fbpx
Shopify VAT Guide

Shopify VAT Guide: All You Need To Know

Suppose you are selling goods on Shopify and have European Union (EU) or UK customers ordering from your store. In that case, you are probably eligible to collect and remit VAT to the EU tax authorities instead of sales tax.

Whether you are an EU-based or a non-EU-based Shopify merchant, you have to charge VAT on the sales that you make to EU customers. However, the rules to apply VAT may vary and may depend upon where your goods are located at the point of sale, the value of the goods, and what platform you sell on.

Also, the EU introduced changes in the rules for e-commerce taxation from 1 July 2021 to simplify VAT compliance for e-commerce companies and ensure a level playing field for EU sellers and traders based overseas. Therefore, as a Shopify merchant selling goods in the EU, it’s important to understand your VAT obligations under the new tax regime and plan your taxation accordingly.

If you are a Shopify merchant selling goods in the EU and are unaware of how VAT works in the EU, then you need not worry as we have prepared a Shopify VAT guide for you that explains everything you need to know about VAT in the EU.

However, in this guide, we will walk you through the steps on how to charge VAT on Shopify and try to know does Shopify charges VAT.

What Is VAT?

As per the European Commission, the Value Added Tax, or simply VAT, in the European Union is a general, broadly based consumption tax applied to the sale of goods and services within the EU. It is an indirect tax assessed on the value added to goods and services. This means VAT is paid only on the value added at each stage of production and distribution. Accordingly, the final VAT paid is made up of the sum of VAT paid at every stage.

Furthermore, the VAT-registered traders receive a VAT number. The traders have to showcase this number on the invoices along with the VAT amount charged to the customers. This way, the customer knows how much he has paid on the final product and how much VAT he can deduct as an input tax.

Since VAT is a consumption tax, it is borne ultimately by the final consumer. It is not a charge on the seller of the goods or businesses. However, the seller of the goods pays the tax collected from the final consumer to the EU tax authorities.

Now, VAT applies more or less to all goods and services bought and sold for use or consumption in the EU. Goods and services supplied as exports to customers outside the VAT area are typically not subject to VAT. That is, exports of goods to destinations outside the EU are generally exempt from VAT. This means that sellers do not charge VAT on the sale, and the transaction is considered zero-rated for VAT purposes.

On the flip side, goods and services supplied as imports to EU customers are subject to VAT to maintain a balance for domestic producers so that they can compete on equal terms within the European market with goods and services imported from outside the EU.

This means that as a Shopify merchant selling goods to EU customers, if you supply goods to EU customers for importation, then the goods imported into the EU are generally subject to import VAT. Import VAT is distinct from domestic VAT and is collected at the point of entry into the EU. In such a case, importers bringing goods into the EU are often required to be registered for VAT. This registration allows them to comply with VAT obligations related to imports.

Read: E-Commerce VAT: Understanding Value Added Tax For Global Sales

Does Shopify Charge VAT?

Shopify, as a platform, does not automatically charge and remit VAT on behalf of merchants to the EU authorities. Instead, Shopify provides tools and settings that allow you as a merchant to configure and manage your tax collection based on your business needs and the regions you sell to.

For instance, Shopify allows you as a merchant to configure your tax settings including whether prices should include or exclude taxes, and set up rounding rules. Also, it allows you to assign tax codes to your products to ensure accurate tax calculations.

Furthermore, if you have multiple locations where you fulfill orders, you can set up tax overrides for each location.

Therefore, as a merchant selling goods on Shopify, you are responsible for setting up and configuring tax rates based on your business location and where you have tax obligations.

This is unlike other marketplaces like Amazon, Etsy, or eBay, which collect VAT on behalf of sellers for transactions in the European Union (EU) in certain cases.

Read: How To Set Up Taxes On Shopify?

Who Pays VAT: Buyer Or Seller?

In a transaction subject to Value Added Tax (VAT), it is the buyer who ultimately bears the economic burden of the tax. However, the seller is responsible for collecting and remitting the VAT to the tax authorities. The seller acts as an intermediary in the process.

