You worry about a lot of things as an ecommerce seller. For example, whether or not your new ad is catchy enough to go viral or if this next chargeback will be the one that locks you out of Stripe.
What you shouldn’t have to worry about is planning a two-week vacation to Spain with your family, only to reach the airport in Madrid and be pulled aside by the authorities. What for? Tax evasion, they say. You have tens of thousands of euros in unpaid VAT tax that’s now being requested by multiple EU member governments.
While that’s clearly an extreme scenario, what’s not so extreme is getting an email from Amazon saying they’re closing your seller account due to habitual EU VAT non-compliance.
Like many founders selling in the EU – you may not have even heard of VAT before, especially if you used to only sell inside the US.
So what actually is VAT, and how can you make sure it’s paid on every transaction you have with an EU customer? We’ll talk about the basics below, as well as how OTW Shipping uses software to make your EU sales seamless.
What is EU VAT?
In simple terms, VAT is a type of consumption tax that all EU countries (and others around the world) add to certain goods and services as a percentage of their value. Even though it’s added to every link in the supply chain, ultimately, the end buyer of a finished product is meant to shoulder the tax.
However, it’s on you as a seller to make sure it gets paid.
VAT varies from country to country based on:
Who the buyers and sellers are
Where they’re located
What goods or services are being sold
What part of the supply chain they’re in
In the past, US vendors trying to sell across borders often needed international tax consultants to help navigate the nuanced waters of customs, duty taxes, and VAT.
Lucky for you, the EU has taken pity on foreign ecommerce businesses. As of July 1, 2021, they’ve taken additional measures to simplify the VAT process for you and your buyers.
What You Need to Know About EU VAT
A quick note to start: due to the complexity of the topic, we’re making a few assumptions about your business:
You’re selling a finished physical product or a digital good like software, not raw materials or unfinished parts.
Your product doesn’t involve tobacco, alcohol, or other goods subject to excise tax.
You’re selling B2C (business-to-customer), not B2B (business-to-business).
You have no established presence or part of your supply chain (business license, warehouse or stock, fulfillment center partnerships, brick-and-mortar store, etc.) already in the EU.
If you don’t meet these criteria, you might have to register for an EU VAT number in one or more member countries. At that point you probably want a lawyer or tax specialist to handle the dirty work for you.
If you do meet all these criteria, then the rest of this article is for you.
Basics of VAT: A Glossary
Before we get into the weeds, we’ve put together a few basic terms that you’ll probably see again and again the more you research EU VAT. If you’re already a VAT pro, feel free to skip this part!
Term | Definition |
VAT Number | The unique number that identifies a taxable person (business) or non-taxable legal entity that is registered for [EU] VAT. |
IOSS (Import One Stop Shop) | An online portal created [by the EU] to simplify the declaration and payment of VAT for distance sales of low-value goods not exceeding 150€ imported from third territories or third countries. |
Intermediary | A person who is established in the EU (business or fixed establishment) and who will be the person liable to pay VAT and to fulfill the VAT obligations laid down in the import scheme (e.g. submission of VAT declaration, payment of VAT, record-keeping obligation, etc.). Intermediaries can do the above in the name and on behalf of another taxable person who has appointed them as an intermediary. Member States may introduce additional rules for an intermediary at the national level (e.g. requirement of a guarantee). A taxable person not established in the EU who wants to use the import scheme needs to appoint an intermediary for this purpose. |
Intrinsic Value of Goods | The price of the goods themselves when sold for export… excluding transport and insurance costs, and excluding any other taxes and charges. |
DAP (Duties at Place) / DDU (Delivered Duty Unpaid) | The buyer is responsible for paying import duties and any applicable taxes, including clearance and local taxes, once the shipment has arrived at the specified destination. |
DPP (Delivered Duty Paid) | The seller assumes all responsibility for transporting the goods until they reach an agreed-upon destination. Under DDP, the seller must arrange for all transportation and associated costs, including export clearance and customs documentation. |
Electronic Interface | Online marketplaces/platforms facilitating supplies of goods. |
Deemed Supplier | A taxable person who facilitates a supply of goods that is concluded between a supplier (underlying supplier) and a customer through the use of an electronic interface (e.g. marketplace, platform, portal, etc.). |
An Overview of EU VAT
And now for everyone’s favorite subject: taxes! More specifically, taxes on goods imported from a non-member country into the EU. If you’re interested in summaries of complex legal documents, you can read the main source for this article here.
The most important thing for you to know is that every ecommerce transaction from a business outside the EU to a consumer in a member state is subject to a VAT. How much, you ask?
