Embarking on a journey in cross-border e-commerce comes with numerous challenges. You may have already successfully navigated store registration, product selection, logistics, and transportation. However, just when you begin to receive orders, you might be tripped up by VAT compliance issues. For newcomers to the EU market, understanding VAT is essential.

So, what is VAT? If you know nothing about it, get the answer here. This article will answer your most frequently asked questions about VAT in detail, helping you smoothly expand your business in Europe.

Q1. What is VAT?

Value Added Tax (VAT) is a consumption tax commonly used in EU countries on the value added to taxpayers' production and business activities. Those businesses looking to sell goods or services in the EU will need to register for VAT and comply with VAT regulations. Otherwise, it will potentially result in unexpected roadblocks.

What is VAT used for? You can find it along the entire supply chain, from production in the factory to the sale in online e-commerce stores. However, taxpayers at each stage only pay tax on the value they add at each stage. This helps prevent double taxation. While businesses act as agents to collect and remit tax, it is the final consumer who bears the cost.

Different Types of VAT Rates

A book and a computer, although both include VAT, may have different tax rates. EU VAT can be classified into the following types:

• Standard rate. A VAT rate for most goods and services like electronics, clothing, and dining services.
• Reduced rate. This applies to certain goods and services that are considered essential or that the government wishes to encourage consumption of. For instance, in the UK, child car seats are subject to a reduced rate of 5%.
• Second reduced rate. Some EU countries also set up a second reduced rate to further distinguish and favor certain specific goods or services. For example, Spain has a second reduced rate of 4% for some theater and music events.
• Zero rate. When selling goods or providing services, the VAT rate is 0%.
• Livestock rate. This rate is specifically applied to products related to the livestock industry. Ireland offers a 4.8% VAT rate to livestock used in the preparation of foodstuffs and some agricultural supplies.

Q2. How to Calculate VAT?

Ensuring the correct amount of VAT payment is truly the top priority for businesses when it comes to fulfilling tax obligations. To calculate VAT accurately, it's important to get an idea of two key concepts:

• import duties and sales VAT;
• import duties include import VAT and customs duties.

Customs Duty = Declared Value of Goods × Product Customs Duty Rate

Import VAT = (Declared Value of Goods + Freight Costs + Customs Duty) × 20% (Businesses can claim this as a deduction during quarterly reporting)

Sales VAT = {Taxable Sales / (1 + Tax Rate)} × Tax Rate

Actual VAT Payable = Sales VAT - Import VAT

VAT Calculation Example:

A foreign entity imports a shipment of shoes (with a VAT rate of 20%) into France with a declared value of €5,000 and pays €400 for shipping. The shipment of shoes is subject to a customs duty rate of 10%. During the month, the entity's total sales on Amazon were €14,000.

Q1. How much import VAT did the foreign entity pay in total this month?

VAT on imports = (€5,000 + €5,000 * 10% + €400) * 20% = €1,180

Q2. How much sales VAT is due?

VAT on sales = €14,000 / (1 + 20%) * 20% = €2,333

Q3. How much VAT is due after the monthly filing?

Actual VAT paid after filing = 2,333 - 1,180 = €1,153

By involving multiple tax rates, different types of goods and services, and various tax incentives, the actual VAT calculation will be more tricky. To simplify your VAT compliance process, consider VATAi VAT Services. Its smart system can estimate the tax payable in real time based on documents submitted online. Reach out to VATAi VAT Services today for a free consultation!

Q3. What are the VAT Rates in EU Countries?

Q4. What is VAT Exemption?

VAT exemption means that certain goods or services in EU trading are completely free from VAT. When something is VAT-exempt, you, the sellers, do not charge buyers VAT. However, this also makes you unable to pass on any VAT costs to the consumer and perform input VAT deductions.

Typically, goods and services that fall under the VAT exemption category are considered essential for social welfare. However, which specific items can enjoy exemption will vary across countries, regions, and as policies change. Common VAT-exempt examples include:

• Financial services: Include bank deposits, loans, and insurance.
• Educational services: Public school education services are usually exempt from VAT (private schools generally do not enjoy this benefit).
• Medical services: Some healthcare services are VAT-exempt.
• Social welfare services: Such as funeral services and charitable activities.
• Cultural services: Such as antique trading and art transactions.
• Public services: Such as postal services and public transportation.

Q5. Is Zero Rate the Same as Exemption?

No. The main difference between them is that zero-rated goods and services count towards the total sales, even though these sales don't have a VAT charge. So, you are still required to file them in your VAT returns. Meanwhile, input VAT paid during the procurement process can be claimed back.

But VAT exemption is different. It just means no tax is charged at all, and you can't deduct any input VAT.

>> Learn more with this article: VAT Exempt vs Zero-Rated VAT: What Every Business Needs to Know

Q6. How to Get VAT Refunds?

If your business is VAT-registered and has paid more VAT than you've charged, you may get VAT refunds. Under this circumstance, follow the below instructions to get a refund.

Step 1. Prepare the complete document list for your application, including invoices, contracts, VAT returns, and so on. Make sure they clearly present the amount of VAT due and include the VAT numbers of your business partners.

Step 2. Submit your VAT refund claim form along with the required documents to the tax authority within the specified timeframe.

Step 3. The tax authority will review your application. After that, if you are eligible, send a refund.

VAT laws can be a headache as they are different from one country to another. Directly consulting VAT experts can be highly helpful. They can break down those complex rules, help you prepare documents, and increase your chances of a successful refund.

Q7. What is a VAT Number in the US?

Unlike EU countries, the US does not use a VAT system, so you don't need a VAT number if you do business there. Instead, getting a Sales Tax ID is required for tax obligations. Additionally, sales tax is typically paid directly by consumers to you, the retailers when they purchase something, and you then remit the tax to the government. While sales tax and VAT may seem similar, they are actually different from the bottom.

>> Learn more with this article: VAT vs. Sales Tax: The Key Differences

Overall, if you are planning to expand into the European market, then learning "What is VAT" is a top priority. This article has provided detailed answers to frequently asked questions about VAT, helping you navigate various VAT challenges with ease.

Want further assistance with VAT regulations or the filing process? Feel free to contact the VATAi team. Our professional VAT experts are ready to offer personalized solutions and ensure efficient VAT compliance management.

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