European eCommerce Taxes Explained
EU eCommerce Taxes Explained
eCommerce taxes, or VAT, is one of the factors that affect the overall shipping costs of eCommerce businesses of different niches. These taxes are a prerequisite for local and international businesses shipping within or outside the European Union, and several factors influence them.
While standard VAT rules may apply to the 27 EU member states, there’s little disparity between the VAT for each member state. In essence, different countries in the European Union may witness different tax rates. E-commerce taxes also vary based on the products and the customers. Hence, B2B eCommerce businesses may be taxed differently from B2C businesses.
So, who determines these tax duties? The European Union.
In 2020, eCommerce sales in the European Union cumulated to €717 billion. While this is a celebratory figure, VAT fraud costs EU member states a yearly amount of €50 billion. With such losses, the EU had no choice but to standardise applicable eCommerce taxes. With the updates to eCommerce VAT rules in 2021, there’s a great need for eCommerce businesses to be aware of the changes. This way, they can make the most beneficial business decisions while remaining tax compliant.
Here’s all you need to know about EU eCommerce taxes in different member states.
- Over 150,000 eCommerce businesses in Europe send and receive millions of packages between each other and internationally yearly. This translates to billions of Euros worth of taxes (VAT) and stamp duties applicable to the entire supply chain, from sellers to consumers, couriers, freight operators, etc.
- With the intricacies of tax laws, which differ from one business type, product and member state to another, understanding the eCommerce tax stipulations for one’s specific condition is key to maintaining a successful business with no tax infringements.
- With Bezos’ inventive fulfilment solutions alongside our eCommerce tax guide for EU countries, businesses of all types and sizes can ship within and outside the European Union for nearly nothing and without hefty tax fees. Start saving now!
What Is VAT?
VAT stands for Valued Added Tax. It’s a consumption tax for goods and services within and outside Europe. This tax is typically charged as a percentage of the package’s value. For consumers, it’s a consumption tax, but for eCommerce retailers, it’s an indirect tax as they append it to the price of their merchandise. Thus, customers essentially pay the tax, but eCommerce businesses collect it on the government’s behalf and relinquish it to them.
Ecommerce taxes in Europe apply to commercial activities involving the production and distribution of goods and services within the EU. These taxes are essential for eCommerce businesses that want to remain operational in the EU. For such businesses to be tax-compliant, they must register for a VAT number once they reach a certain turnover threshold. This is also a requirement if they’re storing their merchandise in an EU member state.
How does EU VAT work?
As previously mentioned, each of the 27 European Union member states has special VAT rates for products of various categories. Ideally, this rate can only be higher than 15% when specific goods and services are in question. It can also be as low as 5% of the merchandise’s value if it qualifies for a reduced rate. However, these rates are determined by several factors, including a VAT threshold.
Who pays VAT?
Ecommerce businesses operating from the EU locally or internationally are subject to value-added taxes. VAT is charged as a percentage of the product’s price and added to this price, which consumers then pay. Every yearly quarter, businesses calculate the VAT they’ve collected, subtract it from their business purchases and relinquish the rest to the revenue authorities.
In Europe (EU), eCommerce businesses must remain VAT-compliant and register for VAT to prevent lawsuits. However, not all businesses are eligible to register. The eligible eCommerce businesses for VAT registration are those:
- Storing their merchandise in a European country.
- Setting up a business in a European country.
- Selling their merchandise from a European country.
- That have reached the annual threshold limit for distance (cross-border) selling.
What is a VAT threshold?
A VAT threshold or a VAT registration threshold is a baseline value that, if exceeded, warrants a VAT registration in the country where the products or services are being sold. This means that if a local or cross-border eCommerce business’ sales exceed this yearly threshold, they’re liable to register and pay for VAT in the country they’re selling or holding goods in. This threshold used to be different for each EU member state. However, since July 2021, an EU-wide VAT threshold has been implemented.
How did the EU’s VAT regulations change?
An EU-wide VAT threshold wasn’t the only change in eCommerce tax regulations, as other rules governing eCommerce taxes in the EU were also altered in July 2021. These modernised changes were necessary not only because of the significant losses due to VAT fraud that EU countries had to bear; they were necessary to accommodate the accelerated changes in eCommerce trade since the pandemic, which the previous EU VAT system couldn’t handle.
These changes include:
- Removal of VAT exemptions
Before July 2021, eCommerce businesses operating in the EU and consumers were exempted from paying VAT on imported goods valued at less than €22. This exemption has since been removed, as all goods imported outside and entering the EU are now subject to VAT. The abolishment of the exemption eliminates the preferential VAT treatment given to goods imported outside the European Union compared to those purchased within.