That is, as a Shopify merchant selling goods to EU customers, you are required to charge VAT on the price of the goods or services you sell to EU customers. This is known as output tax for you as a seller.

On the other hand, your customer pays the total amount, including the price of the goods or services plus the VAT at the checkout. The VAT is often shown separately on the invoice. The VAT that the buyer pays to the seller during checkout is known as the input VAT for the buyer.

Therefore, as a Shopify merchant, when you charge VAT to the price of the goods or services you sell to the EU customers and the customers in return pay the VAT during checkout, you collect that VAT from the buyer and remit it to the tax authorities. The amount remitted to the authorities is the output tax minus any input tax.

Before 01 July 2021, every Member State in the EU had a local ‘distance selling threshold’ which traders had to surpass to VAT-register themselves in such a Member State. Accordingly, they had to charge the applicable VAT rates in that Member Country and remit the collected VAT to the tax administration in that country. If, however, the annual taxable turnover of the traders did not breach the local threshold in the country where their customers were located, they had to tax intra-EU online sales in the country of departure of goods.

These rules were changed in 2021. As per the new rules, the EU traders are required to have an annual turnover of EU-wide sales of more than €10,000 to start charging and remitting VAT in the Member State where the goods are delivered.

Read: How To Charge VAT On Shopify?

How Does VAT Work?

Until 01 July 2021, VAT rules for B2C online selling were relatively straightforward unless online merchants started selling to customers based in other EU countries. Under the EU VAT tax regime that existed before 01 July 2021, if your online business did well and its EU-wide turnover increased, it would breach a local ‘distance selling threshold’ in another EU Member State. Such thresholds were calculated on the total B2C supplies of your online business within each EU Member State.

Once your Shopify store’s total sales to private individuals within a specific Member State exceeded the local distance selling threshold within a calendar year, you had to register for VAT in such a Member State, start charging the applicable VAT rates, and remit the collected VAT to the relevant tax administration.

Unless your Shopify store breached a distance selling threshold in another country, you as a business had to charge VAT in the EU Member State where your goods were dispatched from. That is, under the EU distance sales rules that existed before 01 July 2021, you as a Shopify merchant had to tax your intra-EU online sales in the country of departure of goods until your annual taxable turnover breached a local threshold in the country where your customers were located.

Once your online store’s sales breached a local threshold in another EU member state, you were required to register for VAT in that EU country, start charging the applicable VAT rates, and remit the collected VAT amounts to the local tax authorities.

As a consequence, online retailers had to register for VAT in multiple EU Member States which resulted in complex and burdensome VAT reporting. Therefore, to simplify VAT compliance for e-commerce companies, the European Union scrapped the individual distance selling thresholds and replaced them with a single EU-wide threshold.

Alan Chen Freecashflow.io

Book A Call Now

EU VAT Changes 2021

Let’s try to understand how the EU VAT Changes 2021 will impact different entities.

I. Changes For EU-Based Merchants Making Intra-EU Cross-Border Sales

As per the EU VAT Changes 2021, if you are an EU-based business, then starting July 2021, you will have to charge VAT in the Member State where your customers are located, provided your yearly turnover of cross-border sales of goods and e-services breaches the new EU-wide limit of EUR10,000.

But if your annual turnover of cross-border sales of goods and e-services is below the threshold, then you must tax sales in the country of departure. This is unlike the previous VAT rules where you had to register for VAT in each Member State where you breached the distance selling threshold.

So, the objective behind introducing the new VAT rules is to ensure that VAT is due where the customers are located, that is, to ensure that the principle of taxation at destination is applied except for EU-based micro-businesses. Besides this, the aim is to ease the VAT compliance burden on online sellers as they no longer need to correspond with multiple tax offices.

Also, the new single EU-wide threshold will apply to you only if you are an EU-based business established in and shipping goods from a single Member State. If you are an EU-based business and you hold stock in multiple EU countries or are located outside the EU, the single EU-wide sales threshold of EU10,000 will not apply to you.

Also, the replacement of the distance selling thresholds by a lower EU-wide limit means that you as an online retailer will now have to comply with the relevant VAT rates in each Member State. That is the likelihood of complying with the standard or reduced VAT rates in each Member State is much higher now under the new VAT rules than it would have been under the previous distance selling rules.