It depends - all 27 EU members have their own rates, rules, and plenty of fine print to go along. That said, there are some overarching requirements, like a required 15% minimum. In all, the standard rates range from 17% (Luxembourg) to 27% (Hungary), with the average hovering around 21%.
Your buyer’s location will determine which rate is used. And as for who pays it? Depending on a number of factors, it might be you, an intermediary you hire, an online marketplace you use, or even the buyer themself.
If trying to comply with 27 different sets of VAT procedures as a foreigner sounds daunting, don’t worry. The EU thought so too, and three years ago they enacted new VAT rules to try and streamline the payment process for ecommerce while cracking down on tax evasion and tax fraud.
Part of their solution was new online portals, replacing an old scheme called the Mini One Stop Shop (MOSS):
IOSS (Import One Stop Shop) – for entities importing into the EU.
OSS (One Stop Shop) – for EU entities and sometimes foreign entities trading within the EU.
With these new schemes, sellers of goods and some services don’t have to register for a VAT number in every country their customers live. Now EU businesses and foreign ecommerce companies can both, under certain conditions, register in a single country and file all the paperwork and returns in a single place.
OSS and IOSS: a Digital Upgrade for EU VAT Compliance
OSS vs. IOSS: What’s the Difference?
It’s all in the name. While the OSS is largely for EU businesses (or foreign businesses with EU presence) to sell within member states, the IOSS is meant primarily for foreign online sellers with no presence in the EU - or, in other words, ecommerce businesses like yours - who make their sales abroad then send their goods to buyers within.
This is somewhat of an oversimplification, and you can read all about the exceptions and nuances in the EU’s summary notes.
Who can use IOSS
This scheme was made specifically for ecommerce imports with the following people in mind:
EU sellers using their own online stores and importing goods
Non-EU sellers who sell to EU buyers from a country with certain EU trade agreements (like Norway)
Non-EU sellers who sell to EU buyers from countries without agreements, who then require intermediaries (in other words, all US ecommerce sellers)
Electronic interfaces directly
Electronic interfaces through intermediaries
You also have to be selling qualified goods, which must:
Come from outside the EU at time of purchase
Not exceed a total sale price of EUR 150 per package
Be sent by or on behalf of the supplier (you) to a buyer in an EU member state
Not be subject to excise tax
How to use IOSS
So what actually happens when you use the IOSS scheme?
First, you’ll need an intermediary, someone with an established business or presence already in the EU, who will do all the registering for you - for a fee, that is. There are countless companies out there who can help, like SimplyVAT or Crossborderit.
Do you really need one? Sorry, but yes! If you’re not established in the EU, they require you to register through a business or person who is.
Here’s the outline of what happens when you and your intermediary register:
Your intermediary registers with the IOSS for your business through their country of establishment
You get a unique IOSS number, and when a customer makes a purchase from any country and you add VAT to that sale, you put this number on all the shipping and customs paperwork to indicate VAT has been paid
The customer pays for the sale, including VAT
The product ships to the EU and goes through customs, where the VAT paperwork is checked
The product is delivered to the customer
You put the paid VAT and associated paperwork aside, to be reported and remitted through the IOSS online portal quarterly, and the process is complete.
While convenient, IOSS registration isn’t actually required. It may not even make sense with your business model. In fact, electronic interfaces like Amazon most likely have their own IOSS numbers. When you make qualified sales through them, you’ll use their number, making them responsible for compliance.
But what if you sell outside of the big online marketplaces, or you’re not sure if the IOSS works for you? Below we’ll discuss how you can still be VAT compliant, even if you don’t use the IOSS.
How to Make Your Ecommerce Business EU VAT Compliant
To be VAT compliant, someone needs to do the paying. To find out exactly who that is, you should first ask yourself two questions:
Is the total intrinsic value of your goods in each order (in a single package) less than or equal to 150 euros?
If the answer is yes, those sales probably qualify for the IOSS scheme. With the help of your intermediary, you can get an IOSS number with a single country, charge VAT at the point of sale, and send it to your intermediary’s country of registration once a quarter.
Once you’re signed up in one member state, you can make similar sales to customers in other countries without re-registering as long as the correct rate is applied and all reports and information are sent to the IOSS as required.
If your sales are higher than the 150 euro limit, you can do one of two things:
You can make it clear to your customer that shipping will be DAP/DDU and that they need to pay all the required taxes and fees.
You can find an intermediary or consultant to help you get a VAT Number in each country you’d like to sell in.
