It is well known that, despite the pursuit within the European Union of a single internal market, borders between member states are still important even for levying VAT. For supplies of goods to entrepreneurs, this is solved with the system of intra-Community supplies (at the 0% rate) and intra-Community acquisitions. However, the application of the 0% rate is shrouded in strict (administrative) conditions.
But if supplies are made to a non-entrepreneur (a private individual), they cannot pay the VAT for the intra-community acquisition.
Example
When a Dutch entrepreneur sells a consignment of clothing to a German wholesaler, the Dutchman makes intra-Community supplies applying the 0% rate. The German entrepreneur pays Mehrwertsteuer in Germany on the intra-community acquisition at the VAT rate applicable in Germany.
If a Dutch online shop sells a garment to a German private individual, that individual cannot pay VAT on an intra-community acquisition in Germany. After all, a private individual is not liable for VAT. Therefore, the Dutch webshop pays the VAT in the Netherlands, except in the case of distance sales.
Distance sales are sales to non-VAT operators (private individuals), where the transport or shipping of the goods supplied is arranged by or on behalf of the operator supplying the goods. VAT on distance sales is due in the country of residence of the customer. The supplying entrepreneur must report to the tax authorities in that country to meet VAT obligations in that country. To prevent entrepreneurs from becoming liable for VAT in other member states even with small turnovers of distance sales, the distance sales scheme applies only after a threshold set per EU member state has been exceeded (for distance sales in Germany, for example, there is a threshold of €100,000 of supplies per year). Exceeding the threshold in a Member State means that the performing entrepreneur has to pay VAT only in that Member State; not also in the other Member States whose threshold is not exceeded.
The Supreme Court recently confirmed that Dutch VAT must be paid until the threshold amount for a member state is exceeded. In that case, it was established that the total deliveries made by an online shop to German private individuals in the first quarter of the year in question did not amount to €100,000. Therefore, Dutch VAT had to be paid on the total turnover in that quarter. German VAT had to be paid on subsequent deliveries only from the moment the threshold amount was exceeded.
Distance sales involve the supply of goods, not services. Services to private individuals in another EU member state are almost always taxed with VAT in the member state where the supplier resides or is established (a number of specifically designated services are, however, carried out for VAT purposes in a member state other than where the supplying entrepreneur resides or is established).
Only certain electronic services are subject to a system similar to the distance selling scheme. However, to remit VAT on those services, the entrepreneur does not have to report to the tax authority of the other EU member state, but can use the so-called mini-one-stop-shop system (MOSS).
The distance selling scheme also does not apply when the goods leave the European Union. This is when goods are exported (the goods are taken outside the EU's Community territory) and the 0% rate applies to them, even if they are supplied to non-entrepreneurs.