This report provides an overview of the EU’s Value Added Tax (VAT) rules and how these rules impact U.S. exporters of goods and services to the EU. VAT is a complex area consisting of many rules and exceptions. While the guidelines for VAT policy are set at the EU level, the Member States implement, administer and enforce the rules. Therefore, VAT rates differ in each Member State, and currently vary between 15 and 25%. Member States, at their discretion, may apply reduced rates for specific goods and services, or even temporary derogations. This report focuses on the basic set of principles that will help U.S. companies understand and navigate the VAT system.
VAT obligations for U.S. companies involving business transactions can vary according to the following criteria:
-Where the U.S. company is operating from;
-Where a company’s final customers are based;
=Whether a particular customer is a business or a consumer; and
-Whether services or goods are being supplied by the original company.
In the EU’s VAT language, applying VAT is relevant only to “taxable persons.” A “taxable person” is described as any individual, partnership, or company that supplies taxable goods and services in the course of business. Thus “taxable persons,” where stated in this report, refers to these categorizations of individuals/entities that are involved in economic activity.
The most important pieces of legislation on VAT are the EU VAT Directive 2006/112/EC and its Implementing Regulation 282/2011 . See the last section for additional legislative developments.
Topics in this report:
Section I: Overview of the VAT system and how it works;
Section II: How the VAT impacts U.S. companies supplying goods to the EU or within its borders;
Section III: Rules for providing services to EU customers;
Section IV: Specific VAT rules applicable when supplying ESS (Electronically Supplied Services);
Section V: Business activities that may qualify for a VAT refund;
Section VI: Useful web links.
I. What is the VAT? How does VAT work? And who pays for VAT?
The VAT is a tax on consumer spending that is collected by VAT registered traders on sales of goods and services. The premise behind the VAT is that a tax on the “value added” is imposed at each stage of the production and sales process of a good; it is the final consumer – at the end of this process – who absorbs the tax as part of the total purchase price. “VAT is charged when VAT-registered (taxable) businesses sell to other businesses (B2B) or to the final consumer (B2C). VAT is intended to be ‘neutral’ in that businesses are able to reclaim any VAT that they pay on goods or services. Ultimately, the final consumer should be the only one who is actually taxed. Businesses operating in the EU are given a VAT identification number and have to show the VAT charged to customers on the invoices.”1
Please note: Not all goods and services are subject to VAT. For a list of exemptions, consult Title IX of the VAT Directive.
a) Taxing Process
Companies need to pay out VAT on business inputs before being able to recover it through their VAT returns. VAT is charged when a VAT registered business sells to either another business (a “taxable person”) or non-business customer (a “non-taxable person”). There are two forms of VAT relevant to business transactions: Output and Input VAT. Each participant in the supply chain – from manufacturer to retailer, through wholesaler and distributor – charges VAT on the sales it makes. This is labeled Output VAT. When a trader pays VAT on its purchases, this is referred to as Input VAT. Traders take what VAT they have received and compare it to the VAT they have paid out themselves and then submit the surplus to the appropriate VAT authority. If their total VAT payments (input VAT) surpass their total VAT receipts (output VAT), then the entity receives the difference.
When a VAT registered business buys goods or services, it can generally reclaim the VAT it has paid. Please note that if an entity is not a VAT registered business, it may not reclaim VAT that it has paid on goods and services. One must establish its business as a “VAT-registered business” if it sells VAT-taxable goods and/or services and its turnover for a 12-month period reaches or exceeds a certain financial threshold. To consult with a particular tax authority in a Member State country where one wishes to do business, consult the list here. (See the VAT refund section below).
b) VAT Rates
The EU’s VAT system is semi-harmonized. While the guidelines are set out the EU level, the implementation of VAT policy is the prerogative of Member States. The EU VAT Directive allows Member States to apply a minimum 15% VAT rate and a maximum of 25%. However, they may apply reduced rates for specific goods and services or temporary derogations. Therefore the examination of VAT rates by Member State is strongly recommended. These and other rules are laid out in the VAT Directive.
The best sources for navigating the VAT process are the following websites of the European Commission:
• Basic information on the application of VAT in the Member States
• An updated list of the Member States’ VAT rates
• Table of the derogations
• A List of the Member States¡¦ VAT authorities
For more information on VAT rules, consult the EU¡¦s VAT webpage, its webpage on the place of taxation, and the EU¡¦s VAT Committee guidelines. Please keep in mind that the VAT Committee guidelines are not legally binding and can therefore be challenged by Member States.
II. How does VAT impact a U.S. company¡¦s supply of goods and what is its VAT obligation?
VAT is applied at the place of supply of a good or service (meaning where the good is sold or provided to the end user). Therefore, VAT is relevant when the place of supply is in the EU, as this determines the VAT rate to be applied to the transaction. Regarding cross-border sales between a business and another business (between EU states), the VAT is calculated and collected in the Member State where the final sale of the good (or service, discussed below) takes place. The VAT for goods (and services) provided from a business to a customer is paid by a supplier in the Member State where the sale occurs or where the supplier is established.
It is important to note, however, is that this ¡§place of supply¡¨ principle does not always determine whether it is the supplier or the customer who is liable to pay the VAT to the tax authorities.
A supplier’s VAT registration and collection responsibilities depend on several variables, the most important of which are:
• Where the supplier is based;
• Where the customers of the supplier are based;
• Whether the supplier¡¦s customer is a private consumer or a business; and
• Whether services or goods are being supplied by the company
The following sub-sections present VAT scenarios that a typical U.S. exporter and business might face.
a) The importation of goods from the U.S. to the EU
A U.S. producer will most likely first have to export a good to the EU. The importation of goods from non-EU countries, like the U.S., requires that the producer be taxed at the point of importation/entry. Calculating this taxation rate is determined on a country-by-country basis. An exemption to paying tax at this point-of-entry does exist if goods, upon entry to an EU country, are placed under a ¡§suspensive customs procedure¡¨ (e.g. a bonded warehouse) which is an ¡§in-transit¡¨ procedure. The VAT subsequently paid would be at the rate of the Member State that is the goods¡¦ final destination.
The import VAT is calculated based on the value of the goods plus any customs duty. The importer of record (the person or firm that manages the payment of different VATs) is responsible for paying all VAT accounts at this point. In ¡§business to business¡¨ transactions (B2B), this importer of record is often the business customer. This means that the U.S.-based supplier does not need to register for VAT or collect any tax on the sale. However, if the U.S.-based exporter is the importer of record then it would have to be registered for VAT and therefore handle all the accounting for VAT and customs duties in the Member State of importation.
b) VAT on the cross-border supply of U.S. goods within the EU (Intra-EU movement)
As just discussed, an import tax must almost always be paid when a U.S.-produced good arrives in the EU. Once a product has been imported into one particular Member State, VAT is subsequently applied to its onward supply to customers in other Member States. Determining the place of taxation depends, according to the VAT legislation, on where the acquisition of goods legally takes place, usually the final destination.