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In international business, which VAT to apply?

← Legal FAQ ← Invoice Management

In the EU (as in most other countries), the consumption of goods and services is subject to the value added tax (VAT). Although bound to some regulation, the applicable VAT varies between countries and the type of products or services. Now if you do international business, how to tell which VAT to apply?

Info

The information in this article does not constitute any legally effective tax advice. JustOn cannot and must not provide such services. For any detailed questions, contact your tax consultant.

General Rules

There are three general VAT situations for European businesses:

  • Domestic sales
  • Sales within the EU
  • Sales outside the EU

(1) For domestic sales, your local VAT regulations apply.

(2) For sales transactions within the EU, the VAT application depends on whether you sell goods or services and whether your buyers are businesses or individuals.

  • If your buyers are businesses, you usually do not charge the VAT (irrespective of whether you sell goods or services). In this case, your buyer must declare and pay the taxes applicable in their country under the reverse charge procedure. Your invoice must, consequently, bill net prices only, specify the buyer's VAT ID and explicitly state that the reverse charge applies.

  • If your buyers are individuals and you sell goods, you usually must register your business in the buyer's country and charge VAT applicable there (unless the total value of your sales to this country falls below a certain threshold).

  • If your buyers are individuals and you sell services, you usually charge the VAT that applies in your country – except for telecommunications, broadcasting and electronic services ("TBE"), which are taxed in the destination country.

    In the case of TBE services, however, your business may be eligible

    • for the Mini One Stop Shop scheme (MOSS), which allows you to account for VAT in just one EU country instead of each buyer's country, or
    • for the application of simplified VAT rules if your annual turnover does not exceed EUR 10000.

(3) If you sell goods or services outside the EU, you usually do not charge the VAT. Depending on the destination country and your product or service, it is likely that your buyer must declare and pay the taxes applicable in their country under the reverse charge procedure. Your invoice must, consequently, bill net prices only, specify the buyer's VAT ID and explicitly state that the reverse charge applies. In specific cases, however, other rules may apply, like local sales taxes or no taxes at all. For details, contact an appropriately proficient tax consultant or the relevant (foreign) trade chamber.

The following diagram illustrates the general approach when selling abroad.

determine_tax
Selling abroad – VAT application

Note

Be aware that there are several exceptions to these general rules, which may apply to your specific business, for example

  • Immovable property – to be taxed where the immovable property is located
  • Passenger transport – to be taxed according to the distances covered per country
  • Cultural, artistic, sporting, scientific, educational, entertainment and similar events or activities – to be taxed at the place where the events or activities take place

Find the applicable rules and exceptions in Where to tax? on the European Commission website.

For any detailed questions, contact your tax consultant.

Tax Configuration in JustOn

Once you have determined, and clarified with your tax consultant, if necessary, how to apply VAT to the products or services you sell, you configure JustOn Billing & Invoice Management accordingly.

Tax Rules

If you sell products with different tax rates or operate different markets where variable or multiple tax rates apply, you need rules to determine the correct tax rate for an invoice line item. To this end, JustOn Billing & Invoice Management supports tax rules. They provide for tax rate lookups along various combinations of account region, merchant or business entity region, product tax class, product group, etc.

To have JustOn calculate the taxes based on tax rules, you set up the tax rules that meet your business requirements – usually a dedicated tax rule for every applicable tax rate, including one for reverse charge.

In the given context, your business must use individual tax rules for specific invoice regions. To this end, you determine the invoice region based on certain criteria. Consequently, you can apply the tax rule as defined for the region.

Note

Be aware that the United Kingdom has left the European Union and, therefore, must now be dealt with as a non-EU country, pending other regulations in the future. Make sure to adjust your tax rules configuration accordingly.

Tax Rules
Using Invoice Region to Control Tax Rules

Reverse Charge

Certain international business conditions make buyers, rather than suppliers, liable to pay the taxes on transactions. The reverse charge procedure is a common practice for trade within the European Economic Area, including Switzerland. It does not apply, however, to all businesses or products in all associated countries.

Setting Up Reverse Charge Notice

Cross-border VAT on Your Europe
Where to tax? on the European Commission website
EU VAT rules by topic on the European Commission website