Online selling through Amazon, EBay and other similar online platforms have become a populated business. One of the most interesting features of this business is that it allows selling to other countries (technically, other tax jurisdictions) effortless and efficiently. Amazon can even take over all the logistics involved (from storage, advertising, order handling, packing, delivery, invoicing, and collecting the funds…) through his “Fulfillment by Amazon or FBA” facility. Therefore, nowadays e-commerce has become easier than ever, even for non-professional merchants. Now these newcomers can start doing business in a very short period of time, without even the hassle to set up a private managed online shop.
However, one of the issues frequently overlooked by these new merchants – and, for that matters, not only by them but also by much more seasoned business – is the tax issue. Amazon, likewise every other platform, assumes no responsibility for the tax implications involved in online selling. Even when the invoice is issued by Amazon on behalf of the online seller, the tax reporting of the transactions always lies on the seller. Then, it is important to understand how taxes should be dealt with, especially for cross border sales.
If an Italian businessman imports from China certain electronic devices and sale them online, through his own web page or through Amazon or other platform, to UK customers there are two questions to be answered (i) where the profit obtained on these sales be taxed (direct taxation) and (ii) where and how VAT should be paid (Italy or the UK).
The first question is quite straightforward: since the Italian businessman has no any place of business located in the United Kingdom – he does not do business through a Permanent Establishment (“PE”) in the UK, but online he is not taxable in the UK but in his country of residence, Italy, since most countries tax his resident tax payers on their worldwide income.
However, the second question is much more complex. The answer to where VAT should be paid depends upon three aspects: what are you selling, where are you selling and who are you selling to.
The first thing to consider is what kind of goods you are selling. There are two completely different set of rules for digital products and for physical goods. In this post I will only refer to the rules applicable to physical goods. If you are interested in knowing more about the VAT treatment of digital items, please read our post about the VAT treatment of digital products. The basic idea for these products is that VAT will be due in the country where the customer is located. However, to avoid that the tax payers were obliged to register and file taxes in every UE country where they make sales, a scheme called One Stop Shop has been implemented.
However, if you are dealing with physical goods, the answer to where VAT is due depends on the two following circumstances, namely, (i) the place where your customer is located –within the European Union or in a third country and (ii) who is your customer, other business (“B2B”) or an end consumer (“B2C”)-.
With regards to the place where the customer is located, the rule is that if the customer is located outside the European Union the sale is considered an export. Exports are exempt from VAT, which means that the seller should not charge VAT to their customers. This does not mean that the transaction is tax-free. The customer should pay VAT (or a similar indirect tax, like the sales tax) as an import in his country of residence.
But this duty lies on the buyer, who is the importer and therefore the person obliged to comply with all the tax obligations involved in the import (VAT, import duties, health and safety issues…).
When the customer is located in other EU country then the taxation of the sales varies depending on who is your customer, i.e., other business (“B2B”) or an end- consumer (“B2C”).
The first question to be addressed is how do you get to know if the customers are a business or an end consumer. This is easy: if the buyer gives you a valid VAT number issued by the tax authorities of his country of origin, then you should consider him as a business, entrepreneur or taxable person – all meaning the same thing. Remember always to check that the VAT provided by the buyer is a valid one in the so-called VIES. The VIES (“Vat Information Exchange System”) is a registry of entrepreneurs kept by the European Commission and feed by the different tax authorities of the member states. The VIES, which is public and free, can be accessed at web page of the EU Commision. Thus, if your buyer does not give you a VAT number or, after due diligence, the number does not appear at the VIES, then he is not a business, but an end consumer.
Having clarified the above, the rules are the following:
If the buyer is a business, then the transaction is not subject to VAT in the country of the seller, but in the country of the buyer. Yes, you do not have to charge VAT to your customer if he is a business located in other EU member. Technically, this transaction is an “intra Community delivery of goods” and is exempt in the country of origin. The buyer must account himself for the VAT through the “reverse charge mechanism”. He must self- charge the VAT in his own country. Likewise, remember that if you are buying stuff from other European business, you have to pay VAT in your country of origin through this self- charge mechanism. In case of sales to other business, remember to file an informative statement called “Intrastat”, if your sales to other EU countries go beyond a certain threshold.
On the contrary, when the buyer is an end consumer (B2C), then the rules are different. Under a VAT scheme called “distance selling regime”, the basic rule is that the seller should apply the VAT of his home country. This is quite convenient, since it removes the hassle of handling the VAT registration and compliance in all the countries were the goods are sold, which in practice would make the business unworkable, at least for small ventures, as is often the case.
Every rule has exceptions, and this case is no different. Here are the most important ones:
When the sales in other UE countries exceed a certain threshold then registration and compliance in other countries is compulsory. The threshold is determined on a country by country basis, and the figure ranges from EUR 35,000 to EUR 100,000, depending on the country. Note that only B2C sales are taken into account for this purpose.
For instance, a French seller of apparel sells during one year EUR 50,000 to UK consumers. Then he would charge French VAT, at the appropriate rate according to French VAT rules, since in the UK the threshold for distance sales to trigger UK taxation is EUR 100,000 (the equivalent in GBP). But if the following year, the French businessman sells EUR 150,000 to UK customers, then he would be obliged to register and pay VAT in the UK when his sales exceed the threshold of EUR 100,000.
It is important to remark that the tax payer can always opt to register and pay VAT in the customers’ countries. This option must be notified to the tax offices of the seller’s home country and the customer’s one. This option makes sense when the VAT rate of the home country of the seller is higher than the one applicable in the customers’ countries. The competitive advantage of a reduced tax rate can offset the compliance cost in a foreign country, as long as the expected turnover in that country is high enough. However, this option is not generally available to resellers of used goods, who must charge their home country VAT to his customers. The interaction between the distance selling regime and the one applicable to used goods is quite complex and goes beyond the scope of this post, but the simple rule is the one explained above.
Finally if you are a reseller of goods subject to excise taxes, such as spirits, wine, beer and tobacco then you must register and pay VAT in the countries were your customers are located. It does not matter how much you sell in these countries; you have to register and pay VAT from the first unit sold.
As you see, selling through online platforms, such Amazon and EBay, can be a very lucrative business but the Tax Man wants his share of your cake. Failing to duly comply with the VAT regulations can be dangerous and expensive. In our firm, Lexcam we have a team of skilled professionals to take care of these matters, allowing you to do what you are best at: make your business grow ! Good luck
If you need more info, feel free to contact the author: [email protected]