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 consumption tax that is charged on most goods and services sold in the EU. The lists of VAT exemptions are defined by the individual EU Member States and thus vary from country to country. While the guidelines for VAT policy are set at the EU level it is the Member States that implement, administer and enforce the rules. Therefore, while the EU sets minimum rates, Member States define their own VAT rates, which currently vary between 17%-27%. 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.
Last Published: 10/20/2016
Introduction
VAT is a consumption tax that applies to most goods and services and is paid by the final consumer.  A reduced rate of VAT can be applied to a restricted list of goods and services referred to in Annex III of the EU VAT Directive 2006/112/EC.
 
The tax is collected from final consumers by “taxable persons” who will then in turn pay the collected amount to the revenue authorities of the Member State where the transaction has taken place (place of supply).  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 categories of individuals/entities that are involved in economic activity.
 
Taxable persons can deduct the amount of VAT they have incurred during purchases made from their overall VAT obligations due to specific Member State revenue authorities. VAT obligations for U.S. companies involving business transactions can vary according to the following criteria: 
  • From where the U.S. company is operating;
  • Where a company’s final customers are based;
  • Types of good and services that are sold;
  • Whether a particular customer is a business or a consumer; and
  • Whether services or goods are being supplied by the original company. 
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 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 VAT exemptions, consult Title IX and for the list of goods and services with reduced VAT rates please see Annex III 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 at 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.  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: 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 
 
U.S. Goods imported into the EU will be taxed at their point of entry into the Member State where they are cleared.  There is no central EU VAT rate; therefore the taxation rate is subject to the Member State where the goods enter. (See above: VAT rates)

However, there is an exception to this rule.  If the goods are placed under a “suspensive customs procedure” (which is considered an “in-transit” procedure) when they enter the European Union, the VAT rate on the imports will be representative of the Member State where the goods finally rest. 
 
The VAT rate on imports is calculated based on the value of the goods plus any customs duty.  The person or firm responsible for paying this VAT rate is called the importer of record.  If the U.S.-based exporter is listed as the importer of record, then the U.S.-company takes on all responsibilities associated with the VAT.  However, in most “business to business” transactions (B2B), the importer of record is the business customer located within the European Union.
 
This means that, in general, the U.S.-based supplier does not need to register for VAT or collect tax on the sale.
However, for some Member States, the U.S.-based company is indeed required to register for VAT, regardless of their role in the transaction (e.g. the United Kingdom established such an obligation since December 2012).  To determine whether the Member State you wish to do business in requires U.S. Companies to register for VAT, please consult the respective Member State’s VAT or taxation websites here
 
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.
 
For goods traveling to customers in other countries (beyond the import country), the supplier of the goods does not have to pay VAT on the transaction if the end business customer has a registered VAT number that is then attached to the invoice. The customer applies the local VAT rate using the reverse charge procedure, meaning that the business customer here, for VAT purposes, acts as both the supplier and the recipient. This intra-EU transaction is called an acquisition.
 
If a U.S. business/producer is selling goods within the EU directly to consumers who do not apply VAT to their acquisition (meaning they do not have a VAT number) the rule of distance selling threshold is applied. This means that for instance, a U.S. company operating its EU base out of the UK can charge the UK VAT on its sales of products to consumers in other Member States if its total value of sales to one of those Member States remains below the distance selling threshold. Thresholds vary for each Member State. U.S. companies need to register for VAT in each Member State where the threshold is breached. The threshold only applies to goods sent from a VAT registered business in one EU Member State to a non VAT registered consumer in another. 
 
U.S. companies can arrange for an EU-based agent, registered for VAT purposes, to import and supply goods on their behalf. The agent will be considered the principal for VAT purposes. The principal would make any necessary customs entries as the importer, pay or defer the VAT, and take delivery of the goods.
 
