Technological advances in trade make it necessary for countries to update their taxation laws on imported goods, including digital sales. In April 2016, the EU launched its Digital Single Market Strategy for Europe as part of a VAT action plan, which introduced VAT collection on digital products. This plan was intended to modernize VAT for ecommerce and simplify VAT collection.
Although VAT has been charged on electronically-supplied services sold into the EU since 2016, the VAT collection of these digital products will have greater awareness and scrutiny as of July 1, 2021, due to the new EU VAT scheme. This means that businesses that have not been collecting VAT on digital sales into the EU need to be more vigilant in their collection and reporting for these sales.
The online retailer is responsible for charging, collecting, reporting, and submitting EU VAT. This guide will cover what constitutes a digital product, why you need to collect and report VAT, and how to go about this.
Note: The terms digital service, digital product, online service, and e-service are used interchangeably in this document.
What a digital service is
Digital services are defined as telecommunications, broadcasting, and electronic services (TBE) or electronically-supplied services (ESS) that are downloaded or transferred rather than physical products that are shipped. Digital products are those that are stored, delivered, and used in an electronic format with minimal human involvement. These are products that the customer receives via email, internet download, or website login, i.e. software, digital audio, video, and ebook files.
Note: Gift card purchases online are not considered digital products.
Examples of digital services
Example 1
A PDF that you purchase and download from the Internet without human involvement is considered an electronically supplied service.
Example 2
A PDF that you purchase online and receive in the form of an email attachment from the online retailer is not considered an electronically supplied service.
Why do you need to report VAT on digital sales to the EU?
Governments have been missing out on the tax revenue from the sale of digital products. Physical products are taxed when they cross a border through customs clearance. Digital sales may not physically be transported across a country’s border, but VAT is still due for the sale. The goal is to keep the collection of VAT consistent for sold items, both digital and physical, to ensure fair competition between EU online retailers and non-EU online retailers, and to combat VAT fraud.
VAT rules for business-to-consumer (B2C) digital sales into the EU
The VAT rate to charge is based on the customer’s country (country of consumption) and is based on the entire amount of the sale.
Effective date
As of July 2021, all orders into the EU, including digital sales, incur VAT because of the end of the 22 EUR de minimis threshold.
When a sale is made it is important to confirm the location of the customer from a billing address, the country of issued credit card, the IP address, and the country of the SIM card (for sales made on mobile devices).
All online retailers selling digital services into the EU need to register and remit VAT under IOSS (Import One-Stop Shop) since there is no physical package or customs intervention. The Import One-Stop Shop IOSS is designed for use by online retailers selling into the EU who do not have an EU location.This means you register in only one country in the EU for an IOSS VAT ID. Registering for an IOSS will allow you to consolidate all EU VAT payments into a single return.
As a non-EU business, it is necessary for an intermediary(a person or business that is established and taxable in the EU and can register and remit on your behalf) to assist with registration and remittance. Resources for VAT compliance are through your own international tax representative company.
Steps to VAT collection and remittance as part of the IOSS scheme
Collect the VAT from the customer at the time of sale.
Itemize the VAT amount on the sales invoice.
Submit a quarterly return to the country of registration, organized by the destination country (location of the customer at the time of sale). The non-Union website will calculate how much VAT you owe from the total invoice value you enter. You will receive instructions on how to complete the payment.
Keep records for 10 years of your digital sales.
It's important to remember that you must preserve sales and customer information for at least 10 years. This information should include:
The country to which the product has been sold
The type of product
The date of sale
The local VAT
The amount to be paid in local currency
The date and method of receipt of payment
The invoice
The name of the consumer
The information for determining the consumer's country, i.e. their IP address and billing information
VAT rules for business-to-business (B2B) digital sales into the EU
Do not charge VAT on B2B orders. When selling to businesses with valid VAT registration numbers from EU countries, you do not charge VAT for either physical or digital goods. Through an EU program called a reverse charge, B2B buyers are responsible for declaring and payment of VAT to their own government.
VAT requirements on invoices for B2B sales (digital and physical)
Obtain a valid VAT identification number from each buyer (business).
Add their VAT ID to the invoice; each country has a unique format for VAT numbers.
You do not need to add the VAT charge to the invoice; it is the buyer’s (business) responsibility to handle VAT on the transaction.
Verify the VAT ID to ensure it is a business VAT number.
How do I start charging, collecting, reporting, and submitting EU VAT?
The first step is to register for an EU VAT number in any EU country of your choice, then follow the steps as outlined in the above section in this guide: Steps to VAT collection and remittance as part of the IOSS scheme.
What should I do if a consumer purchases both a digital product and a physical product from my store?
Physical goods have separate rules involving cross-border customs and taxes and should be invoiced separately from digital products.
What happens if I do not report digital sales?
Fair reporting is the right thing to do. Can you ignore the regulation? Legally, no. The non-Union, Union scheme, and IOSS are optional. The benefit of these schemes is to remit in one country; otherwise, it is necessary to register and remit in all the EU countries where sales are made.
