Nowadays world is full of opportunities for ambitious entrepreneurs. Options are not limited only to domestic trade, international business is an extremely alluring possibility with enormous of potential. However, anything involving more than one country is bound to bring upon complications that could scare away potential risktakers. This problem was greatly alleviated as far as intra-Community transactions are concerned by the European Union and mechanisms meant to simplify the process and encourage newcomers to the intra-Community transactions.
International trade has a complicated feeling about it, the very first impression about it is likely to be more income along with even more trouble. In practice it might not be so far from truth especially in case of supply chain involving multiple countries. Single mistake might cause a chain reaction involving tax authorities in multiple countries and resulting issue would likely be extremely troublesome to solve. Not to mention just familiarizing oneself with tax regulations and VAT directives in each country would be a nightmare to behold. There are also various agreements between countries in place regulating taxation such as double taxation treaties (DTT) of which one should be aware in case of rapidly expanding business seeking to expand their activities into other countries.
The agreements between respective countries are one thing to consider, however European Union went further within its borders in order to simplify the process of trading between EU member states. Many mechanisms were introduced in order to encourage entrepreneurs to take that risk and try their luck with presented opportunity. As a result, within the introduced mechanisms it is possible to operate transactions between EU member states with much less trouble. While it sounds beautiful, those mechanisms have their limitations and not all transactions can be settled through them.
EU VAT directives are means to harmonize and stabilize the situation by creating uniform rules applicable all over European Union. Overall goal is to create universal rules applicable all over community, avoiding situation where one EU country will impose regulations or taxes far exceeding acceptable range within community(EU). For all interested in performing business activities on the territory of the European Union it is important to remember that EU law has priority over laws of local European country, which is highly beneficial for the intra-Community traders as it greatly limits the need to familiarize themselves with constantly changing tax regulations.
VAT or Value Added Tax is a type of consumption tax applied on sale of goods and services that is used worldwide with certain exceptions. The way VAT is meant to work is to eliminate the possibility of double taxation. This sounds like marvellous idea – but how does VAT truly work? It is not magically calculated out of nowhere after all. This leads to the topic of input and output vat.
Input VAT is VAT tax that has been incurred through going each stage of production and distribution of goods, while output tax is the VAT tax added to the price of the goods or services that customer will pay on purchase. However, VAT paid at previous stages is not paid again, only for added value is VAT applied. In other words, tax is accrued on each stage and accumulated until it is finally recovered in full from final buyer.
As an example, might serve a simple imaginary case:
- Raw materials – Base price 5.00, VAT rate (5%) 0.25(payable to tax authorities), total 5.25
- Product from manufacturer – Base price 10.00, VAT (5%) 0.50 (0.25 payable to tax authorities), total 10.50
- Product sold in shop – Base price 20.00, VAT (5%) 1.00 (0.50 payable to tax authorities), total 21.00
- Price paid by the customer – 21.00
Essentially, cost of VAT is recovered from next buyer until the last consumer who bears all the costs. Using this method seems very efficient at charging due tax and avoiding double taxation at the same time, as authorities collect VAT only from gradually increasing value of sold goods at each stage.
Alternative to value added tax is sales tax, that can be found in for example United States. Different from VAT, sales tax is applied only once – at the time of final sale. Crucial difference between two systems is that under VAT rules tax is paid by all purchasers, while final burden lies on the consumer, meanwhile as far as sales tax is concerned – only consumer is charged tax at the time of final sale, which creates certain complications should buyer be a reseller of goods – in such case it is required to inform the seller of goods about it and provide evidence for that claim. Both systems have their nuances, with advantages and disadvantages that are advocated by supporters of respective systems.
VAT within European Union
EU countries make use of value added tax and European Union is at all times trying to make the EU VAT laws abided within territories of all member countries. As stated previously, EU VAT directives take priority over local VAT regulations, although tax rates are not imposed on member countries which results in EU VAT rates being relatively spread out with standard rate ranging from 17% to 27%. EU regulation do however require its members to charge VAT and set a minimum (but not maximum) standard rate of 15% that member countries can set, with reduced and super reduced rates also available.
From this it is easy to see that paying VAT is not as simple matter as it would seem at first, especially when one is required to pay due taxes in multiple countries, however, EU has introduced multiple mechanisms to simplify the taxation procedures.
General rule to follow, when it comes to VAT for EU-based companies, is that VAT is paid in country of final consumption. When it comes to exporting goods to countries not belonging to the EU, VAT is not charged on exports of goods. Instead import VAT will be charged in the country of destination, however in order to fully deduct any receivable VAT that was paid in the process it will be necessary to provide documentation as evidence that the goods in question were delivered outside the EU. Caution is advised as lacking documentation may result in deprivation of right to VAT reimbursement for relevant exported goods.
This brings another topic – intra-Community distance sales of goods or in Polish “wewnątrzwspólnotowa sprzedaż towarów na odległość” (WSTO), which concerns sales to private consumers in different country within EU. This type of transaction is associated with a limit of 10.000,00 EUR for supply of goods or services to the consumers within other countries of EU. Towards this limit are counted:
- Value of supply of goods to the consumers in different member countries of EU
- Value of services of telecommunication, broadcasting and electronic nature provided to the consumers in different member countries of EU
Within this limit taxable person can settle these transactions on the rules of domestic sales, however after exceeding it, it is obligatory to either register for VAT purposes within every member country of EU in which sales of goods took place or to register in VAT OSS (One Stop Shop) system and settle all sales to other member countries of EU. It is important to remember that it is possible to register on the voluntary basis before crossing the limit, however after doing so it is mandatory. Furthermore, please remember that it is voluntary to register before crossing threshold, however once VAT OSS is used for intra-Community distance sales of goods transactions, it is used for all of them, not just for few selected ones.
VAT OSS system is one of the mechanisms that EU introduced in order to simplify the difficulty of doing intra-Community transactions, which replaced the previously established VAT MOSS system. By making use of it, it is possible to settle supply of goods and services to the final consumers within other member countries of the EU and declare them all within single EU VAT return in member country of identification (country in which entity registered for VAT OSS). It is a massive simplification over a more traditional way – registering in every country within sale took place and declaring them separately.
Another mechanism is VAT IOSS (Import One Stop Shop) system, which is meant for transactions involving importing goods from countries from outside EU for the consumers within member countries of the EU. It is meant to be used by entities involved in e-commerce and distance sales of goods imported from third countries or transported from territory of third countries within package not exceeding 150 EUR with goods that are not eligible for excise tax.
Like with all procedures involving tax, a lot of attention is dedicated to validity of data, this applies not only to transaction itself but also trade partners. When receiving invoices it is necessary to be always cautious as a simple mistake within might invalidate it creating further obligations. This brings us to topic of VATIN or VAT identification number, which is a must entity interested in doing any entrepreneurial activity. It is easy to recognize EU VATIN, as it is a standard VATIN preceded by 2 letters forming VAT code of country issuing it. As far as EU VAT codes are concerned, all countries use identifiers ISO 3166-1 alpha-2 with exceptions of Greece – using identifier for Greek language EL from ISO 639-1, and Northern Ireland (using code XI for the purposes of trade with the EU).
For convenience of checking validity of VATIN’s issued in EU member countries or Northern Ireland EU introduced VIES service. VIES is a tool which allows to quickly check validity of given VATIN, however its range is limited and for countries outside its jurisdiction it is necessary to request a verification of VAT number with tax authorities of relevant country. Despite that, it is definitely an extremely useful tool that allows to check whether it is valid EU VAT number we are dealing with, without any further actions on part of the checking party – no registration or data of requesting party required.