When a U.S. exporter uses a principal (also known as an importer of record) to handle the import procedures, this import agent would normally then complete the import declarations. The importer of record will need to acquire an Economic Operator Registration and Identification (EORI) Number. The “Importer of Record” pays the customs authorities the appropriate import VAT. Because the goods imported are not for the purpose of the agent’s business, they cannot reclaim what they paid in VAT as an input tax. Thus, they would normally include the import VAT amount it paid in its invoice to the U.S.-based exporter.  U.S. companies often pay this VAT as part of the total fee to the shipper/forwarder in the EU. However, if the U.S. company registers itself as the importer of record and is therefore “registered” for VAT, then it can reclaim this import VAT.  
 
III. VAT rules on the supply of services to EU customers
The EU’s VAT law considers everything that is not a good (generally a tangible property) as a service.  Services can include everything from the licensing for intellectual property to downloadable software to consulting – to name but a few examples.  The VAT requirements for services depend on the final customer: 
  • For a taxable person (a Business-to-Business relationship), the supply of service is taxed where the customer is established; 
  • For a non-taxable service (a Business-to-private individual customer relationship), the supply of service is taxed where the supplier of the service is established. 
There are also a number of exceptions to the above described two-way taxation rule, which include – among –others:
  • B2C services provided by an intermediary are taxed at the location of the main transaction;
  • B2B and B2C services connected with immovable property are taxed at the location of the property.  
When it comes to B2B transactions, in many cases, the business customer will account for VAT using the reverse charge procedure thus making it not necessary for a U.S. based supplier to register for a VAT number in the EU. However, under certain circumstances - depending on the relevant legislation of each Member State -, registration for VAT purposes is necessary. This may occur when the buyer is a non-business customer not registered for VAT purposes. For example, radio and television broadcasting services are governed by specific EU rules requiring non-EU suppliers to register in the Member State where they are providing the service to non-business customers.
 
Consequently, where a U.S. producer needs to pay VAT and at what rate depends not only on the type of service that is provided, but also what the status of the customer that is receiving the service. This is either a taxable person (which is a business customer acting in an economic capacity) or a non-taxable person (the final consumer who is not carrying out any further activity).  
 
IV. Specific VAT rules on Electronically Supplied Services (ESS) to EU non-business customers
      (Article 58 of VAT Directive) 
From 1 January 2015, all supplies of telecommunications, broadcasting and electronic services will be taxable at the place where the customer is located.  In the case of businesses, this means either the country where it is registered or the country where it has fixed premises receiving the service.  In the case of consumers, it is where they are registered, have their permanent address, or usually live. 
   a)  What is an electronically supplied service?
Electronically supplied services are defined in Article 7 of Implementing Regulation (EU) No 282/2011 as services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology.  Moreover, Annex II of the VAT Directive gives an illustrative, but non-exhaustive, list of the types of supplies that can be considered ESS. The European Commission`s VAT Committee has issued non-binding guidelines on what can be considered ESS.  Their guidelines suggest a two-step test to assess whether a given supply can be considered an ESS: “An ESS should be reliant on the Internet or similar network for its provision” and “be essentially automated, involving minimal human intervention.” Therefore, where an electronic network such as the Internet is used simply as a means of communication in much the same manner as a telephone or fax machine, the service provided might not be considered an ESS because the service relies on substantial human intervention.
 
In addition, the European Commission has issued explanatory notes to provide a better understanding of the implementation mechanism. Again, please keep in mind that these notes are not legally binding and can therefore be challenged by Member States.
 b)  Taxation obligations of ESS 
Article 58 of the VAT Directive places VAT requirements on U.S.-based suppliers of ESS to non-business customers (non-taxable persons), where earlier this was not required. The provision states that any ESS provided by a non-EU country to non-taxable persons in an EU country must be taxed at the place where the customer has a permanent address or currently is residing at the time of the provided service. Sales made to business customers require the importing company to pay the VAT under the reverse charge procedure. Consequently all VAT-registered U.S. companies would file VAT receipts to EU-based VAT authorities following transactions of ESS good and services with non-taxable EU persons.
 