In addition to replacing the distance selling threshold with a lower EU-wide limit, the EU VAT changes 2021 have introduced the One-Stop Shop (OSS) scheme to mitigate the increased VAT reporting obligations that the ‘destination principle’ general rule will inevitably bring. These schemes allow you as a Shopify merchant to submit a single EU VAT return instead of registering in each Member State where you make B2C supplies.

What Is A One-Stop Shop (OSS) Scheme?

The One-Stop Shop (OSS) is an electronic portal that allows you as an EU merchant making cross-border sales in the EU to account for VAT or file VAT returns in a single Member State rather than registering in each EU Member State where you make B2C supplies. Thus, this scheme assists you as an EU merchant with reporting your intra-EU cross-border sales to multiple EU countries.

The single Member State where you register is called a ‘Member State of Identification’. Such a Member State is responsible for distributing the relevant VAT amounts you report and pay each quarter to the various Member States where your customers are located. The Member States where your customers are located is called the ‘Member States of Consumption’.

Thus, as an EU merchant, if you register for the OSS scheme, there is no need for you to register for VAT in the EU countries that are included in your OSS filing as long as the EU country included in the OSS filing is not your home country or an EU country where you have a physical location or hold inventory.

This means that if you have a physical location or your hold inventory such as in a warehouse in an EU country, you need to be VAT-registered in that country and must file a domestic VAT return in each country.

Thus, this scheme is an extension of the Mini One-Stop Shop (MOSS) scheme that allows businesses to file VAT returns or account for the VAT due on their supplies of telecommunication, broadcasting, and electronic services to EU customers.

Before 01 July 2021, there were two schemes: the Union MOSS scheme for EU-based businesses and the non-Union MOSS for businesses based outside of the EU. Post 01 July 2021, the scopes of both the Union and non-Union MOSS were extended into the new Union and non-Union OSS schemes. These schemes allowed the following EU B2C supplies to be reported:

Eligible Supplies EU Businesses Non-EU Businesses
Intra-EU B2C distance sales of goods Union One-Stop Shop (Union OSS) Union One-Stop Shop (Union OSS)
Intra-EU B2C services Union One-Stop Shop (Union OSS) Non-Union One-Stop Shop (non-Union OSS)

The OSS scheme is optional and it acts as an alternative to registering for VAT in several Member States. Furthermore, the VAT returns that you file through OSS solely account for payable VAT, which means you as an online business will not be able to offset any input VAT via the scheme.

So, it’s important to consider this aspect when opting for OSS. That’s because if you incur VAT in other Member States as a business, you might want to keep your local VAT registrations so that you can deduct the VAT that you incurred on purchases in your VAT return.

Registration To The OSS Scheme

If you are an EU-based business, you can register for OSS from your country of establishment.

However, if you are a business based outside of the EU and supplying B2C goods to EU customers, you will be able to register for the Union OSS in a Member State where you hold stock. If you are a business based outside of the EU and supplying services to EU customers, you must register for the non-Union OSS. To register for the non-Union OSS, you can choose where to register to record your B2C supply of services.

Under the prior distance selling regime, you as an online business had to report all supplies in the country-specific VAT returns. This has changed with the introduction of the OSS scheme as it allows you as a business to account for B2C crossborder supplies only. Therefore, as a business, you should check whether any of your B2C supplies qualify for the new schemes.

Remember, the new OSS scheme only covers B2C cross-border sales of goods and services. This means that if you are VAT registered for any supply other than distance selling of goods to private individuals, you may need to keep your existing VAT registrations. Thus, for supplies other than cross-border supplies, you will be required to report the OSS VAT returns in addition to any domestic VAT returns or additional reporting required for other types of supplies.

Micro-Business Threshold

If you are a ‘micro’ EU-based business having EU-wide taxable turnover per calendar year below EUR 10,000, excluding home country turnover, you may require a VAT registration only in your country of residence. This means you will only need to charge the VAT rate of the EU Member State you are established in.

