1. When is VAT on drop shipping transactions due?
If you operate in the field of drop shipping and would like to figure out whether VAT on a given transaction is due, you will need to determine the place of the supply of the product concerned. If your supplier is based in China and it ships to the EU, no VAT will be due as the place of supply is where the goods are shipped from. Normally, if the place of supply is outside of the EU, no VAT is due.
Even if no regular VAT applies to your drop shipping transaction, your product may be subject to import VAT. Please note that import VAT applies only to products that meet a certain threshold which, depending on the country, may vary between EUR 10 and EUR 22. It is worth mentioning that certain countries exclude mail orders from the exemption. Also, certain products are not exempt from VAT, irrespective of their value. Those products include (i) tobacco, (ii) tobacco products, (iii) alcoholic products, (iv) perfumes, and (v) toilet waters.
2. Who is responsible for collecting and paying VAT?
If regular VAT is due, you are responsible for adding VAT to the price of your product and your customer is responsible for paying that VAT to you. Once the VAT is paid to you, you need to remit it to the relevant government.
Pertaining to import VAT, if your customer is the importer of record, your customer will be responsible for paying the import VAT. In case your business is an importer of record, your business will be responsible for paying the import VAT.
3. To what countries should VAT be paid?
Regular VAT should normally be paid to the country in which the taxable place of supply is located. With regard to import VAT, it needs to be paid to the country where the goods are being delivered.
The VAT rates of the EU countries differ significantly. Luxembourg has the lowest VAT rate (17%), whereas Hungary has the highest VAT rate (27%).
4. Do drop shipping companies need to be VAT registered?
Your drop shipping business needs to be registered for VAT in four cases, i.e., (i) you carry out the supply of services or goods taxed with VAT; (ii) you make an intra-EU acquisition of goods; (iii) you receive services for which you are liable to pay VAT; or (v) you supply services for which your customer is liable to pay VAT.
If you register for VAT, you will receive a VAT registration number which can serve to identify you as a tax payer. Each EU country is responsible for issuing its own VAT numbers. Hence, you may be required to obtain VAT numbers in different countries. A VAT number always begins with the code of the country that issued it. The code is followed by a number of digits and characters.
VAT numbers are always issued by the tax authorities of the EU countries. Many private companies offer to obtain VAT numbers for other businesses in exchange for an advanced payment. One needs to exercise caution with regard to such offers as they may be fraudulent.
5. What are the “distance selling” thresholds?
The term “distance selling” within the meaning of EU law refers to selling goods from one EU country to a customer in another EU country who is not VAT registered. Such sales are also known as business-to-consumer (“B2C”) sales. For example, distance selling encompasses selling goods via (i) mail orders, (ii) the Internet, or (iii) phone.
If you sell goods from an EU country to another EU country, you will usually not be required to register for VAT in the other EU country, unless you meet the distance selling threshold applicable in that other EU country. Each EU country has its own “distance selling” threshold. After you reach the threshold in a given country, you are required to register for VAT in the same country and collect VAT at the rate applicable in the country.
The distance selling thresholds are made publicly available by the European Commission and may change from time to time. They may vary between EUR 35,000 (this is the threshold in Belgium, Estonia, Ireland, Greece, Spain, France, Cyprus, Latvia, Lithuania, Malta, Hungary, Austria, Portugal, and Slovenia) to EUR 100,000 (this is the threshold in Germany, Italy, Luxembourg and the Netherlands).
6. What is the VAT One Stop Shop (MOSS)?
The EU VAT Mini One Stop Shop (MOSS) started operating on the 1st of January 2015. The MOSS can be used only by businesses providing certain services and, more particularly, (i) electronically supplied services, (ii) telecommunication services, (iii) television services, and (iv) radio broadcasting services. It does not cover (i) the supply of goods (including distance selling) whereby electronic systems are used to place orders and (ii) the supply of services that are different than the aforementioned types of services.
Since drop shipping is usually focused on the sale of goods, it is unlikely that the MOSS system will be of any help to owners of drop shipping stores. Nevertheless, if, in addition to your drop shipping activities, you provide services, you may wish to consider using the MOSS system.
7. The legal requirements applicable to VAT invoices of drop shipping businesses
This section deals specifically with the EU legal requirements applicable to VAT invoices. Under EU law, sellers are required to issue invoices in most (i) business-to-business transactions and (ii) certain business-to-consumer transactions. Certain exceptions apply to financial transactions and other transactions.
Before examining the specific requirements which each VAT invoice issued by a drop shipping business needs to meet, we need to mention that electronic invoices are equivalent to paper invoices. Also, it is important to know that the rules applicable to invoices can be divided into two categories. The first category covers EU rules. The second category relates to national rules. Each EU country is free to adopt its own national rules to the extent that those rules do not contradict to the EU rules. Thus, if you issue invoices under the laws of a given EU country, you need to be aware of both categories of rules.
Each VAT invoice needs to include: (i) the date of the invoice; (ii) a unique sequential number identifying the invoice; (iii) the VAT identification of the customer (if any); (iv) the name and the address of the supplier; (v) the name and the address of the customer; (vi) a description of the type and quantities of goods or services supplied; (vii) date of payment or transaction (if different than the invoice date); (viii) the VAT rate applied to the transaction; (ix) the amount of VAT applicable to the transaction; (x) breakdown of VAT amount payable by VAT rate or exemption; and (xi) the unit price of the purchased services or goods (exclusive tax, rebates, and discounts).
In addition to the information mentioned above, businesses are free to include any other information in their invoices. Such information may include (i) their brand, (ii) letterhead, and a (iii) message thanking their customers for making the choice to buy their products.