Is it the size and diversity of the European union member states? Is it the local and EU wide schemes to give sellers more flexibility in how they manage their supply chains? Is it the assumption that the rules are difficult to understand or that managing VAT obligations for online sales direct to consumers or via marketplaces a specialist area?

In this case study, we take a closer look at the issues, confusion and uncertainty that sellers face with sales tax in general and VAT compliance in particular.

Let’s start with the experience of sellers starting out in European markets. First up – how sellers can get their products into the hands of European customers?

Location, Location

Why start here? Mainly because VAT on sales is calculated by applying some basic criteria, the first one being the location goods are shipped from and the location where the goods are shipped to the final consumer.

For companies based outside the EU, there are several established routes to market to consider, including:

• Partner with a third-party logistics service within the EU
• establish a logistics hub within the EU directly
• join a marketplace or multiple marketplaces that offer logistics and inventory management services
• dropship each order directly to individual EU consumers

The pros and cons of each option will vary depending on the seller’s business model and strategic goals. And multiple supply chain options are often deployed at points of accelerated growth and expansion.

Rates, Limits and Deadlines

The European Union (EU) consists of 450 million people across 27 member states, each with its own VAT rules and rates. The basic principle is that while all states are required to charge Value Added Tax on the sales of goods or services to the final consumer, setting the rates and declaring exemptions remains the decision of each member states government.

There are three moving targets when it comes to VAT compliance that every seller needs to know – VAT rates change, thresholds exist and there are multiple deadlines that must be met.

Here’s the breakdown –

Rates

Each member state sets its own VAT rates, which may vary significantly. As an example, the standard VAT rate in Hungary is 27%, while in Spain, it is 21%. All subject to change of course!

Thresholds

Thresholds define VAT Registrations: Different countries have different thresholds for when your business must register for VAT locally in that country. This effectively means sellers are responsible for monitoring their sales volumes in each country they operate in.

Compliance Requirements

The inevitable paperwork, filing frequencies, and compliance obligations can differ between member states. Not only does this increase admin but worryingly, it demands extra time, energy and focus to keep on top of compliance just as a business is accelerating.

Local and Regional Requirements

The European Union has implemented a series of VAT management schemes to make life easier for eCommerce sellers and increase competitiveness for consumers while maintaining a level playing field to EU and non-EU based sellers to thrive.

One-Stop-Shop (OSS):

The OSS scheme allows sellers to report and pay VAT for all EU sales through a single return in one member state. Registration is required to get started and again ‘Ship from and Ship to’ location rules will still apply when calculating rates.

Import-One-Stop-Shop:

The IOSS scheme allows sellers to report and pay VAT due on imports of low value goods to consumers in the EU, Northern Ireland, or both. Registration is also required to get started and again ‘Ship from and Ship to’ location rules will still apply when calculating rates.

Local Marketplaces

Platforms like Amazon and eBay may have their own specific VAT requirements, further complicating compliance for sellers who use these channels.

See the research sources for EU laws and VAT schemes listed at the end of the case study.

Specialist Knowledge

Many eCommerce sellers will not have in-house sales tax experts. Sellers are laser focused on growing the business, gaining and retaining customers, and innovating. Yet, dropping the VAT compliance ball or missing important details on filings can have an outsize impact on business cash flows.

Engaging external consultants or tax advisors to manage VAT is a tough choice for emerging brands, and many small businesses struggle to afford these services so early in their development cycle.

What gets your business over the line with all this uncertainty?

Get your head straight with a platform that can surface issues quicky and easily. Can you see your net VAT position at a glance? If the answer to either question is no, don’t worry – it is perfectly possible to get Net VAT Position when you have an integrated feed of European sales transaction data calculating VAT from your webstore checkout.

No sure about the rates to apply to your products? You can now take a few minutes to check the default settings on your webstore setup for European sales data. Correct any VAT rates – including the exemptions for specific categories – to resolve any errors at source and move forward with confidence in your process.

Taxmatic customers have made savings amounting to thousands of Euro on average thanks to lookback audits on historic sales transactions.

Rates and exemptions were checked and correctly applied. Taxmatic includes Lookback Audits as part of the onboarding service.

If you are not getting this information from your existing service provider as standard – you wonder what your business could be paying above the odds.

What next?

Taxmatic also helps to surface issues with Customs VAT on shipments into the EU and how they were managed retrospectively.

In April 2024, a new customer was greeted with the news that overpaid Import VAT of €100K were ready to be refunded, 12 months after the original charges were levied on the seller. All thanks to a standard Taxmatic Lookback Audit during the customers onboarding phase that

Of course, the real value of a Lookback Audit is lies in your future – by not compounding an initial miscalculation is far more advantageous.

Creating a system of VAT charges that at transparent, automated and rules based, where you can see, question and understand changes to regulations (without tracking hundreds of variables) builds trust and confidence.

And better cash flow management – the key to all successful businesses that grow rapidly.

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Sources for EU compliance regulations and VAT schemes

To ensure proper VAT compliance for selling products in Europe, importing goods, and understanding different VAT schemes like IOSS, OSS, and local tax schemes, you should familiarize yourself with the following documents and resources from the EU Commission: https://commission.europa.eu/index_en

Steps to Ensure Compliance

1. Register for the appropriate VAT schemes (OSS, IOSS, local VAT) based on your business model.

2. Understand the VAT rates and rules applicable in each EU country where you operate.

3. Use the EU VAT resources to stay updated on any changes in regulations.

4. Consult with a tax professional or advisor with expertise in EU VAT laws to ensure all aspects of compliance are covered.