Rules for Choosing the Place of Taxation On Selling Goods
The next issue, which we suggest to figure out during the consideration of the European VAT system, is the place of taxation on delivering goods. This issue is decisive for the companies that have a large number of counterparties in Europe, when planning their trading activities.
The EU Directive 2006/112 /EU defines different rules for determining the place of taxation for each type of transactions:
- supply of goods
- intra-Community acquisition of goods
- importation of goods
- supply of services
For the supply of goods, VAT is levied at the place of delivery depending both on the way of supply and the nature of the goods themselves:
- If the goods are not sent or transported, the place of taxation will be the location of the goods at the time of delivery.
- If the goods are dispatched/transported by the supplier, the customer or a third person, the place of delivery (and accordingly the taxation) will be the country where the goods were at the beginning of the dispatch/transportation.
- For remote sales (if the annual sales volume in the buyer’s country does not exceed the threshold value), VAT is charged at the place where the dispatch/transportation of goods to the buyer begins, except for the cases when the supplier prefers to pay tax in the country of destination.
- For remote sales (in case of exceeding the threshold value of annual sales volume in the customer’s country), VAT will apply at the place where the dispatch/transportation of the goods to the customer ends.
- In the case of installation or assembly by the supplier, the place of taxation will be the country where this installation/assembly was made.
- If the goods are sold on board of river, sea-going ships or aircraft or trains, taxation takes place at the point of departure of this passenger transport within the Community.
- When gas or electricity supplied through the distribution system is taxed at the place of efficient use and consumption.
- The acquisition of goods is subject to VAT in the Member State issuing the VAT number (Member State of identification) under which the acquisition is made. In this case, if the goods are transported to another state (the Member State of arrival), tax must be paid in that State with subsequent adjustment for the VAT paid in the Member State of registration. The examples of the two situations are as follows:
- If the company purchasing goods from Norway provides the supplier with its Estonian VAT number, the VAT on the purchase must be paid in Estonia.
- If the goods purchased by the company that provides the Estonian VAT number are actually sent from Norway to Poland, VAT on the purchase must be paid in Poland, and the tax collected in Estonia will be reduced accordingly.
For example, if an Austrian company after renting a car in Austria from a German company decides to purchase this machine, Austria will be the place of delivery, and VAT will apply in Austria.
For example, when delivering the goods by a Czech company to a customer in Prague, which is transported by a designated carrier from Poland, VAT will apply in Poland.
For example, if the annual sales of a Swedish company to the clients in Malta do not exceed the Maltese threshold, then VAT apply in Sweden. At the same time, if a Swedish company undertook to pay VAT at the destination, it will apply in Malta.
For example, an English company sells clothes through the Internet for private clients throughout the EU. When selling clothes to the customers in Lithuania, Lithuanian VAT will apply when the threshold established in Lithuania is exceeded, and French VAT should be added to the customers in France when the French threshold is exceeded, etc.
Here we note the fact that on December 5, 2017, the European Council adopted a package of legislation changing the rules of the European VAT for online sales of goods and services. In particular, it is supposed to simplify the current Mini One Stop Shop (MOSS) mode for cross-border telecommunications, broadcasting and electronic services, as well as transition to taxation at the place of destination and simplification of the declaration submitted via One Stop Shop (OSS) for remote sales of goods. In addition, these changes provide for the introduction of VAT liability for electronic interfaces (for example, platforms) that facilitate the supply of low-value goods imported into the EU or sales in the EU, carried out by suppliers from third countries. The new legislation will come into effect in stages, in 2019 and 2021.
For example, when the equipment installed in Denmark by an Italian supplier for its customer is supplied, Danish VAT must be paid. If the equipment is installed by the customer, the delivery will be subject to taxation in Italy.
For example, when selling goods to the passengers taking a flight from Frankfurt am Main to Schiphol, German VAT will apply. For the return flight, Dutch VAT will apply
For example, when gas is brought by a Slovak energy company through a natural gas distribution system to the private customer living in Vienna, Austrian VAT will apply.
The place of taxation is determined by the place of acquisition of goods for the transactions on the acquisition of goods within the EU (that is, the Member State where the goods are located after transportation from another Member State).
The acquisition of goods within the EU by taxable persons and non-taxable persons are subject to VAT. For simplification reasons, goods purchased by taxable persons, covered by a SME scheme or the flat-rate scheme for farmers or by a non-taxable legal person are not subjected to VAT if annual acquisitions are below an annual turnover threshold set by their Member State (minimum EUR 10 000).
On importing goods, VAT is usually levied on passing customs clearance for its release into circulation. However, when goods are imported into one EU country but intended for use or consumption in another, a suspensive procedure may be applied, under which VAT will be levied in the European country of destination, and not in the European country through which the goods are imported.
Imported goods can be placed under one of the following customs procedures:
- goods placed for temporary storage;
- goods that are on import processing without paying tax (a system of temporary cancellation of duties on imports of raw materials to the EU countries, components or semi-finished products that can not be obtained from the EU Member States and used in the process of manufacturing another product);
- goods placed in customs warehouses or in free zones;
- temporary importation;
- transit procedures;
- free zones where goods are not subject to VAT, as well as import duties and fees;
At the same time, VAT will not be levied until the goods are released for domestic consumption.
For example, for consumer goods that, when entering the EU in Poland, are placed under the transit procedure to their final destination in Germany, where goods leave customs procedures, German VAT will be charged.
Import VAT is paid in the same way as customs duties. Taxpayers must fill in and submit a Single Administrative Document to the Customs, which includes the value of the goods, place of origin, consignee, destination, price, weight, etc. Information on VAT, excises and customs duties must be indicated in a separate column.
So, we have considered in this blog the rules for choosing the place of taxation in the supply of goods, acquisition of goods within the EU, as well as on importing goods. The choice of the place of taxation on the supply of services is also regulated by a plenty of rules, therefore this issue will be considered separately in one of our next blogs.