Online trading: great opportunities for growth if you take each VAT step carefully
Online retailers with cross border ambitions should carefully consider a few important issues while selling online goods to consumers in another EU country. Complying with local VAT regulations is often complicated and time-consuming, but with the right research and the right advice, (costly) VAT mistakes can be avoided and your e-commerce business can be in control from a VAT perspective.
Let's have a closer look at the most important practical areas of concern when selling online goods to private consumers in other EU countries and discuss the points of interest online retailers run into:
- Understand and monitor the distance selling threshold.
- Take the right steps to register for VAT when breaching the threshold.
- Comply with the local VAT regulations after registration.
Understand and monitor the distance selling threshold
Every country has a distance selling threshold in place. Many international online retailers are not aware of these thresholds. It is very important to investigate the level of the applicable distance sales threshold when initiating the sales process in a new country. From the very first sale to this country, be sure to keep a record of the total sales to this country. This will allow you to monitor the total sales to each country and anticipate breaching a threshold way ahead. As soon as the threshold is breached, your company needs to register for VAT in the country of arrival and charge local VAT to the consumers.
Did you know every company may also choose not to apply the distance sales thresholds and charge local VAT from the very first sale? In this situation you do not have to monitor the sales thresholds, but on the other hand, it leaves you with a compliance burden in many EU countries.
A recent public consultation published by the European Commission, showed that understanding and monitoring the distance selling threshold is a real issue among the majority of online retailers. The most common issues, mentioned by the respondents in the above mentioned public consultation are shown in figure 1.
Take the right steps to register for VAT when breaching the threshold
VAT registration procedures vary significantly per country. It is important to know which requirements need to be met when registering for VAT in a specific country. Pay attention to, for example:
- the required documents. Do these need to be translated into the local language? Do they need to be apostilled?
- the parties involved. Is it mandatory to appoint a tax representative when setting up the registration? Is it advisable to seek help from local experts?
- the language. Is it possible to communicate in English, or are documents and communication restricted to the local language?
- the time frame involved regarding the registration process, as it can take up to six months to get the VAT number.
Comply with the VAT regulations after registration
Bear in mind that, after breaching the threshold, the local VAT regulations apply to online sales of the country of arrival. The following issues could have an impact on your systems and processes:
- VAT percentages could lead to either different profit margins in these countries or reassessment of your selling prices.
- Different invoice requirements may result in a need for you to adapt the invoice format for every country.
- Deadlines for VAT returns and the payment of the VAT due vary per country and should be met at all times.
- If the compliance process is only possible in the local language, it would be advisable to seek a local expert for advice to make sure the compliance obligations are correctly fulfilled.
The European Commission's public consultation also made it clear that online retailers face difficulties when dealing with VAT in other EU countries. Figure 2 shows the most common issues mentioned by the consultation respondents, when it comes to dealing with VAT.
In summary, the current VAT system results in various (financial) burdens to online retailers with online cross border sales:
- a risk of extra costs involved when your e-commerce business does not comply with the VAT regulations per country; and
- a high administrative burden as a result of the complexity of the local VAT regulations.
It is very important for the system to be changed soon in order to make sure doing business in the EU is not made difficult for online trade by all these burdens.
The European Commission has noticed the urgency for new harmonised VAT rules throughout Europe to make cross border trading less complex, less costly and less risky.
Until these new rules apply, online retailers with cross border ambitions are advised to only approach new international markets once a thorough assessment of the local VAT regulations has taken place.