This removal also checkmates the abuse of VAT exemptions as several businesses mislabeled their consignment of goods to prevent paying VAT, an action that undercut EU competitors, increased financial losses to the EU treasury and compounded the tax burden on taxpayers.
- Abolishment of country-specific VAT thresholds
Previously, eCommerce sellers needed a VAT registration in each EU member state where they made a turnover above a certain threshold. This threshold varied from one European country to the next. Today, an EU-wide VAT threshold of €10,000 has been implemented. In essence, eCommerce businesses operating within the EU that exceed a yearly turnover of €10,000 will have to pay VAT to the member state to which their goods are delivered. Once distance sales exceed this EU-wide threshold, VAT is also due in the receiving countries.
This EU-wide threshold implies that eCommerce businesses would need to register for VAT in each country they deliver to, which seems tasking. Conversely, they can use a One Stop Shop (OSS), which enables online businesses to handle all VAT obligations across the EU from a unified electronic portal. With an OSS, online merchants can register for VAT in their member state, pay the quarterly VAT via the OSS, and have the OSS transmit said VAT to the respective member state.
Another benefit the OSS has over the EU-wide threshold is that the former can be used by foreign businesses that want to expand into the EU while the latter cannot. Also, OSS benefits customers as OSS-registered online sellers include VAT in their prices. Therefore, customers won’t have to be called to pay VAT separately once their product arrives, as it’s already been paid.
- Customs on goods over €150
Imported goods valued at over €150 are susceptible to customs duties, while those under €150 are subject to VAT. However, consumers shopping with online merchants that use Import One Stop Shop (IOSS) will not deal with extra charges or taxes upon delivery, even if their order exceeds €150 or if it comes from within or outside the EU. Without an IOSS-registered online merchant, customers will be subjected to VAT and clearance fees once the order gets to the EU.
VAT for EU member states
Each European Union country is responsible for setting its eCommerce VAT rates, which is why they differ. However, online businesses should be aware of the VAT intricacies, which include:
- Standard rate
- Reduced rate
- Special rates.
Standard rate: This applies to most goods and services. It cannot be less than 15%.
Reduced rate: A reduced VAT rate is typically applied to specific goods and services. It cannot be less than 5% of the product’s value. Electronically-supplied goods and services are not eligible for a reduced VAT rate.
Special rates: Special VAT rates are only allowed in some EU countries and for certain supplies. Special VAT rates could be:
- Super-reduced rates: This is less than 5% and applied to a limited list of goods and services in specific EU countries.
- Zero rates: This is applied to certain sales. With a zero rate VAT, consumers aren’t charged VAT, but eCommerce sellers can still deduct the VAT on purchases directly related to the sale.
- Parking rates: This is applied by some EU countries to goods and services that aren’t included in Annex III of the VAT Directive.
Here are the eCommerce VAT rates for each EU member state:
All other taxable goods and services.
Real estate, foodstuff, domestic flights, etc.
Austria has two reduced VAT rates: 13% and 10%.
Some foodstuffs, alcoholic beverages, domestic passenger transport, clothing, etc.
The Swedish VAT Act grants a 12% first reduced VAT rate to foodstuff and a 6% VAT to books and other publications.
Since Brexit, the laws governing eCommerce taxes in the European Union have significantly changed. From removing tax exemptions to abolishing country-specific VAT thresholds, the EU eCommerce tax system has recorded several alterations.
For eCommerce businesses operating or storing their stock in the EU via full-service fulfilment providers like Bezos, awareness of all VAT-related updates is essential to achieving success while remaining tax-compliant.
Bezos’ innovative fulfilment service enables eCommerce businesses to mitigate VAT costs. We’re IOSS-registered and can guarantee swift imports, order fulfilment and deliveries within and outside the EU. Speak to an expert today to get started!
What are the new eCommerce VAT rules?
The new eCommerce VAT rules are as follows:
- Tax exemptions for goods valued up to €22 are removed.
- The receiving EU country must pay VAT for goods within €0 to €150.
- An EU-wide VAT registration threshold.
What are digital service taxes in the EU?
DST or Digital Service Taxes are revenue taxes on digital services. They include gross receipt taxes and transaction taxes that apply to digital services.
How does VAT work for eCommerce?
B2B companies don’t charge VAT if their customer has an EU VAT number, and B2C companies can apply their country’s VAT to the sale. They can also register their business for VAT in the consumer’s country or use One Stop Shop for multiple countries.