank
- The country which issued their credit or debit card
- Their device’s IP address
- Their SIM card number, if they buy using mobile
You also need to record and keep this information for ten years, for each customer.
Anything else to declare?
When you’re shipping into or throughout the EU, you’ll also need to be aware of EC Sales Lists (ESLs). These track B2B sales and stock movement, managing taxable supply throughout EU countries. They’re filed with your VAT return.
If you’re shipping products to the EU from outside, you’ll also need a European Operator Identifier Number (EORI). This, along with your VRN, identifies shipments and lets you reclaim VAT paid at customs.
What happens if I don’t pay European VAT?
EU crackdowns on eCommerce platforms and individual sellers are now commonplace. Failure to observe the law could land you with:
- Penalty fines
- Demands for backdated payments
- Loss of your Amazon or eBay seller account
- Investigations into your business
This should really go without saying but, don’t commit tax fraud, full stop.
