As you expand your eCommerce business within Europe, it's imperative to keep VAT rates in mind and incorporate them into your pricing strategy. When entering or expanding into the EU market, you must comply with the varying tax rates of each country as you begin selling in new territories.
Despite the EU having overarching policies that apply to all member states, there is no unified VAT rate, allowing each member state to determine its own based on fiscal strategy.
The EU has established a framework of rules for each country to adhere to when setting VAT rates. One crucial rule is that the main rate must exceed 15%, while the reduced rate cannot surpass 5%. Each country must have a standard rate and may apply up to two reduced rates.
Consequently, VAT rates across the EU range from 17% in Luxembourg (the lowest rate) to 27% in Hungary (the highest rate), resulting in a diverse taxation landscape that poses challenges for online sellers.
For eCommerce businesses operating within the EU, it's essential to note that the applicable VAT rate for a transaction depends on the customer's location, not the business's. For instance, if a Bulgarian business, subject to a 20% VAT rate, sells to a customer in Hungary, subject to a 27% VAT rate, the VAT applied to the transaction is 27%.
However, there's a caveat: for the first €10,000 of revenue from EU cross-border transactions, businesses are not required to apply country-specific rates. Instead, they apply their local rate and remit VAT locally. Once this threshold is surpassed, VAT must be remitted to each country where transactions occur, typically through the OSS scheme.
When calculating margins and determining product pricing, sellers often mistakenly include VAT based on their own country's rate, leading to inaccurate expense calculations. Therefore, it's advisable to factor in VAT using an average rate based on the countries with the most orders or determine a VAT-exclusive price.
Different eCommerce platforms offer varying technical capabilities for pricing. For instance, platforms like Magento and WooCommerce provide numerous integrated pricing options and additional extensions for custom functionality. The recommended approach is to set VAT-exclusive pricing in the backend and calculate the correct VAT rates at checkout after the customer provides their address.
It's crucial to distinguish VAT charged on B2B transactions on your website. Business-to-business transactions within the EU are considered intra-community supplies and are therefore exempt from VAT, requiring a 0% VAT rate on business orders.
Validating VAT numbers supplied by business customers is essential. This can be done manually or ideally automated and integrated into the checkout process using the EU VAT Information Exchange System (VIES) to ensure both the accuracy of the VAT number and its eligibility for 0% rates on intra-community supplies.
Marketplaces like Amazon only allow VAT-inclusive pricing, necessitating separate pricing for each marketplace. Automating this process using bulk-upload options is advisable to save time and facilitate future pricing adjustments.
In addition to B2C purchases, Amazon also facilitates B2B transactions. Validating VAT numbers through VIES and issuing invoices for business customers can be streamlined using tools like SimpleVAT, which automates VAT checks and invoice generation via API.
Ready to tackle the EU VAT challenges in eCommerce and leverage them to your advantage? Discover how SimpleVAT can streamline your VAT compliance with its VAT software and expert consultation on legislation and technical setup.
