Over the past few days, I’ve become more and more annoyed by the number of American companies on the ’Net complaining about the “complexity” of accounting for VAT and the fact that they have to identify their customers’ country of residence, although those of us inside the EU (according to them) don’t.
To set the record straight, the moment you start thinking about physical goods, VAT is even more complicated to account for if you are inside the EU! In particular, non-EU businesses can register under a simplified scheme that means they only have to register in a single member state and must pay all VAT due (at rates appropriate to the customer) to that member state. Whilst intra-EU trade is simpler in the case where the company is providing a service over the Internet (because they are only required to charge VAT in their member state in that situation), if any physical goods change hands, then it balloons into a monster! To trade physical goods within the EU, you must:
- Identify the country of residence of your customer.
- If the total sold into that country is over the distance selling threshold for that country (which isn’t necessarily in the same currency as the sale, and may not even be in the same currency as the VAT you must charge!), then:
- If you aren’t registered for VAT in the customer’s member state, you must do so.
- If that member state happens to be Finland, then you can’t sell your goods, because Finland requires registration prior to trading.
- You have to charge VAT at the prevailing rate for the customer’s member state—but be careful, because some products attract different rates of VAT than others.
- This VAT may not be in the same currency as the sale. It may also have to be calculated according to complex and often arbitrary rounding rules, all different depending on which country you are talking about.
- You may have to pay the VAT up-front, or in arrears, depending on the member state’s regulations.
- You may have to pay the VAT after invoicing the customer, rather than when the customer pays you.
- Depending on the regulations in force in the customer’s country, you may have to appoint a VAT representative.
- You may have to comply with other onerous regulations (for instance, in Greece, some documentation must be handed over in person)!
- If the total sold into the customer’s country is below the distance selling threshold, then you can charge VAT in your member state instead. This usually means that you have to quote VAT in your currency on their invoice, even if you have decided to bill the customer in their own currency. Plus, the customer will probably be expecting to pay VAT at their local rate. All of which adds up to a certain amount of confusion.
- Additionally, you need to remember that if you have (for instance) downloadable software and a CD-ROM on the same invoice, you may need to comply with two different VAT regimes (which may have contradictory rules) on the same invoice, and you’ll have to quote two separate amounts of VAT. </ol>
You can’t even (necessarily) get around the VAT complexity by outsourcing, because of the rules over “triangular transactions”, which are explicitly designed to prevent such things.
What this means in practice is that it’s impossible for an EU company to trade properly over the Internet, because you won’t be able to tell when the distance selling threshold has been exceeded when quoting a price to your customer. Of course, you are allowed to register for VAT individually in every member state of the EU, but that’s 25 sets of complicated, contradictory and often obtuse sets of rules that you must comply with (potentially more than one set at once, even on a single invoice), and what’s more, it means filling-out up to 25 separate VAT returns every month, many in a foreign language—and I don’t know about you, but I certainly can’t speak a word of Dutch, Italian, Greek, German or Spanish, let alone any of the less well known languages. Oh, and just to top it off, a lot of it has to be done on paper because of countries that don’t allow electronic VAT returns, or (like Germany) still require a paper return even if an electronic one has been provided. And as I mentioned above, you actually have to go to Greece! Aaaargh!
Obviously, all of this is fine for large companies, because they can just register everywhere and employ enough people to handle it. But for smaller companies, it’s a real nightmare.
Basically, what I’m trying to say is that the majority of American organisations that have complained about how complicated it is for them don’t even know that they’re born! The rules within the EU are frankly diabolical, and still provide a considerable advantage for companies selling into the EU from outside, especially for smaller organisations.
Disclaimer: I should just add that I’m not a qualified accountant and that the above shouldn’t be used as tax advice. If you have a question about VAT, then EU member states often have VAT helplines that businesses can use to get definitive answers, or, failing that, you should either consult a professional adviser or obtain copies of the relevant laws from the appropriate authorities.