EU VAT scheme for digital services
EU VAT on digital services
Learn when EU VAT applies to electronic services.Selling digital products to the EU
Technological advances in trade make it necessary for countries to update their taxation laws on imported goods, including digital sales. In April 2016, the EU launched its Digital Single Market Strategy for Europe as part of a VAT action plan, which introduced VAT collection on digital products. This plan was intended to modernize VAT for ecommerce and simplify VAT collection.
Although VAT has been charged on electronically-supplied services sold into the EU since 2016, the VAT collection of these digital products will have greater awareness and scrutiny as of July 1, 2021, due to the new EU VAT scheme. This means that businesses that have not been collecting VAT on digital sales into the EU need to be more vigilant in their collection and reporting for these sales.
The online retailer is responsible for charging, collecting, reporting, and submitting EU VAT. This guide will cover what constitutes a digital product, why you need to collect and report VAT, and how to go about this.
What a digital service is
Digital services are defined as telecommunications, broadcasting, and electronic services (TBE) or electronically-supplied services (ESS) that are downloaded or transferred rather than physical products that are shipped. Digital products are those that are stored, delivered, and used in an electronic format with minimal human involvement. These are products that the customer receives via email, internet download, or website login, i.e. software, digital audio, video, and ebook files.
Examples of digital services
A PDF that you purchase and download from the Internet without human involvement is considered an electronically supplied service.
A PDF that you purchase online and receive in the form of an email attachment from the online retailer is not considered an electronically supplied service.
Applying VAT to digital services
Why do you need to report VAT on digital sales to the EU?
Governments have been missing out on the tax revenue from the sale of digital products. Physical products are taxed when they cross a border through customs clearance. Digital sales may not physically be transported across a country’s border, but VAT is still due for the sale. The goal is to keep the collection of VAT consistent for sold items, both digital and physical, to ensure fair competition between EU online retailers and non-EU online retailers, and to combat VAT fraud.
VAT rules for business-to-consumer (B2C) digital sales into the EU
Charging VAT on digital goods sold into the EU
The VAT rate to charge is based on the customer’s country (country of consumption) and is based on the entire amount of the sale.
As of July 2021, all orders into the EU, including digital sales, incur VAT because of the end of the 22 EUR de minimis threshold.
When a sale is made it is important to confirm the location of the customer from a billing address, the country of issued credit card, the IP address, and the country of the SIM card (for sales made on mobile devices).
Example: Itemized VAT for a digital sale invoice on a B2C shipment
Remitting VAT to the EU for digital services
All online retailers selling digital services into the EU need to register and remit VAT under IOSS (Import One-Stop Shop) since there is no physical package or customs intervention. The Import One-Stop Shop IOSS is designed for use by online retailers selling into the EU who do not have an EU location.This means you register in only one country in the EU for an IOSS VAT ID. Registering for an IOSS will allow you to consolidate all EU VAT payments into a single return.
As a non-EU business, it is necessary for an intermediary(a person or business that is established and taxable in the EU and can register and remit on your behalf) to assist with registration and remittance. Resources for VAT compliance are through your own international tax representative company.
Steps to VAT collection and remittance as part of the IOSS scheme
Collect the VAT from the customer at the time of sale.
Itemize the VAT amount on the sales invoice.
Submit a quarterly return to the country of registration, organized by the destination country (location of the customer at the time of sale). The non-Union website will calculate how much VAT you owe from the total invoice value you enter. You will receive instructions on how to complete the payment.
Keep records for 10 years of your digital sales.
It's important to remember that you must preserve sales and customer information for at least 10 years. This information should include:
VAT rules for business-to-business (B2B) digital sales into the EU
Do not charge VAT on B2B orders. When selling to businesses with valid VAT registration numbers from EU countries, you do not charge VAT for either physical or digital goods. Through an EU program called a reverse charge, B2B buyers are responsible for declaring and payment of VAT to their own government.
VAT requirements on invoices for B2B sales (digital and physical)
Obtain a valid VAT identification number from each buyer (business).
Add their VAT ID to the invoice; each country has a unique format for VAT numbers.
You do not need to add the VAT charge to the invoice; it is the buyer’s (business) responsibility to handle VAT on the transaction.
Verify the VAT ID to ensure it is a business VAT number.
Country: Italy
VAT number: IT99999999999
Noncompliance
If you’ve failed to follow the IOSS VAT requirements for selling digital products into the EU, you will face consequences:
Frequently asked questions
How do I start charging, collecting, reporting, and submitting EU VAT?
The first step is to register for an EU VAT number in any EU country of your choice, then follow the steps as outlined in the above section in this guide: Steps to VAT collection and remittance as part of the IOSS scheme.
What should I do if a consumer purchases both a digital product and a physical product from my store?
Physical goods have separate rules involving cross-border customs and taxes and should be invoiced separately from digital products.
What happens if I do not report digital sales?
Fair reporting is the right thing to do. Can you ignore the regulation? Legally, no. The non-Union, Union scheme, and IOSS are optional. The benefit of these schemes is to remit in one country; otherwise, it is necessary to register and remit in all the EU countries where sales are made.
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