Since this micro-business exemption is relatively low, most EU-based online merchants surpass this threshold within no time which means they begin charging VAT based on the location of their customers sooner. As a result, these micro-businesses require an OSS registration or VAT registration in each country where they have customers.

II. Changes For Non-EU-Based Merchants Exporting Goods To EU Customers

As per the EU VAT Changes 2021, if you have a business established outside of the EU but hold stock within an EU Member State, you are still required to VAT-register in the EU country or countries where you hold stock. Such registration allows you to reclaim any import VAT you pay to transport your inventory into the country.

Furthermore, the EU-wide micro sales threshold limit will not apply to you, though you can hold inventory in an EU country as a non-EU-based seller. Thus, if you have any intra-EU cross-border B2C transactions, you can register for the OSS scheme and declare such intra-EU cross-border B2C transactions in your OSS VAT returns.

On the other hand, if you have a business established outside of the EU and don’t hold stock within any EU country, you must pay VAT on all consignments supplied as imports to EU customers. Before July 01, 2021, goods valued up to EUR 22 were exempted from VAT when imported into the EU. Since this exemption led to fraudulent practices and significant losses in VAT revenues for EU tax administrations, the EU removed the VAT exemption at importation.

Furthermore, to mitigate the impact on businesses and custom operators, the EU introduced the Import One-Stop Shop (IOSS) scheme on 1 July 2021.

What Is Import One-Stop Shop (IOSS) Scheme?

The Import One-Stop Shop (IOSS) is an electronic portal where EU and non-EU businesses can file their VAT returns or account for the VAT due on their low-value distance sales of imported goods.

This scheme allows businesses, including online marketplaces, to report the import VAT due on their B2C sales of goods imported into the EU with a consignment value of less than EUR 150.

Remember that as a trader, you can account for and pay for the VAT due on distance sales of imported goods whose intrinsic value does not exceed EUR 150 under the IOSS scheme. Intrinsic value is the price consumers pay for the goods at checkout before considering transport, insurance, and taxes. It is the value representing the goods that a trader packs and dispatches simultaneously to the same consignee and within the same transport contract. Furthermore, this value should not include transport and insurance costs unless such costs are already included in the price of the goods rather than mentioned separately on the invoice.

If the intrinsic value of an EU consumer’s consignment goes over EUR 150, such a consignment will no longer be eligible for the IOSS scheme. Instead, VAT will be due upon importation of such a consignment.

Registration To The IOSS Scheme

If you are an EU-based business, you can register for the IOSS scheme directly with the tax authorities of the Member State where you have your business established. However, if you are a non-EU business, you must appoint an EU-based intermediary to register for the IOSS scheme.

How Does The IOSS Scheme Work?

If you are signed up to the IOSS scheme, as an EU-based or non-EU-based trader, you must charge VAT when accepting payment from your EU customers for orders valued up to EUR 150 and shipped in the same parcel. The VAT rates to be charged on the parcel will depend upon the location where your customer is based.

Thus, you will send the consignments that qualify for the IOSS scheme as imports into the EU. Such imports will be exempt from import VAT and duty as you already collected VAT from the buyers at the checkout. Furthermore, you as a seller will securely communicate your OSS identification number to the person in charge of declaring the goods at the EU border. Since you already collected VAT at the point of sale from the buyer, the parcel will be customs-cleared without VAT being due upon importation.

Furthermore, as an IOSS user, you must submit a monthly IOSS return and make a monthly payment of the VAT collected from EU consumers.

Thus, the IOSS scheme simplifies the VAT compliance for traders making distance sales of imported goods into the EU. Furthermore, it gives EU customers greater visibility on how much they are paying for the goods they order. The primary benefit of using the IOSS scheme is that customers know exactly how much they are paying for the goods they order without any additional charges when receiving the goods.

Since now you have a fair understanding of how the OSS and IOSS schemes work, we have summarised the supplies that each of these schemes accounts for.

Supplies Union-OSS Non-Union OSS  Import OSS
Supplies covered by the scheme
  • B2C Intra-EU distance sales of goods by EU and non-EU businesses.
  • B2C cross-border supplies of all services by businesses based in the EU
All B2C supplies of services by a business established outside of the EU (e.g. the UK) Distance sales of goods to EU consumers when the goods are imported in consignments with a value not exceeding EUR150, irrespective of where the seller is based.