In that second case, you’ll be responsible for:
Accurately calculating all VAT
Correctly applying it to each sale
Collecting it
Filling out shipping paperwork with applicable registration numbers
Sending all VAT to the correct locations during collection time.
Whichever you choose, make sure your website or marketplaces clearly communicate to the customer what taxes are being charged. Also whether or not extra steps or fees will apply at time of delivery or pick-up.
Do you sell exclusively through established online marketplaces like Amazon, Etsy, and eBay, or do you use your own site?
If you answered yes to the first part and your sales are less than 150 euros each, congratulations, you’ve won the VAT lottery.
That’s because the EU now requires many Electronic Interfaces (in other words, ecommerce platforms) to consider themselves the deemed suppliers responsible for VAT.
In other words, if you sell on Amazon, suddenly Amazon is responsible for calculating, charging at point of sale, and remitting the correct amount of VAT for your low value EU sales. Under the right conditions, you may never need to register with the EU yourself, as most Electronic Interfaces should have their own IOSS numbers.
If your sales exceed that 150 euro threshold per order in a single package? Unfortunately neither you or your marketplace can now use the IOSS scheme, and you’re back to the old fashioned methods mentioned above.
As soon as you sell through your own site (or a marketplace without an IOSS registration), you become responsible for collecting and paying VAT yourself or pushing the responsibility onto your customers.
How do you collect and pay VAT in this case?
Do the research and legwork yourself. Look into intermediaries, pore over documents, research software that might help, and make sure your business is following all the rules.
Change your business model so that you’re only selling low value goods on established platforms with their own IOSS numbers and compliance procedures.
Partner with a trusted logistics company to help. Many 3PLs like OTW Shipping are old pros at international e-commerce and already utilize software and experts to help you meet all your tax obligations.
How OTW Shipping Takes Care of EU VAT
At OTW Shipping, we’re expanding our services to help our growing number of partners looking to expand into the EU. Right now, we partner with ShipHero to add your VAT / IOSS Number added to shipments to the EU and the UK.
Interested in hearing more about how we can help your business? Sign up for a free call on our website.
VAT FAQs
What are the downsides of registering with IOSS? Upsides?
Pros:
Single registration with one country, not each one where your customers live.
Quicker customs clearance speeds.
No additional steps or VAT fees for customers past checkout.
Payments in a single currency.
Cons:
Fees associated with any intermediary or legal assistance you hire.
Increased paperwork potential with mandatory quarterly returns and reporting.
Are the rules the same for the UK?
Ever since Brexit, the UK has updated its own rules concerning importation and VAT and is not part of any EU scheme. Make sure you look into British law and business procedures carefully if you plan to expand your sales to the UK.
Which country should I register IOSS through?
In most cases, as a US e-Commerce business without an EU presence, you’ll register in the country your intermediary works from. If you gain an EU presence in the future, you’ll most likely have to get a VAT number with that country as well.
Will registering with IOSS hurt my sales?
Probably not, as any sale you make to the EU is required to charge VAT whether you’re registered or not.
In fact, joining the IOSS scheme streamlines the purchase and shipping process for your customer, who won’t have to deal with payment or paperwork upon receiving the item. As you know, happy customers become repeat customers!
How is VAT enforced?
You don’t necessarily have to register for an IOSS or VAT Number, but you do have to make sure to comply with EU VAT regulations. While your Spanish vacation likely won’t be cut short by law enforcement for any minor mistakes, non-compliance can lead to:
Closed marketplace accounts and blacklisted online stores
Fines or other penalties from affected EU countries
Forced back payment of dues
Rejected goods at the border from customers hit with surprise VAT fees
Even more, if you intentionally flout any laws, it’s possible for authorities to investigate and charge you with a criminal offense. Please don’t commit international tax fraud, folks.
Will my goods also be subject to other customs and duty taxes?
Potentially. VAT isn’t meant to be a comprehensive tax, so you can expect other typical fees associated with importation to apply.
All countries have their own import rules, procedures, and rates, so before shipping anything, make sure you’re familiar with them. You can also partner with someone like OTW shipping who can make sure your products reach your customers’ doorsteps.
Do I definitely need an intermediary to register with IOSS?
If you have no prior established business presence in the EU, then yes. In this case you are required by EU taxation and customs regulation to have an intermediary.
Finding a trusted intermediary may not be cheap, but consider the benefits as well. You’re gaining a local business expert on top of someone who can help you through language barriers if you only speak English.
What if my product isn’t software but other telecommunication and broadcasting services?
See pages 33-35 of this document.
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