VAT within Member States
The European Union’s Value Added Tax (VAT) system is semi-harmonized: while the guidelines are set out at the European Union-level, the implementation of VAT policy is the prerogative of Member States. The VAT Directive allows Member States to apply a minimum fifteen percent VAT rate. However, they may apply reduced rates for specific goods and services or apply temporary derogations from VAT. Therefore, the examination of VAT rates by Member State is strongly recommended.
In addition, the European Union applies VAT to sales by non-European Union-based companies of electronically supplied services to European Union-based non-business customers. U.S. companies that are covered by the rule must collect and submit VAT to EU tax authorities. As of 2015, telecommunications, broadcasting, and electronic services are taxable at the place where the customer resides. In the case of businesses, this means either the country where the business is registered or the country where it has a fixed premise receiving the service. In the case of consumers, it is where they are registered, have their permanent address, or otherwise live.
As part of the 2015 legislative changes, the Commission launched the mini One Stop Shop (known as MOSS) scheme, the use of which is optional. It is meant to facilitate the sales of electronically supplied services from taxable to non-taxable persons located in Member States in which the sellers do not have an establishment to account for VAT. In 2021, this service will be extended to cover online sales of goods and services other than electronically supplied services.
The mini One Stop Shop scheme allows taxable persons (namely, sellers) to avoid registering in each Member State where the product would be sold. A taxable person who is registered for the mini One Stop Shop in a Member State (the Member State of identification) can electronically submit quarterly mini One Stop Shop VAT returns detailing supplies of electronically supplied services or other sales to non-taxable persons in other Member States (the Member State of consumption), along with the VAT due. On February 12, 2020, the European Union adopted Commission Implementing Regulation (EU) 2020/194 concerning VAT on e-commerce. This regulation provides details for the registration in the VAT One Stop Shop and the Import One Stop Shop (see below).
In November 2019, the Council adopted new regulations that will pave the way for a smooth transition to new VAT rules for e-Commerce: Council Directive (EU) 2019/1995, which amends Directive 2006/112/EC regarding provisions relating to distance sales of goods and certain domestic supplies of goods, and Council Implementing Regulation (EU) 2019/2026, which amends Implementing Regulation (EU) No 282/2011 regarding supplies of goods or services facilitated by electronic interfaces and the special schemes for taxable persons supplying services to non-taxable persons, making distance sales of goods and certain domestic supplies of goods.
July 1, 2021 VAT Changes
As of July 1, 2021, changes were introduced to the way that VAT is charged on online sales, whether consumers buy from traders within or outside the European Union:
Prior to these changes, goods imported into the European Union valued at less than 22 euro by non-EU companies were exempt from VAT. This exemption has now been lifted so that VAT is charged on all goods entering the European Union – just like for goods sold by EU businesses. (Under the previous system, certain unscrupulous sellers from outside of the EU mislabeled the consignment of goods to benefit from this exemption, which led to an estimated seven billion year in fraud annually).
Previously, e-commerce sellers needed to have a VAT registration in each Member State in which they have a turnover above a certain overall threshold, which varies from Member State to Member State. With these changes, these thresholds were replaced by one common threshold of 10,000 euro above which VAT must be paid in the Member State where the goods are delivered (that threshold already applied for electronic services sold online). An online seller would register for the One Stop Shop to address all of their VAT obligations for their sales across the entire European Union. Once registered, the seller could pay VAT in the One Stop Shop for all of their EU sales via a quarterly declaration, and the One Stop Shop system would transmit that VAT remittance to the respective Member State. Sellers outside of the European Union can also take advantage of this system, and prices should include VAT.