February 17th, 2021
What is VAT?
VAT stands for value added tax, it is a tax that is added at every step of the supply chain where value is added. It starts from raw materials, on to manufacturers, manufacturers on to suppliers, suppliers on to the wholesalers, wholesalers on to the final customers. The VAT goes all the way down the supply chain where it reaches the end consumer. The end consumer will be carrying the VAT and cannot reclaim VAT.
Over 140 countries around the world use this system. In the EU, the European Union guidelines are used.
It is Important to realise that VAT is not a tax burden for you if you have a business liable for VAT; an EU registered business can always reclaim or offset VAT charged to the business on purchases.
So how does it work, what triggers a VAT liability?
There are 5 main triggers:
1. Holding stock in a EU country
If you move goods into a fulfilment centre in a EU country, this will trigger a VAT obligation. Make sure to register before importing your goods, so you can reclaim import VAT on your VAT return.
2. Selling via an online marketplace in the EU
This doesn’t technically trigger a VAT registration, since it is not covered in the EU VAT directive. However, over the last few years the tax authorities have been scrutinizing the online marketplaces, since fraud has occurred.
There are changes in the EU legislation at hand to make the online marketplaces liable for VAT.
Some marketplaces already shift the responsibility for VAT collection to the sellers, therefore you have to be VAT registered before you can sign up. Specifically for Amazon sellers; keep an eye on the different requirements, they will vary from country to country.
3. Exceeding a EU distance selling threshold
What is the EU distance selling threshold?
The EU distance selling thresholds helps sellers to sell cross border within the EU without high cost of compliance. It allows you as a seller to test the different markets and to see where your end customers are before you put in time and cost into compliance.
The distance selling thresholds apply if you hold stock in one EU country, and sell to private individuals in another EU country. You can sell up to EUR 35,000. Germany, the Netherlands and Luxemburg use a EUR 100,000 threshold per calendar year.
If your sales stay below this threshold, you will charge the local VAT rate.
If you exceed the threshold, you need to register for VAT and pay VAT in the inbound country. So the VAT obligations shift from the sales departure country to the sales arrival country.
In July 2021, the threshold will be lowered to EUR 10,000 for all EU countries.
4. Dropshipping from a supplier within the EU
Dropshipping is a retail fulfilment method where a store doesn’t keep the products it sells in stock. Instead, it purchases the item from a third party and has it shipped directly to the customer. As a result, the seller doesn’t have to handle the product himself.
The biggest difference between dropshipping and the standard retail model is that the selling merchant doesn’t stock. Instead, the seller purchases inventory as needed from a third party, usually a wholesaler or manufacturer, to fulfil orders.
Since the seller still is the owner of goods before they are transported to the final customer, he is liable for VAT in the country the stock is held.
5. Importing goods from outside the EU to the final customer.
For instance if you hold your stock in the US and your customer is located in Italy, VAT and duties have to be paid. You need to decide if this will be done by you or by your customer. The one who pays will be the importer of record. Duties are non-reclaimable, but the VAT is. If you want to be the importer of record and want to reclaim VAT then you need to be registered in each country you are importing into. You cannot reclaim without a VAT registration in that country.
As an online seller it is very important to know your VAT obligations. Not being compliant will lead to paying the VAT and a penalty which is always a percentage of the VAT owed. The potential exposure is relatively high.
If you would like to work out where and when you will need to VAT register in a EU country, please contact us for more information.