E-commerce in the EU: Should you think about VAT?
If you are thinking of moving a business to Europe, you are probably aware that you have access to a market of 500 million consumers in an area that generates approximately 23% of global nominal GDP. E-commerce in the EU is a lucrative opportunity for your business.
Furthermore, the EU’s statistical office Eurostat, believe that cross border E-commerce in the EU is not yet fully exploited by enterprises and that E-commerce in the EU has the potential to reshape the European Single Market for enterprises and private consumers by enabling price and product-related comparisons in a borderless market environment.
B2C E-commerce in the EU falls under the regulatory regime called distance selling. It is crucial to consider international VAT obligations because different VAT legislation can have significant effects on profit margins, and, if handled incorrectly, can lead to significant penalties.
So, if you are thinking of engaging in EU distance selling, here are some questions to help keep your business one step ahead. (Please note, different legislation applies to the trade of services and to E-commerce trade between non-EU and EU countries).
Where are my customers located? Quite simply, different VAT rules apply depending on where your customers are.
What are the sales figures for each country we sell to? When your figures exceed the VAT distance selling thresholds, EU VAT regulations require companies to register for VAT as non-resident traders in each country. In France this threshold is €100.000 per annum. (Article 34 of the VAT directive 2006/112)
Have we obtained VAT Registrations? Where this threshold is crossed, your business needs to register for VAT. An application will need to be made directly to the tax authority in the country where you’re making sales. So, once you have registered for VAT, you will have a new local VAT number, and you will need to ensure you trade in compliance with local rules.
Is our VAT treatment correct? It is crucial that you understand what VAT rate applies to your sales in each country where your customers are located as not all goods are liable to the same rate of VAT. For example, the standard French VAT rate is 20% but certain goods have different rates, such as food and books (5.5%). (See Code Général des Impôts)
Do we have retrospective VAT issues? Did you pass the threshold before applying for VAT Registrations? If so, it may be necessary to liaise with relevant European tax authorities to resolve these retrospective VAT issues.
Okay, we are doing E-commerce in the EU and have now registered for, and are charging, local VAT. How do we accurately ensure reporting compliance? Keep in mind that each EU Member State has its own reporting compliance. For France:
- Invoices must be issued according to French law,
- VAT declarations must be made every month, or in certain instances every quarter, and
- A separate Intrastat filing has to be completed when sales pass €460.000 per annum. (INTRASTAT Regulation No 3330/91 of 7 November 1991)
Are we up to date? VAT legislation is also frequently subject to change, so make sure your business is informed about any changes that could affect your compliance.
How does all this affect our business strategy? Having to account for different VAT rates will affect your profit margins. For example, a product sold in the France will have 20% VAT on it, but the same sale in Hungary will have 27% VAT (highest in the EU). With this information in mind, we recommend you analyse your pricing strategy.
These questions lead you through some of the principal tax issues you will encounter when engaging in E-commerce in the EU. However, there are intricacies that vary depending on your industry, size and point of distribution. Get in touch with our expert cross-border team so we can take care of and manage your company’s fiscal situation, enabling you to dedicate yourself to the growth of your business.