Why is the EU VAT System Necessary and How it Works
Данным блогом мы начинаем серию публикаций, посвященных европейскому НДС, который так интересует наших клиентов. Неудивительно, ведь он имеет большое значение для ведения бизнеса в ЕС. Поскольку тема очень обширная, обсуждать ее будем поэтапно. И начнем мы с рассмотрения сути и назначения системы НДС, а также общих понятий и правил.
On posting this blog, we are starting a series of publications on the topic of the EU VAT which is so interesting for our customers. It is not surprising, as it is important for doing business in the EU. As the topic is very extensive, we will discuss it step by step. Let’s start with considering the essence and purpose of the VAT system, as well as the general concepts and rules.
The idea of the European VAT is that enterprises could trade within the EU without being registered as a VAT payer in each individual union country. The rules of the EU VAT are quite complicated, but this is the only alternative to the passage of even more complicated bureaucratic procedures.
VAT is a consumption tax. Business that is a VAT payer pays this tax when buying goods and services, and then returns it back by including these goods and services in the total amount of purchases in the VAT declaration. Companies registered as VAT payers, when trading with each other, can transfer VAT through a chain, at the end of which all the VAT is paid by the consumer (and he does not return it). Therefore VAT is called a consumption tax, as it is paid by the consumer in the end.
The EU VAT aims at achieving the same effect: when companies registered by VAT payers, on trading with each other within the EU, could transfer VAT along the chain to the final consumer in every European country without excessive bureaucracy.
Before deepening into the details of the functioning of the EU VAT system, we will consider several important concepts:
Consumer or business
The status of your partner is very important for the EU VAT - if he is a business or a consumer. As for VAT purposes, it is usually considered, depending on whether the partner is registered as a VAT payer. As a rule, the availability of a VAT number means that the partner is a business, and in its absence - a consumer. According to this logic, business that is not registered as a VAT payer will be also considered a consumer.
Goods or services
f purchases and sales are made exclusively within the same EU country, the same VAT refund procedure applies to goods and services. When trade is conducted outside one EU country, it becomes important what is the subject of the deal - a commodity (a physical object being moved from place to place) or a service. This is due to the fact that VAT rules are different for goods and services.
Everything is quite simple with the goods: such transactions are taxed according to the VAT rules of the EU country in which the seller is located. For example, when delivering goods from Italy to other EU countries, VAT will be levied in Italy.
The rules for the provision of services assume that the service is provided in person. Therefore, the place of delivery of the service, as a rule, is the location of the client (in contrast to the goods). For example, a German company conducts training for a Polish company. The client is in Poland, so the place of delivery is Poland. Thus, the sale takes place outside the VAT of Germany. Services are subject to the rules of VAT at the location of the client.
Sales to European consumer (without VAT number) / purchases by European consumer
The European consumer bears the costs of paying the final cost of VAT, whether he is in the same EU country as the supplier, or in the other EU country. In most accounting systems, this is considered as sale to a local customer. VAT is simply added to invoice at the rate of the country of the supplier.
If the annual value of sales in the EU exceeds the established threshold, seller fills in the Declaration on the statistics of trade in the EU.
Electronic sales to European consumer
There are also various rules and methods for selling digital services to consumers in the EU. In this case, VAT should be levied at the local rate of the country and the VAT declaration must be submitted using the MOSS (Mini One Stop Shop) system, which allows you to submit only one VAT declaration working with different EU countries.
Sales of goods to business (on providing VAT number) / purchase of goods from business
Seller must have VAT number of the customer so the sale to be considered B2B. If there is none, sale is considered as B2C. The account must include both the VAT number of the supplier and the VAT number of the customer.
Any sales to the European business should be included in the consolidated declaration (EU Sales List). This is a separate declaration, which is submitted monthly or quarterly.
On selling B2B goods, VAT is charged at zero rate. In most cases, the place of delivery for the sale of goods is the supplier’s country, so the sale is carried out within the supplier’s VAT, but the VAT rate is 0%. This sale must be also included by the supplier in the consolidated declaration.
Sales of services to business (on providing VAT numbers) / purchases of services from business
The place of delivery for the services is the customer’s location. When providing services to the EU, the VAT obligation arises from the buyer. VAT is not indicated in the invoice, since the customer is responsible for charging and accounting of VAT. It is done using the reverse charge mechanism. In this case, the transaction is considered in the VAT declaration, as if it were a sale and a purchase at the same time. The declaration includes the amount of the purchase of the service and VAT for this amount, and at the same time, the same amounts are displayed as the sales amount and VAT from the sale amount. In general, the net effect will be zero. The supplier includes services in the consolidated declaration.
Trade within the EU or with the third country
Transactions within the EU: commercial transactions between businesses located in different EU countries are not considered to be import and export but transactions within the EU. When delivering goods, the tax is levied in that EU country to which the goods are delivered.
Import: When importing goods, VAT is usually levied when customs procedures are passed for issuance of goods. However, when the goods are imported into one EU country, but intended for use or consumption in another, VAT may be levied with a suspensive condition. According to this condition, VAT will be levied in the EU destination country, and not in that EU country through which imports are made into the EU.
Export: When exporting from the EU, VAT is not levied.
So we have outlined only the general principles of the functioning of the EU VAT system. This information is applicable mostly for small businesses with a relatively small number of transactions. In the following blogs of this series, we will consider the rules in detail.
However, for an average and large-scale commercial business, or in the presence of other complex circumstances, it is necessary to obtain additional expert advice.