If you’re opening a business in or expanding to the European Union, you may not be aware of your obligations when it comes to value added tax (VAT). Because of the open trade between EU countries, the obligation to pay this goods tax often falls on the exporter, as opposed to customs. Changes to the rules on digital services within the past few years have complicated matter somewhat - and a new set of rules on cross-border trade is on the way.
The new rules and guidelines are designed to favour EU businesses by altering thresholds, as well as clamping down on non-EU businesses avoiding tax. To get to grips with the current and upcoming legislation, here’s a brief guide to your obligations from 2018 onwards as an EU seller, and the best ways to pay tax on cross-border and global transactions.
Current cross-border VAT rules
At present, EU businesses selling to other EU businesses do not need to worry about VAT - so long as the other business has a valid VAT number. The business receiving the goods must account for the VAT as if it was selling them, at the rate of VAT local to that business.
The issue arises when you’re selling to consumers in another EU jurisdiction. If your total sales to that country exceed its annual threshold - either €35,000 or €100,000, depending on local law - you are obligated to register for VAT in that country.
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For a large or predominantly online business, this could mean reporting your VAT to dozens of countries each year. The European Commission calculates that on average, businesses pay €8000 in VAT each year for every territory they sell to, which could be 28 different countries.
This presents unique bookkeeping requirements, as well as having to deal with paperwork or online forms in the language of that country. For many businesses this is a time-consuming and resource-intensive process, and is often outsourced to professional accountants.
What is MOSS VAT? And how does it affect digital services?
The rules are slightly different if you’re selling ‘digital services’, such as ebooks, music, movies, games, or other services rendered online. As global online competition was deemed to have an unfair advantage, the EU’s ‘place of supply’ rules were significantly amended in 2015.
Wherever in the world your business is located, you are now obligated to calculate and charge VAT on digital services at the rate local to EU customers. The main difference is that sellers of digital services can make use of the Mini One Stop Shop (MOSS) VAT service.
By registering with a MOSS VAT online portal in any EU jurisdiction, a business can more easily pay all of its digital VAT obligations. By sending a quarterly MOSS VAT return and payment through the portal, you can pay all your VAT obligations without having to register in each territory.
New cross-border VAT rules
After a year of consultation, new cross-border VAT rules were finally ratified in December 2017, and are due to come into force from 2021. They are designed to make EU business more competitive, to simplify the process of paying VAT, and to clarify the position of online sellers.
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The big news is the extension of MOSS to all online sales from all jurisdictions, not just the sales of digital services. Countries around Europe will be expected to relaunch their VAT One Stop Shop services by 2021, to cater to the influx of business from inside and outside the EU. The EU-wide refresh is expected to make the sharing of information between countries even more efficient, and should further expedite the process of paying for cross-border VAT.
The rules have also been changed to benefit small and micro-businesses. A yearly 10,000 VAT threshold will be implemented from 2019 onwards, under which businesses will only have to pay VAT to their local government. In addition, companies with less than €100,000 in cross-border sales will only need one piece of evidence to locate their customers, rather than the current two.
New VAT rules for foreign sellers
Elsewhere, large online marketplaces will now be required to guarantee that all of their sellers have valid VAT numbers before they are allowed on the platform. The VAT exemption on consignments of non-EU goods under €22 is also being revoked, preventing businesses on these platforms from shipping goods VAT free to EU-based fulfilment centres.
There are also improvements for foreign businesses sending goods into the EU, however. Trusted sellers and those who are MOSS registered will find that consignments valued under €150 are no longer stopped for VAT clearance and collection, expediting the shipping process.
For many foreign sellers, it is likely that VAT charges will be subsumed and catered for by postal services. Rather than declaring for individual shipments, postal operators will now be allowed to report VAT on a periodic basis. Costs are expected to decrease for consumers too, who should see increased competition driven by a newly levelled playing field.
Non-EU businesses looking to use the new MOSS service may want to look to Ireland. The UK was the previous favourite destination for English language MOSS registrations, but Brexit has cast an uncertain light on the future of UK VAT obligations. Ireland is now the only remaining native English-speaking country in the EU, and operates a very similar MOSS portal. (For more information and a free guide on how start your business in Ireland, see our article 'Why You Should Be Setting Up A Company in Ireland'.)
While the impending changes are extremely promising for businesses, the majority of them do not come into force until 2021. For now at least, you will have to seek help from a specialist accountant to fulfil your cross-border VAT obligations in any EU country you trade with.
For small and micro-businesses however, 2019 marks a shift in VAT obligations that could save you thousands every year. And from 2021, the process of paying VAT in or outside of the EU - as well as the whole online shopping landscape - looks to be changing for the better.
For more information on your VAT obligations when trading within or to the EU, help with MOSS VAT, other tax advice or any accountancy requirements, please don’t hesitate to contact us on 0033 (0)1 53 57 49 10 or email us from our contact page.