In order to comply with the legislation, companies need to identify whether their consumers are business or non-business customers and where they are located, since the VAT rates differ among Member States.  The EU’s VAT Information Exchange System (VIES), listing VAT-registered companies, can help find such information. Concerning the location of the customer, the VAT rate is calculated on the basis of a customer’s declaration, potentially verifiable against a credit card billing address or by geo-locating tools.  For more information on the functioning of the VIES, please click here.
 
The European Commission has recognized the burdensome nature of this initiative which requires sellers to adjust their prices according to the taxation policies of 28 different countries. Therefore a revision of the VAT Directive with particular focus on ESS obligations is expected to be published by the end of 2016.
 
For more information, please consult the European Commission’s website on VAT rules for ESS. Furthermore, the European Commission has set up a list of national contact points in the 28 Member States, who can be consulted on the 2015 VAT changes. 
 
 c) VAT on cross border supply of goods originating within the EU
 
US companies that have a registered EU presence, and are manufacturing goods or offering services from their EU-based headquarters, will be required to eliminate unjustified geo-blocking and other forms of discrimination on the grounds of nationality, residence or establishment. According to a May 25, 2016 proposal of the European Commission the E-commerce Directive will be revised in such a way as to make sure all EU member state nationals have access to the goods and services offered by EU-based companies.
 
This revision means that companies with a registered EU presence that have previously been selling their goods and services in designated countries (very often their country of origin) for the simple reason of avoiding increased administrative burden will now be forced to accept purchases from all EU member states.  This has raised concerns because under the current VAT Directive all purchases are taxable in the country, where the customer belongs (i.e. is registered or has its permanent address). Consequently, the final costs of products or services sold to different member states will differ based upon the VAT of the given country and other postal costs.  Calculation and follow up of the VAT changes in member states requires new investment (software, additional personnel etc.). This proposed requirement puts an additional burden on companies, especially SMEs and has already brought criticism from the European Small Business Alliance (ESBA).  As noted above the VAT Directive is undergoing a revision by the end of 2016. This guidance note will be updated when the revisions enter into force. 
 
 d)  Options for U.S. Exporters on dealing with ESS  
 
Companies impacted by VAT rules have several options to achieve compliance. This report does not make any endorsements or recommendations, but presents the following options for U.S. businesses: 
  • Set up a permanent establishment in one of the 28 EU Member States and apply the rate of VAT applicable in that Member State to all their ESS sales to customers within the EU
  • Register for VAT in each Member State where they make sales to non-business customers and collect VAT at the rate applicable in those Member States, therefore making separate returns to each national VAT authority (this option is usually preferred).
  • Use the Directive’s Special Scheme that allows companies to register towards a single VAT authority of their choice and charge a different VAT rate depending on where their customers are based. In this case, VAT returns are submitted to a single authority.
  • Sell ESS through local EU-based distributors by redirecting potential customers to their websites. The distributor would apply the local rate of VAT applicable in its country and handle VAT administration with the local authorities.
  • Outsource electronic transactions to an E-commerce Service Provider including VAT collection and administration, among other services.     
d) Mini One Stop Shop (MOSS)
As part of the legislative changes of 2015, the Commission launched the Mini One Stop Shop (MOSS) scheme.  It is meant to facilitate the sales of ESS from taxable to non-taxable persons (B2C) located in Member States in which the sellers do not have an establishment to account for the VAT.
 
This scheme allows taxable persons (sellers) to avoid registering in each Member State of consumption. A taxable person who is registered for the mini One Stop Shop in a Member State (the Member State of Identification) electronically submits quarterly mini One Stop Shop VAT returns detailing supplies of ESS to non-taxable persons in other Member States (the Member State(s) of consumption), along with the VAT due.  These returns, along with the VAT paid, are then transmitted by the Member State of Identification to the corresponding Member States of consumption via a secure communications network. Therefore, by using MOSS, companies selling ESS to non-taxable persons located in various Member States can avoid collection and payment of VAT to multiple Member States authorities.  Once a company registers for the MOSS service it needs to use it in all transactions and cannot opt-out of it on an individual basis.
 
