In the globalised economy, businesses are highly likely to purchase goods and services from other countries, both within the EU and from outside the EU. Given this, the topic of VAT on imports becomes a critical one to discuss. Unfortunately, cross-border value-added taxation can be highly confusing, mostly due to the rules differences from one nation to the next. To clear up some of the confusion, we’ll be looking at how these overseas transactions are taxed in Europe.
VAT on imports or intra-community supplies?
In the European Union, businesses need to distinguish between VAT on imports and intra-community supplies clearly. The former involves the purchase of goods from a non-EU country into the Union, and in this case, the standard rate of the value-added tax will be applied in the country where the goods arrived. Customs will release the products to you when the tax charge is settled, and the goods will then be in free circulation.
If goods are being exchanged between member states, they’re classified as intra-community supplies, and these transactions are zero-rated. This change was brought about by the market reforms of 1993 to simplify business operations. However, there are exceptions. For the goods to be zero-rated, the transactions must meet the criteria below.
- Both businesses must have a valid VAT registration number.
- The sales invoice must have the registration number of the customer.
- Check the foreign business’ registration details in the EU VIES system to be certain.
- Documentation should prove that the goods moved across borders.
- Within three months of the sale, the goods must leave the seller’s country.
When these conditions are not met, the authorities may suspect missing charges or fraud. If you sell to individuals or a business without a value-added tax number, you must charge the rate of the origin country.
If you import goods, your country’s tax authorities will need to accurately record the flow of goods and the potential tax liability. When you purchase products from outside the EU, either you or your customer (if you’re reselling) will need to provide a valid VAT number. However, since you don’t want your customer to see the cost of goods sold and your potential profit margin, your business itself will supply this information.
If you’re an EU company getting imports or intra-community supplies from another member state, your domestic value-added tax number should suffice in most instances. However, there are instances where this won’t work. For example, a French company brings goods from Israel to Germany but sells these goods in France. In this case, the company will need to be registered in Germany because of German law.
A non-EU country bringing goods into a member state will need to be registered in at least one member country.
Some nations have deferment schemes so that reduced or zero rates of VAT on imports are applied, and the Netherlands is one of them.
A quick summary
The summary below will make it easier for you to understand how VAT on imports and intra-community supplies works.
- Buying goods from outside the Union – Tax is paid at the point of arrival if the items are used for commercial purposes. The charges can be deducted if the items are to be resold.
- Buying services from outside the Union – You pay the applicable charge in your country and the reverse charge procedure comes into motion. You can deduct the charge later in your tax return.
- Buying goods and services from within the Union – You must pay value-added tax as if you sold the good or service, but this amount can be deducted on your tax return later.
However, there are exceptions where these standards don’t apply in some special territories. For more information on these deviations, the European Commission’s guide is beneficial.
Despite some semblance of structure, VAT on imports can undergo changes from one location to the next, especially when you consider separate policies like deferment schemes. Since most of the transactions mentioned above have tax-recoverable components, an automated VAT refund solution like VAT4U can be highly beneficial.