Intra-Community VAT: How it Applies to Cross-border Business
The European Union (EU) has enacted a trade policy between its member countries. Within the EU, sales aren't treated as imports and exports. Instead, the EU has established specific rules to make trading between countries a straightforward process known as intra-community VAT.
Intra-Community VAT Defined
Intra-community VAT is a specific set of regulations applicable to cross-border ventures in the European Union.
Each one of the EU Member States has its own VAT laws. There is also a separate, common VAT law for commercial business transactions between professionals and companies operating within the European Union. Intra-community VAT provides the countries within the European Union with a broad framework to expedite these activities. The EU VAT Directive coordinates the regulations for the tax for all EU countries.
Types of Intra-Community Transactions
The two main types of intra-community transactions are:
- Intra-Community Suppliers of Goods and Services: A business sells products or services to other EU countries
- Intra-Community Acquisitions of Goods and Services: A business buys products or receives services from a supplier in another EU country
How is Intra-Community VAT Implemented?
The EU VAT Directive is administered through the VAT laws of each member country. The rules are identical for calculating the VAT of all intra-community business transactions between member countries.
Factors Influencing the Way VAT is Treated
The way VAT is treated depends on the following factors:
- Type of goods or services involved
- Type of transaction - either a sale or purchase
- Flow of goods
- Buyer and seller conditions - whether it is a business-to-business (B2B) or a business-to-consumer (B2C) transaction
Other aspects of the transaction, such as transport, terms and documentation provided by the customer and the supplier, can influence how intra-community VAT is handled.
As a fundamental premise, customers and suppliers must each have a valid VAT number to complete intra-community transactions.
Intra-Community B2B Transactions
In a business-to-business transaction, the first question is where to tax the company supplying the goods.
The basic rule when importing goods is that taxes are charged in the country where the goods are received. In other words, the intra-community goods would be reported as exempt in the shipping country provided the following conditions are met:
- There is a movement of products between member countries.
- The customer's intra-community VAT number in the arrival country is valid.
If both conditions are satisfied, your invoice can read 0% for intra-community VAT when shipping your products.
Intra-Community Acquisition of Products - B2B
Suppose your company receives an invoice with 0% VAT with the intra-community supply VAT exemption for items purchased. In this case, it must apply reverse charge VAT.
How to Apply Reverse Charge VAT
Your Accounts Department will have to calculate the VAT manually. Next, the VAT is reported as due and as a deductible on your company's VAT return.
For example, suppose Business X issues an invoice with a reverse charge to Business Y for €200. In that case, Business Y must pay the face amount of the invoice to Business X (€200) and no VAT is owed.
When Business Y prepares its VAT return, the company manually calculates the VAT on the €200. For this example, we'll use France's VAT rate of 20%). Twenty per cent of €200 equals €40. The €40 is reported under the "Sales" section of Business Y's VAT return (as output VAT). It is listed under the "Purchases" section of the VAT return (input VAT). Since the two amounts result in a zero, no VAT is owed to the tax authorities on this particular invoice and there is no refund.
Intra-Community Sales of Goods to Customers - B2C
This type of sale usually refers to a situation where a product is purchased online and delivered to a private customer in a different EU country. An example of this is when an online store sells its wares to individual customers in France.
The intra-community VAT rules for B2C transactions are subject to an annual threshold of €10,000. The threshold applies to all "intra-community distance sales and telecommunications, broadcasting and electronic services (TBE services)."
If your intra-community sales are lower than the annual threshold, VAT is charged at your country's standard VAT rate. Once your business meets the intra-community threshold for another member country, VAT is charged at the usual rate for each destination country.
When calculating the annual threshold, take note that it is a global one. You should not apply it to each country that receives your products. Instead, you calculate the threshold based on all intra-community sales and TBE services.
The global threshold only applies to supplies with permanent addresses in an EU country. The goods must originate in one of the EU member countries.
**Note: The exemption threshold doesn't apply if the supplier has facilities outside the EU or keeps inventory in multiple EU countries.
One-Stop Shop Schemes
One-stop shop (OSS) schemes grant e-commerce companies the right to register for VAT once per year for all their EU sales if they wish. The business can report all its European sales on one VAT reclaim form and pay VAT in one country.
There are three schemes sellers can use. The seller's choice depends on the type of supplies it sells and the country it operates in:
- Union OSS
- Non-union OSS
- Import OSS
Take note that participation in these schemes is voluntary. Businesses with online intra-community distance sales or import distance sales can also opt to register for VAT in each country where they ship products to customers.
Business Transactions Covered by OSS Schemes
When companies sell products in their home country to customers situated in the same country, the sales are not covered by an OSS scheme. These sales are reported on a VAT return in the usual fashion.
The deal will count as intra-community distance sales if the products are imported from another EU country. In that instance, they should be reported on the OSS return.
Other sales that would be included on the OSS return, since they are covered under new VAT rules for e-commerce companies include the following:
- Distance sales of products imported from countries outside the EU when imported in shipments worth less than €150
- Distance sales of products and services to a non-taxable customer in another EU country
What are the Benefits of OSS Schemes?
Participating companies get several benefits from OSS schemes and e-commerce VAT rules in the EU, such as:
- They may be able to avoid registering for VAT in several countries because they have customers in multiple EU countries
- Your Accounts Department doesn't need the extra work that comes with registering VAT in multiple countries. An OSS scheme means the entire process is streamlined and saves time
- Spending less time administering the OSS scheme also means lower expenses. Your Accounts Department staff can spend their time working on other tasks more likely to generate income for the business, such as invoicing or handling accounts receivable matters
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