Selling goods cross-border on electronic channels entails tax liabilities, some of which may come as rather unexpected. Here are some practical issues our clients have encountered, which hopefully may help avoid their mistakes.
As long as you sell goods or provide services in your home country, the rules are simple: you do not have to add VAT with a turnover below EUR 40,000 in Estonia and Latvia, and EUR 45,000 in Lithuania. With cross-border transactions, however, things become more complicated.
Here’s the rule of thumb: if you sell goods to anyone outside the European Union, you charge 0% VAT. And if you sell to another VAT payer in the European Union, you also enter 0% VAT and the tax is calculated by the other party.
But if you sell goods from Estonia, Latvia or Lithuania to consumers in other European Union member states, a number of problems will arise. States have provided turnover limits, and anyone who exceeds the limit will have to register as a VAT payer in the country. In Estonia, Latvia, and Lithuania this limit is EUR 35,000, ie if the turnover of goods sold to Estonian, Latvian or Lithuanian consumers exceeds this limit per calendar year, you must register as a VAT payer here and start paying VAT here.
Similarly, an Estonian, Latvian or Lithuanian trader selling goods in, say, Germany, and exceeding the local turnover limit, will face registration obligations there. Furthermore: if you sell excise goods to consumers in another EU country, you will be required to register as a VAT payer in the country as soon as you sell your very first beer bottle!
The good news is that a VAT reform in the European Union is planned for the beginning of 2021. Once in force, distance sellers who sell to consumers in other member states will no longer have to register as VAT payers in different countries. Estonian, Latvian or Lithuanian sellers will simply calculate the VAT amounts of those countries and pay the tax in Estonia, Latvia or Lithuania, while the local tax board will forward the amounts to other countries. Companies whose cross-border turnover remains below EUR 10,000 a calendar year can pay VAT in Estonia, Latvia or Lithuania.
Electronic services are taxed where consumed
Taxation of electronic services – any electronically transmitted image, music, film, game, access to databases, etc – is subject to slightly different rules. The place of taxation is the country where the consumer is located, so no registration obligations follow; you just have to register in the MOSS (Mini One Stop Shop) system in Estonia and pay VAT here.
In the case of electronic services, however, it is often difficult to locate the customer and calculate the VAT rate. As proof, you must present two non-contradictory pieces of evidence of the customer’s location. For example, if a customer has an IP address in Germany and pays with a German credit card, it can be safely assumed that the consumer is from Germany. You calculate German VAT and pay it to the Estonian, Latvian or Lithuanian tax board, which forwards it to Germany. The EUR 10,000 limit also applies here.
Customs issues present a headache
Customs issues have also caused many problems in transactions with third countries. No problems can be expected within the EU, which also serves as a customs union, but upon selling or buying goods outside the EU, some exciting tax liabilities may be incurred.
No customs tariffs are imposed by the EU for goods sold outside the Union, but a problem may arise in the receiving country. For example, China or the United States may impose a duty on the goods you sell.
Also, we have seen Estonian, Latvian and Lithuanian companies and consumers buying goods from outside the EU and not being able to retrieve them unless import duties are paid.
Regular import duties are the least taxable, usually single-digit: say, you wish to import axes and so pay a 3% customs duty. There are, however, worse options. First, retaliatory tariffs, named after the Donald Trump-China-Europe “gymnastics”, when taxes were slapped on steel, then jeans, then Harley-Davidsons, and so on. These tariffs are often as high as 25% or even 50% percent.
But the toughest are the anti-dumping duties that the EU imposes on Chinese goods. China subsidizes its companies, so the EU balances these benefits with its customs duties, reaching as high as 70% or 85% of the value of the goods. This also means you’d better know where the goods are coming from – you may, for example, buy electric bicycles from Taiwan, but if the tax authorities finds out that the bikes are of Chinese origin instead, your bikes become 85% more expensive.
In 2021, the so-called “Ali Express” changes will also enter into force. If you order small purchases for less than 22 euros, you will have to pay VAT.