VAT Obligations In The UK And EU

As a Shopify merchant selling goods to EU consumers, you must understand what are your VAT obligations at certain points of the supply chain. Your VAT obligations may depend upon where your customers are located and where you have your business established.

The following section explains, in brief, your VAT obligations as a Shopify merchant selling goods to EU consumers.

I. Selling In The UK

The first case is the one where you sell goods as a Shopify merchant to your customers located in the UK, but you are a non-UK business and hold goods outside the UK. In such a case, if you sell goods through your Shopify store to customers in the UK with a consignment value of less than £135, you must charge VAT at the point of sale.

Since you already collected VAT at the point of sale from the buyer, the parcel will be customs-cleared without VAT being due upon importation. The VAT rate must be the UK VAT rate applicable to your products on all sales made to UK customers.

However, if you sell goods through your Shopify store to customers in the UK with a consignment value of over £135, you can choose whether you or the customer is the importer of record for the sale. In case you are the importer of record, then you must be VAT registered. Further, you must charge VAT at the point of sale, pay import VAT, and reclaim it on your VAT return.

II. Selling Within The UK

The second case is the one where you sell goods as a Shopify merchant to your customers located in the UK, but you are a non-UK business and hold goods within the UK. In such a case, you must VAT-register yourself in the UK where you hold goods.

Accordingly, you must charge VAT on all sales that you to UK customers. The VAT rate must be the UK VAT rate applicable to your products on all sales made to UK customers.

Furthermore, you can claim any import VAT paid on your VAT return, excluding those businesses that are under the Flat Rate Scheme.

III. Selling Into The EU

The third case is the one where you sell goods as a Shopify merchant to your customers located in the EU, but you hold goods outside the EU. In such a case, if you sell goods through your Shopify store to customers in the EU with a consignment value of less than €150, you are eligible to report these sales through the Import One Stop Shop (IOSS) scheme. Furthermore, as a part of the IOSS scheme, you must report these sales on a single monthly VAT return and expedite customs processes.

On the contrary, if you sell goods through your Shopify store to customers in the EU with a consignment value of more than €150, you need to VAT register in the country where you supply goods as imports to EU customers and charge VAT at the customer’s local rate.

IV. Selling Within The EU

The last case is the one where you sell goods as a Shopify merchant to your customers located in the EU and you hold goods within the EU. Thus, if you sell goods through your Shopify store to customers in the EU and you hold goods within the EU at the point of sale, you are eligible to report these sales through the One Stop Shop (IOSS) scheme in the Member State in which you hold the stock.

Note that you will have to VAT-register in every Member State in which you hold stock. Also, through OSS, you need to file a single quarterly VAT return to report all your intra-EU distance sales.

Remember, you must always charge the local VAT rate applicable to where your customer is based the moment you cross the EU-wide Distance Selling Threshold of €10,000. This is inclusive of all intra-EU sales.

VAT Reporting For Online Marketplaces

Let’s assume that you are a seller selling goods on an online marketplace like Amazon. Now, if any of the above transactions occur, then the liability to charge and collect the VAT from the EU customers will move from you as an EU seller to Amazon.

As a consequence, you as a seller are deemed to be making a zero-rated supply to Amazon while Amazon is considered as the actual seller of the goods for VAT purposes. Thus, Amazon, as a marketplace, becomes the ‘deemed supplier’ of the goods. What this means is that Amazon as an online marketplace is deemed to have received the goods from you as a seller and then supplied those goods to the final EU customer.

Fundamentally, what would have been a direct supply from you as a seller to the consumers is now split into 2 distinct supplies:

  • A first B2B supply from the seller to the marketplace
  • A second B2C supply from the marketplace to the consumer

Note that starting 01 July 2021, online marketplaces have been made responsible for charging and collecting VAT on behalf of sellers in specific scenarios. The objective behind shifting the VAT liability from sellers to online marketplaces is to ensure that overseas traders do not sell goods to EU customers VAT-exempt either by fraud or for not being aware of their VAT obligations.

