As a US based business, you’re probably generally familiar with rules concerning physical presence and your sales tax obligation. (If you’d like a refresher, check out our nexus guide!) However, the rules are different outside the United States, and, often times, physical presence is not considered a threshold for a collection/remittance obligation.
For instance, if you’re selling electronically supplied services into the European Union, you are required to register, collect, and remit VAT on your sales. The EU has enacted rules to make this obligation simpler, but many businesses selling electronically supplied services are unaware of this requirement and are exposed to compliance risks.
What is an electronically supplied service?
The term electronically supplied services covers a broad range of transactions including; supplying software (and updates), images, films, games, music, distance teaching, and website supply and hosting. That is not the full list, as a broad range of remotely supplied sales fall under the electronically supplied services definition.
Who is required to register and collect?
If you only sell to VAT registered businesses (B2B), those that provide you a VAT registration number at the time of sale; or you only sell through a marketplace, then you don’t have to register. For B2B sales, your purchaser will self-assess the VAT. For sales through a marketplace, the marketplace operator is responsible for ensuring VAT is collected and remitted.
But all businesses selling electronically supplied services directly to consumers (B2C) in the EU are required to register and collect. There are no physical presence standards nor is there any revenue or sales thresholds. Under the rules, VAT is due from the first euro you charge to a European customer.
What does this mean for my sales into the EU?
For the most part, all of these sales are subject to the standard VAT rates in all countries and you don’t have the same questions/issues related to product taxability like you do here in the US. Essentially, a business selling these services in a B2C situation should be calculating and charging the VAT rate applicable in the customer’s country. This means you should be collecting French VAT of 20% on your sales into France and 27% on your sales into Hungary.
Yes, those rates are correct. The minimum standard VAT rate allowed in the EU is 15%. Currently, Hungary has the highest rate of 27%.
How can I comply with those rules?
The EU has created a simplified system to allow businesses to comply with this tax collection and remittance requirement. The Modified One Stop Shop (MOSS) scheme was set up to make it easy for businesses outside the EU to comply with these rules.
A business without a location in the EU is allowed to pick one country and register in that country under the MOSS scheme. They will receive a special registration number and they are then allowed to file all the taxes collected to that one country. You must calculate the taxes per each countries rate and report those sales separately on the MOSS return, but the country will then be responsible for distributing the funds amongst the other EU countries.
As an alternative, the business can opt to register in every EU country and report their sales to each country under the typical process. Of course, if you choose this option you need to contend with all the languages in the EU.
The European Union has created an easy to follow MOSS guide for micro-businesses that provides a good summary of the rules and processes.
The European Commission also produced a more expansive guide for those selling electronically supplied services to help you fully understand your obligations.
Is this just a rule in the European Union?
No, though the EU has created a simplified scheme, many countries have changed their rules in recent years to capture VAT on these B2C electronically supplied services. South Africa, Switzerland, Australia and New Zealand are just a few of the countries that have similar rules. Those countries may have a minimum sales threshold before you are required to register, such as South Africa that has a $50,000 ZAR registration threshold.
What should I do?
As it becomes easier and easier to become a global business, you should keep up to date with these changing rules. If you are selling electronically supplied services you should review your sales channel and determine if you are making sales outside the US. If you are selling into the EU, or other countries, you should determine if you are required to register and collect VAT on those sales.
As you can see, the VAT rates in Europe are generally much higher than sales tax rates in the US. The penalties and interest charges in addition to the uncollected VAT can be very expensive for those that aren’t complying and are assessed by a jurisdiction for not collecting the VAT.
While Taxify can’t help you with the international solutions, Sovos, our parent company, can! They supply the compliance and calculation solutions for those who are selling outside the US. Subscribe to our newsletter and we’ll keep you up to date on these rules as they evolve.
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