Use of the MOSS is entirely optional, and is meant to serve as a simplification measure following the change to the VAT place of supply rules, in that the supply takes place in the Member State of the customer, and not the Member State of the supplier. The Commission published practical guidelines for the use of the MOSS scheme.
 
Further information relating to VAT on ESS:
 
 
 
http://europa.eu/rapid/press-release_IP-16-1887_en.htm  

V. VAT Refunds
A taxable person (thus a business conducting economic activity in the supply of goods or services) has various options. (1) It can deduct VAT that was made on purchases if the goods and services are used for economic activity. If not, then such a business cannot apply for a VAT deduction. (2) As mentioned in the beginning of this report there is also an opportunity to receive a VAT refund if a taxable person’s input VAT exceeds its output VAT. The refund is the excess that was paid. However, checking this policy on a country by country basis is recommended because some Member States allow the excess VAT paid to be carried over into the next taxable period to offset any proceeding taxation that may be due by a company.
Links to the VAT refund procedures in the Member States are on the EC website on VAT refunds. (3) U.S.-based companies with no subsidiary in the EU must pay VAT related to their business dealings in a Member State where they do not supply goods or services but have a right to a refund in the Member State where the VAT was incurred.

 
Please note: “A taxable person does not have the right to a VAT refund if the business conducted does not require charging VAT on its outputs (such as schools, banks, insurance companies, and small businesses under the exemption threshold). There is also no right to a refund if the activities of a business are used for an ‘exempt activity.’”[2]
 
In October 2014, the European Commission proposed a new draft Directive to introduce a standardized VAT return process in the European Union by 2017.  The purpose is to replace the 28 Member States’ versions currently in use, thus ensuring companies provide the same basic information within the same deadlines across the EU, irrespective of the Member State they file from. This should reduce red tape and administrative costs for the submission of company VAT returns.  Along with the VAT identification number and the tax period, the new form (to be completed in the language of the person liable for VAT) would have only five boxes (VAT to be paid, deductible VAT, balance between VAT to be paid minus deductible VAT, total sales and total purchases).  As the Proposal stands, Member States may, however, add up to 21 additional boxes. During the second half of 2014 the initiative came to a halt as Member States requested 60 additional boxes of information thus – in some countries – increasing the administrative burden. Consequently, some Member States have blocked this initiative and requested further consultations.  
 
Based on the proposal companies will have to submit VAT returns monthly, with the exception of enterprises with a turnover of less than €2 billion; they will need to submit quarterly. The requirement in some countries to make an annual summary of VAT would be scrapped.

VI. Additional links 
VAT General Overview
EU’S VAT Committee
EU Member States’ VAT Competent Authorities
UK’s HM Revenue and Customs VAT website
 
For More Information
For more information on this topic, or for a copy of our related reports, please contact: eszter.kantor@trade.gov  Commercial Specialist, U.S. Mission to the EU. The U.S. Commercial Service at the U.S. Mission to the European Union is located at Boulevard du Regent 27, Brussels BE-1000, Belgium.

The U.S. Commercial Service can be contacted via e-mail at:
brussels.ec.office.box@mail.doc.gov
or by visiting the website: http://export.gov/europeanunion
 
To the best of our knowledge, the information contained in this report is accurate as of the date published. However, the Department of Commerce does not take responsibility for actions readers may take based on the information contained herein. Readers should always conduct their own due diligence before entering into business ventures or other commercial arrangements. The Department of Commerce can assist companies in these endeavors.
 
INTERNATIONAL COPYRIGHT, U.S. DEPARTMENT OF COMMERCE, 2016. ALL RIGHTS RESERVED OUTSIDE OF THE UNITED STATES.
[1] “Questions and Answers: Value Added Tax,” European Commission Memo 11/874, 6 December 2011.
 

Prepared by our U.S. Embassies abroad. With its network of 108 offices across the United States and in more than 75 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://export.gov/usoffices.



European Union 28 Taxes