Understanding VAT on Digital Services for EU Consumers: A Guide for U.S. & Canadian Businesses
Since January 1, 2015, there’s been a significant change in how VAT (Value Added Tax) is applied to digital services sold to consumers (B2C) in the EU. With the European Union representing a significant and diverse market with over 400 million customers it is important that North American businesses understand the VAT implications of operating in the EU.
All businesses selling digital services to EU based consumers (B2C) must charge VAT (Value Added Tax) on those sales.
If you’re a U.S. or Canadian e-commerce business offering digital services, here’s what you need to know:
• Universal Application: No matter where your business is headquartered, if you sell digital services to individual consumers in the EU, you are obligated to charge VAT.
• Location-Based VAT Rate: The VAT isn’t based on where your business is located, but where your EU consumer resides. So, if you sell to an individual in Spain, you’ll need to apply the Spanish VAT rate.
• Compliance is Key: It’s crucial to be aware of these rules and ensure your business adheres to them. Non-compliance could lead to penalties and complications with EU tax authorities.
What services come under EU VAT OSS
VAT OSS is specifically designed for businesses engaged in digital B2C services in the EU, meaning that your customers are individual consumers or non-VAT registered entities in the EU.
Under the VAT OSS regulations, digital services, include a wide range of electronically supplied services. This encompasses services such as:
• Streaming or downloading of video and music content.
• Software, mobile apps, and updates.
• E-books, e-learning courses, and other digital educational content.
• Online gaming and gambling services.
• Web hosting and other cloud-based services.
• Subscription-based services like streaming platforms or software-as-a-service (SaaS).
EU VAT OSS for US & Canadian Businesses
While all businesses selling digital services to EU based consumers (B2C) must charge VAT on those sales, businesses have the option of registering in each EU state where they sell digital services B2C or registering for VAT OSS in one EU state.
Given the complexity of registering and complying with multiple EU Vat regimes, EU VAT OSS (One Stop Shop) is a key simplification mechanism for North American businesses, selling digital services to consumers (B2C) across the EU.
Why the EU VAT OSS is key for US and Canadian businesses with EU customers:
Our expert Vat team is well-versed in the complexities of UK & EU VAT registration. Our Vat registration team can guide US & Canadian businesses through the entire process, ensuring that all necessary documentation is completed accurately and efficiently.
- Simplification of VAT Obligations: Without VAT OSS, businesses would need to register for VAT in every EU member state they sell to, a cumbersome and administrative-heavy process. With OSS, they can register in just one member state and cover all B2C sales across the EU.
- Reduction in Compliance Costs: Registering for VAT in multiple countries is not only time-consuming but also expensive. The VAT OSS system minimizes these costs by consolidating the VAT registration and reporting process.
- Uniform Reporting: The VAT OSS provides a standardized format and process for reporting VAT, making it easier to understand and fulfill EU VAT obligations.
- Efficiency and Time-saving: Businesses can file their VAT returns and make payments through a single online portal rather than navigating different portals and systems for each country.
- Improved Cash Flow Management: By centralizing the VAT process, businesses can better predict, plan, and manage their cash flows related to VAT payments.
- Competitive Edge: Understanding and efficiently managing VAT obligations can provide a competitive advantage in the EU marketplace. It ensures businesses do not overcharge or undercharge their customers and can lead to better pricing strategies and enhanced customer trust.
- Reduced Risk of Penalties: Non-compliance with EU VAT regulations can result in substantial penalties. By using OSS, US & Canadian businesses minimize the risk of non-compliance and potential fines.
The Non-Union VAT OSS Scheme for US & Canadian businesses
The Non-Union OSS scheme is designed for businesses that are not established in the EU but provide certain services to consumers (B2C) in the EU.
The scheme allows US & Canadian businesses to handle their VAT obligations for all EU member states through a single registration and return, rather than having to register in each EU country where they have B2C customers.
Do I need specific software for VAT OSS?
You do not need specific software or applications to operate Vat OSS. We work with multiple clients in Canada and the USA who use varied software applications and ecommerce platform solutions.
Registration for Non-Union VAT OSS
US and Canadian businesses can navigate the registration process directly, choosing the EU member state to register for the Non-Union OSS or use the streamlined service created by Orsa Saiwai for US & Canadian businesses.
The selected country becomes your ‘Member State of Identification’ (MSI), Orsa Saiwai use the Republic of Ireland for our clients.
Once registered in the chosen EU state, businesses need to declare and pay VAT on B2C services sold to consumers in all EU member states via a single quarterly return.
Filing obligations under VAT OSS
Each quarter a VAT OSS return needs to be filed in the EU, this is a single return. The return will show the amount of B2C sales made in the quarter and the VAT collected from the customers on these sales.
While it is possible to file the Quarterly VAT OSS return directly to tax authority of the MSI, given the complexities, especially for businesses based outside the EU, leveraging the expertise of service providers like Orsa Saiwai is a wise choice. This will ensure full compliance, accurate rate application, and timely filing.
Collection and payment of VAT
With the VAT OSS system, while businesses collect VAT from their EU consumers at the point of sale, they don’t immediately remit this amount to the respective tax authorities. Instead, they retain these funds until the end of the quarterly period when the consolidated payment is due.
The payment of the VAT due each quarter needs to be made in EUR. For businesses based in North America, this can result in additional international wire fees and foreign exchange fees. To relieve these additional costs, Orsa Saiwai has created a streamlined payment system of the Vat, that eliminates international wire costs and Foreign Exchange Fees.
VAT Rates in the EU
The European Union (EU) has 27 member states, with each state having its own standard Vat rate. For example, the standard rate of VAT in Germany is 19%, while in Italy it is 22%. Therefore, you need to determine the correct VAT rate based on the customer’s location at the time of the sale.
Reduced rates may apply to certain types of digital services in specific countries, which can further complicate the rate determination process.
Vat OSS Compliance requirements
Businesses must maintain detailed records, determine customer location, note VAT rates, record sales values, and retain records for 10 years.
Why US & Canadian businesses trust Orsa Saiwai for their EU OSS registration and OSS filings.
• Expertise and Support from the EU: As a full-service EU based Vat services firm rather than a software as a service vendor, we provide a fully integrated service for VAT OSS registration and filings.
• VAT Compliance: The EU’s rules regarding VAT for digital services are complex. We provide tools and services that ensure North America businesses comply with these regulations, ensuring they charge the correct VAT rates for each EU member state.
• Streamlined payment solutions: North American businesses can avoid expensive quarterly international bank wire costs and foreign exchange transactions fees by using our Vat payment system. This allows North American businesses pay their quarterly Vat payments in USD to a domestic US account.
• Simplified One-Stop-Shop (OSS) Registration: Our expertise in EU Vat means that we are able to provide a more streamlined registration process, making it easier for North American businesses to get registered for VAT OSS.
• Reporting & Filing: Keeping track of sales, VAT collected, and ensuring timely and accurate filings can be daunting. We provide consolidated reports, making the filing process more straightforward and ensuring businesses meet all deadlines.
• Service not software: We are not a software as service vendor, our Vat teams work with the most popular e-commerce platforms, making it easier for businesses to work with us.