The EU issued tough rules in 2015 and 2021 for non-EU businesses that do e-commerce with consumers in the EU. The EU is an important marketplace with 27 member countries.
These rules apply the destination principle – EU VAT is collectible at the VAT rate in the customer’s country.
The EU rules distinguish between B2B (business to business) and B2C (business to consumer) services. Below we discuss B2B rules.
EU Member States:
The 27 EU Member states are:
Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain and Sweden. The United Kingdom is no longer counted as a member of the EU, it is in a transitional phase of “Brexit”.
B2B:
In the case of B2B, non EU businesses supplying to EU businesses normally need to take no action. Instead the EU business customer must account for the VAT to its own national VAT authority at the VAT rate prevailing in its own country. This is known as the reverse-charge mechanism.
For example, if a US company provides a digital service to a French business, the US business generally takes no action and the French business accounts for VAT on the transaction to the French VAT at the French VAT rate.
When is VAT Due?
If a non-EU business supplies digital services and the customer doesn’t provide an EU/UK VAT registration number then the supplier should treat the transaction as a B2C supply and charge the VAT due in the customer’s country.
If the customer is unable to supply a VAT registration number but claims they are “in business” but not VAT registered because, for example, they are below their country’s VAT registration threshold, the supplier may consider accepting other evidence of the customer’s business status e.g, a link to the customer’s business website or other commercial documents.
Where is the consumer?
A business which makes cross-border digital service supplies should generally obtain and keep two pieces of information to evidence where a consumer normally lives. This demonstrates that the correct rate of VAT has been charged and will be accounted for to the correct EU country.
For many businesses this requirement may be challenging. So, for businesses that use payment service providers, the the following approach may be considered:
(1) At the point of sale, ask the consumer to provide details of either their billing address, including the member state, OR their telephone number, including the country dialing code.
(2) When the consumer pays for the digital service, obtain from the payment service provider a notification advice containing the 2 digit country code of the consumer’s member state of residence as listed in their records.
Next Steps:
Please contact us if you need to discuss the above or any other business matter.
Always consult experienced professional advisors in each country concerned – we can help arrange this.
© November 17, 2024