Also, as per the EU VAT changes 2021 for e-commerce, online marketplaces are responsible for charging and collecting VAT from consumers when they facilitate the following supplies:

  • Distance sales of goods imported into the EU with a value up to EUR 150 and
  • Supply of goods to EU consumers, when the goods are located within the EU and the seller, is based outside of the EU. This is irrespective of the value of the goods.

Read: Amazon VAT: What US Amazon Sellers Must Know?

VAT Rates In Europe

The VAT Directive lays the framework for setting up VAT rates in the EU. However, the Directive enables the national governments to set up the number and the level of rates based on the following two basic rules.

As per the first rule, the governments can set up standard rates for all goods and services. This is the rate that EU countries must apply to all non-exempt goods and services. Furthermore, this rate cannot be less than 15%, but there is no maximum rate.

As per the second rule, the national governments within the EU can apply one or two reduced rates to those goods and services listed in the VAT Directive. Such rates can be applied to goods or services listed in Annex III of the VAT Directive but not to electronically supplied services. Furthermore, such rates cannot be less than 5%.

Note that these special rates that the EU countries apply are the exceptions to the basic rules. Due to the existing conditions, the EU countries are allowed to apply these special rates for a temporary period. The objective behind applying these rates is to gradually align the national laws with the VAT Directive.

The following table showcases the VAT rates applied to different EU countries.

Member States Code Super-Reduced Rate Reduced Rate Standard Rate Parking Rate
Belgium BE 6/12 21 12
Bulgaria BG 9 20
Czech Republic CZ 10/15 21
Denmark DK 25
Germany DE 7 19
Estonia EE 9 20
Ireland IE 4.8 9/13.5 23 13.5
Greece EL 6/13 24
Spain ES 4 10 21
France FR 2.1 5.5/10 20
Croatia HR 5/13 25
Italy IT 4 5/10 22
Cyprus CY 5/9 19
Latvia LV 5/12 21
Lithuania LT 5/9 21
Luxembourg LU 3 8 17 14
Hungary HU 5/18 27
Malta MT 5/7 18
Netherlands NL 9 21
Austria AT 10/13 20 13
Poland PL 5/8 23
Portugal PT 6/13 23 13
Romania RO 5/9 19
Slovenia SI 5/9.5 22
Slovakia SK 10 20
Finland FI 10/14 24
Sweden SE 6/12 25
United Kingdom UK 5 20

Do I Need An EU VAT Number?

Whether you need an EU VAT number depends on various factors, such as the nature of your business activities, the countries you operate in, and the threshold limits set by the EU member states.

A VAT (Value Added Tax) Identification Number is a unique identifier assigned to businesses registered for VAT. Also called VAT Registration Number, this number identifies a taxable person or a non-taxable entity registered for VAT.

Your business needs a VAT Number if it:

  • Supplies goods or services taxed with VAT;
  • makes an intra-EU acquisition of goods;
  • receives services for which it is liable to pay VAT
  • provides services for which the customer is liable to pay VAT

Remember, the same VAT number does not apply in all the EU countries. Every EU country issues a separate national VAT number. This means if you as a Shopify merchant supply goods and services in several EU countries, you must apply for a separate VAT Number in each of these countries.

Want Help With E-Commerce Taxes And Accounting?

Alan Chen Freecashflow.io

Book A Call Now

 

Free E-book for E-Commerce Entrepreneurs

9 Most Crucial eCOM Tax Deducations The IRS Doesn’t Want You to Know

Explore More

How To File Taxes For Shopify Store?
Blog

How To File Taxes For Shopify Store?

How To File Taxes For Shopify Store? In this article, you will learn: Shopify Taxes Shopify Store Owners Need To Pay Shopify Income Tax: Forms,

Boost Your E-Commerce Business Now

drop us a line and keep in touch
Alan Chen

Schedule Your Call with Alan!

Hate working with accountants that don’t understand your online business?

By the end of this Strategy Session, you will have a clear understanding of the next steps you can take.

 This Call Is Completely FREE.

Have Urgent Questions You Need Answered?

Book a FREE consultation call with Alan and talk to a CPA who actually understands and cares for your business.

Alan Chen