The aim is for the European Union (EU) to be one large single market. Yet entrepreneurs still regularly have to pay VAT in other Member States.
Online shop
Take running an online shop, for example. You’ll receive orders from all over the world. After all, there’s a reason you’re selling via the “www”.
As far as the rest of the world outside the EU is concerned, there is no problem. You can then send the goods across the EU’s external border VAT-free (you provide proof of this with the customs documents). The goods are made VAT-free in the Netherlands because you are permitted to apply the 0% rate. You may deduct the VAT on your purchases.
Distance sales
But what if your customer lives in a different EU Member State to the one where your business is based? In that case, you must pay VAT in the Member State where you are based, unless you are making what is known as a distance sale.
A distance sale is a supply of goods:
- to a non-VAT-registered business (a private individual);
- who lives in another EU Member State;
- where the goods are dispatched or transported by, or on behalf of, the supplying trader.
Distance sales are only taxed in the country where the customer resides if the total value of such supplies in a year exceeds a threshold set by each Member State. Germany applies a threshold of €100,000 for this; Belgium applies a threshold of €35,000. The thresholds for the other countries can be found here (These are the amounts shown in the “distance selling” column.).
Administrative burden
It can actually be advantageous to pay VAT in another country. After all, several Member States apply lower rates than the Netherlands. The aim of the distance selling scheme is also to ensure that VAT is charged on the goods supplied by the Member State in which consumption takes place.
The downside, however, is that you must be registered as a VAT-registered business in the Member State in question. You must then fulfil your periodic administrative obligations there. Generally speaking, this cannot be done without the assistance of an adviser in that Member State.
Simpler
There must be a simpler (and therefore cheaper) way of doing all this. The EU agrees. That is why, from 2021 onwards (it is expected), a system under which the online shop pays all VAT – regardless of where in the EU it is due – to the tax authorities of the country in which the online shop is established. The EU Member States will then ensure that the VAT revenue is channelled to the relevant Member State. This is also referred to as a ‘one-stop shop’ system. A scaled-down version of this currently exists for certain services provided to private individuals.
Until then, businesses supplying goods to non-business customers in other EU Member States must keep a close eye on the rules governing distance sales.