When and how to charge VAT

July 10, 2007 5:48 AM

Is there a simple rule that governs VAT charges for e-commerce between EU countries?

Every EU country has it's own VAT rate (Germany: 19%, Spain: 16% etc.).

So what rate is to be charged if you're a German business selling & shipping a tangible (non-electronic) product to a customer in Spain or the UK?

I'm assuming that if you're an EU business selling & shipping a tangible product to the US you don't charge VAT at all...right?

posted by subpixel to work & money (8 comments total)

It's not an easy question to answer. If you're dealing with a business, grab a lawyer who knows what he's talking about and have him help you out.

I think dealing only inside the EU makes things a bit easier, but going outside the continent (especially to places like China) make things more complicated too, since they have their own rules about what exactly gets taxed.

My (very) uninformed knowledge says that you pay the tax on the recieving end of things, so a UK -> Spain transaction would pay the Spain tax. The problem is that VAT gets paid at every step of the process. The example I've seen is that when you sell the lumber, you pay VAT, when you sell the chair you make from the lumber, you pay the new VAT and claim a refund of the original amount, then when you sell the chair at retail, you pay VAT, and claim a refund. So I'm pretty sure when you cross a border, you pay VAT in the new country and claim a refund in the old, but please please don't quote me on that.
posted by cschneid at 7:02 AM on July 10, 2007

My (very) uninformed knowledge says that you pay the tax on the recieving end of things, so a UK -> Spain transaction would pay the Spain tax.

This is basically correct, except that there is an exception for low volumes of trade where the VAT is charged in the member state of the seller rather than the buyer. Also, there is the issue of who is responsible for accounting for and reporting the VAT; it's not always the seller.

If you're selling to a business in another EU country who is VAT-registered, then you should find out their VAT number, and then you can zero-rate the VAT, and they're responsible for self-charging the VAT in their own country.

If you're selling to a business that is not VAT-registered, or to a private individual, and the value of your sales to that country in the year are below the 'distance selling threshold' for that country, you should charge VAT on the invoice based on your country's rates. Over that threshold, you're liable to register and account for VAT in your customers' country.

Goods dispatched to the USA from an EU country are usually zero-rated, as far as you're concerned. The importer may be liable for some kind of sales tax at their end, but it's not your responsiblity.

The example I've seen is that when you sell the lumber, you pay VAT, when you sell the chair you make from the lumber, you pay the new VAT and claim a refund of the original amount, then when you sell the chair at retail, you pay VAT, and claim a refund.

The trick to dealing with all of this is just to treat each individual buying/selling transaction separately, rather than trying to figure out exactly where the VAT is flowing in the entire lifecycle of purchasing raw materials through to selling the finished goods.

Finally, just a reminder that this is only VAT -- there may be other customs/excise/import/export duties and responsibilities involved. Within the EU it's fairly straightforward, but other countries will have their own rules.
posted by chrismear at 7:17 AM on July 10, 2007

I am an accountant for a big 4 firm, though by no means a tax expert. I would advise you to speak to a VAT specialist (not trying to pitch professional services here but that is what I would do). VAT/Sales tax can quickly become very complicated particularly when dealing with cross-border transactions.

If you don't want to spend a small fortune on external consultancy fees it may be worthwhile having a look at the HRMC site in the UK to see if you can get further advice there.
posted by ClanvidHorse at 7:28 AM on July 10, 2007

IANA Accountant but I think you pay local VAT until your B2C exports to the rest of EU exceeds 300 000 €.

The whole thing is specified under article 17.1 in EU law but my head exploded reading the lex europa site so don't trust anything I said
posted by uandt at 7:35 AM on July 10, 2007

No, no, you pay VAT on the sending end of things. Buying music online from France to France would be 19.6%, but Luxembourg -> France would be 15%. This is why iTunes, Skype, etc. have their European headquarters in Luxembourg.
posted by stereo at 7:35 AM on July 10, 2007

The general rule is that it is the VAT rate of the supplier which applies ("origin" principle). However, if the level of sales in any one Member State exceed a certain threshold (either €35.000 or €100.000 depending on the Member State), then the supplier must register for VAT and charge VAT at the rate applicable in that Member State ("destination" principle).

Note: not €300,000, as mentioned above. If you're running any non-trivial export business, you could easily go over these thresholds.

This is why iTunes, Skype, etc. have their European headquarters in Luxembourg.

Neither of those are selling physical goods. In the EU, the supply of electronic goods is considered a service, and is taxed at the point of supply of the service, which is country of the seller. With physical goods, the rules are different.
posted by chrismear at 8:54 AM on July 10, 2007

The rule of thumb is that as a company you act as a tax collector for the VAT on the goods or services you sell. So, your customers have to pay it.

In return, a company can deduct the VAT it has paid on buying goods and services from third parties, from the amount of VAT it has collected from its own sales. What remains gets paid to the national IRS, [or in same cases the IRS pays the difference back.]

A Spanish company pays the German VAT on the goods or services bought in Germany, but can get that money back if it collects VAT in Spain on its own goods or services, and if it has a European VAT-number.
posted by ijsbrand at 9:35 AM on July 10, 2007

A Spanish company pays the German VAT on the goods or services bought in Germany

That's not generally true. If the Spanish company buys goods from the German company, and the goods are shipped to Spain by the German company (a fairly usual scenario), then:

"The VAT due on the transaction is payable on acquisition of the goods by the taxable customer in the Member State where the goods arrive. This is known as "intra-Community acquisition". The customer accounts for any VAT due in his normal VAT return at the rate in force in the country of destination."

In this case, the Spanish company would account for VAT according to the Spanish rate of VAT, since the goods are being received in Spain.

You simply cannot say "VAT is always charged based on the origin" or "VAT is always charged based on the destination". It depends on who's involved, what's being sold, etc.
posted by chrismear at 10:48 AM on July 10, 2007