If you run a digital business selling things like online courses, digital content, or software, you will most likely have customers from around the world. And chances are, sooner or later you will have customers from the European Union as well.
This is important, because the European Union (EU) taxes the so-called “electronic services” to consumers in the EU with VAT (value-added tax), regardless of where your business is located.
This means you have to know how to register and how to apply the correct tax rates to your transactions with EU consumers. Because not registering or charging tax can lead to heavy fines and liabilities in the future.
When should you charge tax?
It’s important to keep in mind that the EU requires you to charge VAT to your customers only if they are not VAT registered. Business customers that are registered for VAT are required to self-assess their VAT obligations: you don’t need to charge and collect it from them. This is only different if your business is based in the same EU country as your customer, in which case you have a local sales transaction and you need to charge VAT.
So, the first step in determining whether you need to charge VAT is verifying if your customer is a VAT registered business, or a (non-VAT registered consumer.
Sounds easy, but in practice, it’s not so simple. The EU offers an online database where you can check the VAT numbers of your customers, however, for many countries, it’s neither accurate nor complete. Some countries have separate local government databases that you also need to check. And you need to gather evidence that you actually verified the tax number of each customer who provided you with one. You could do this manually, but that’s practically impossible at scale, and language and technical barriers further complicate it.
At Fonoa, we have developed a tool called Lookup that allows you to automate tax number verification with the touch of a button.
What tax should you charge?
Once you have established that you are dealing with a consumer (B2C) and not with a business (B2B), you need to identify the country of your (consumer) customer and charge the tax rate that is applicable to your service in that country. This is important because all EU countries have their own tax rates.
It’s also important to determine whether your service is considered an electronic service. To help, we have provided a short list with common examples of electronic services at the end of this article.
How can you register?
The tax authorities of the country where your customer is located need to receive the VAT that you have collected on your sales transaction. And in order to remit VAT to them, you need to register.
You could register in every EU country you have customers in, of course, but this can quickly become complex and costly. For every registration, you would need to file periodic tax returns and fulfill other tax obligations.
Luckily, since 2015, the EU has simplified this with the so-called MOSS regime, which is short for Mini One Stop Shop.
In short, by using this regime you can register for VAT in one country, file your (quarterly) tax return, and remit VAT there, for all the EU transactions on which you have collected VAT. The local tax authorities then make sure that every country gets the VAT that is due based on the location of your EU customers. Which saves you a lot of hassle.
If your business is based in the EU, you need to register for MOSS in that country. If your business is not in the EU (but, for example, in the United States, Latam, or Asia), you can choose in which EU country you want to register and remit taxes. Which country to pick is an important choice, as it will affect the filing format, your obligations, and whether or not you need to appoint a local tax representative (which is a topic we’ll address separately).
It’s important to note that if your business is not located in the EU and you have chosen to register in a given EU country, you cannot change the country of registration for the next 2 years.
Finally, keep in mind that there are certain specifics and limitations to using the MOSS scheme, depending on your business setup. Talk to a tax advisor or give us a call if:
- your business is part of a multinational that has multiple subsidiaries that file tax returns as a (VAT) group
- you have multiple offices/establishments in different EU countries.
We can then discuss the options you have, based on your specific setup.
How does Fonoa help?
The Fonoa’s Lookup tool provides a fast and efficient solution to validate your customers’ VAT numbers so you can verify whether you are dealing with a business customer or consumer.
With Fonoa Tax, you can automatically calculate the correct tax rates for all your transactions through our API solution. No manual work, no mistakes.
Through the same API, Fonoa Invoicing allows you to automatically issue locally compliant invoices for all your transactions across the world. Not only this provides your customers with a better experience, but it also helps you make sure you are compliant, no matter what part of the world you operate in.
Some countries require you to send your transaction and invoicing details to the local tax authorities, electronically, in real-time. With Fonoa Reporting, you can easily fulfill your real-time reporting obligations in all countries, through a single API.
Reach out to us and we will help you automate your online business.