If you’re an American Amazon seller who’s serious about expanding to international markets, you’ve probably already heard the term VAT (Value Added Tax). It’s one of the most talked-about topics for US-based Amazon sellers looking to expand internationally, especially in Europe. You may have even read some “nightmare” threads about VAT on Amazon sellers forums.
For Americans, the VAT system of taxation is very different than what we’re used to, even though it’s the standard in many countries around the world. More than 160 countries have a system of value added taxation that collects revenue at every step in the supply chain. In countries like Canada and Australia, it’s known as a Goods and Services tax (or GST). No matter what you call it, the VAT is different from the American system sales tax, where taxes are only levied at the point of sale,
As an American seller venturing into foreign markets, there’s a lot to understand about the way VAT taxes make sellers crazy work. So, let’s dig in.
Let’s start by explaining the tax itself, just what is a VAT? Even if you’ve never paid a VAT as a seller, you’ve paid it as a traveler if you’ve been Europe. VAT is a consumption tax, it’s added to almost all goods and services in the UK and across European Union countries, including Italy, Spain, Germany, and France.
“The Value Added Tax is a form of indirect tax that is imposed at different stages of production on goods and services,” according to Economy Watch.
VAT is complex for everyone, including Europeans, but it’s an entirely different system for Americans. A VAT is applied every time “value is added,” from the raw material supplier to the manufacturer, on to the retailer and consumer. At each of these stages, value is deemed to have been added and the tax is applied. And this is where a lot of the confusion starts for Americans, who are more used to a simple sales tax that kicks in only when a transaction takes place.
In order to meet your VAT obligations and pay the amount you owe, you need a VAT registration number. A VAT registration number is the unique code given to any taxable business or person. As a foreign seller, applying for this registration is a necessary step to conducting business in the EU and UK. Here’s the kicker, you may need more than one registration number. As if VAT wasn’t complicated enough, every country in Europe issues their own VAT numbers and has different rates and collection processes.
For starters, you need to register for a VAT number in any country where you’re storing merchandise. Crazy, right? Whether you’re using an Amazon Fulfillment Centre or a third-party warehouse makes no difference. As a US seller in the European market, you need to register anywhere your product is located. Depending on where you warehouse your goods and which countries you sell to, you may be on the hook to more than one country for VAT. Pay careful attention to where your sales and stock are located and register your business accordingly.
After you have completed your VAT registration in the country where your goods are stored, you need to keep distance selling thresholds in mind.
Simply put, if you’re an overseas business warehousing your goods in one European country, you can make sales in a different European country without having to be responsible for VAT taxes to the second country – as long as your sales stay below a certain amount. That amount is known as the distance selling threshold.
Each country has a different threshold, so it’s up to you to make sure you know what they are and are in compliance. Once you surpass the distance selling threshold for a particular country, you’ll need to be VAT registered in that country.
Here’s an example: You’re a US seller warehousing products in the UK. You’ve taken all the steps required for VAT registration in the UK, and sales are rolling in. A lot of your sales are coming from Germany. Germany has a distance selling threshold of €100,000 – and as long as your annual sales stay below that amount in a calendar year, you do not need to do a thing. Once your sales surpass €100,000, you need a VAT registration number in Germany.
It’s different in every country. Depending on where you’re registered, you may have anything from a monthly to an annual payment schedule. In the UK, where most US-based Amazon sellers begin, you have a choice, if your business turns over less than £1.35 million per year. You can pay VAT and file tax returns monthly, quarterly, and even annually – depending on what’s best for your business.
If you’re in a business that’s frequently paying import VAT, an annual filing system isn’t as advantageous as more frequent payments, where you can recoup the money you paid in more quickly. If you go on an annual accounting system, you’ll only be recouping that money once a year. The con of paying more often is more administration and accounting costs. You’ll need to find the right balance for your business to minimize VAT costs and maximize profits.
When it comes to EU and UK VAT taxes, you may be surprised to learn you can actually get money back from the government.
Each country has their own regulations that must be followed. Certain countries may require having an agent within the country you’re doing business in. Other countries stipulate that filing must happen on a certain day of the month. Always check the precise requirements for each of the countries you’re registered in, so you’re in compliance. It’s important to note that some of this information may change in 2019; that’s when Brexit goes into effect and the UK will no longer be a part of the EU.
That’s the real question, isn’t it? It’s hard to give an exact answer because VAT tax rates vary from country to country. In the UK and in France, VAT is 20%. In Germany, VAT is 19% and in Spain it’s 21%. What you pay depends on where you’re registered, where you’re selling, where you’re storing, and how much you’re selling.
For the sake of our example, we’re going to imagine that you’re an American Amazon seller who exports toys to the UK for sale in the UK and European Union. Here are a few situations that involve VAT and what you need to know:
When you import toys into the UK for sale in the EU… You must pay initial Import VAT based on the cost value of your imported products before they’re even sold. Let’s say you import $100,000 of toys from the US into the UK for sale in the EU. Based on European VAT rates, you’ll have to pay 20% import VAT on the import value of your goods right away. In this case, you would have to pay $20,000.
When listing your product on Amazon, include the sales VAT amount in your listing price… If you fail to do this, you’ll be responsible for paying the VAT taxes yourself! In this example, the VAT rate would be 20% of the sale value of your goods. Therefore, if your toy sells for $20, list it at $24. This is how you’ll get back the $20,000 you paid upfront to Her Majesty’s Revenue & Customs (HMRC), the UK VAT authority.
When paying VAT after your items have sold… At the end of your fiscal period, you’ll add up the VAT collected on your sales. If the amount collected is less than the $20,000 you paid in import VAT, you’ll be reimbursed the difference. For example, if you sell just $10,000 of toys, the VAT taxes will be $2,000 and the UK tax authorities owe you $18,000.
But if you sell more than what you paid to the tax authorities, then you’ll owe the difference. If you sell $110,000 of toys, then you have underpaid, and owe 20% of the margin over your original $100,000 (or $10,000). In this case, you need to pay an additional $2,000.
It’s more important than ever to ensure you’re in compliance when it comes to VAT and Amazon marketplaces. The UK tax authorities have recently ramped up enforcement and are pouring over Amazon looking for non-compliance. According to The Register UK, HMRC opened more than 2,100 investigations between September 2016 and January 31, 2018. If you choose to ignore or not pay VAT taxes, the penalties for getting caught can be steep, as high as 400% of the VAT amount originally owed.
“In recent years we have seen a huge increase in European tax authorities cracking down on non-compliant sellers and marketplaces. As a result, we have seen large numbers of Amazon sellers having their accounts suspended or audited,” says Romilly Blakeley of SimplyVAT.
Lastly, getting your payment processed is arguably the most important step in the VAT process. When it comes time to make your VAT payments, it’s not going to be as simple as dropping a check in the mail. You’ll be dealing with government regulations for making VAT payments and foreign currency exchange rates. If you’re an experienced international seller, then you already know the advantages of having a cross-border payment account.
The right cross-border account will also give you the ability to make VAT payments in local currency with zero fees. Here’s how it works. Your VAT payments must be made in the currency of that government. For example, the UK requires payments be made in British Pounds. If you’re an American seller, you’ve got to find a way to get US dollars into pounds, and that means paying exchange fees. If you’ve just transferred your Amazon UK payouts from pounds to dollars, then you’re paying double exchange fees!
Without a cross-border account for your Amazon marketplace payouts, you could get stuck paying double FX fees just to meet your VAT obligations. The right cross-border account gives you the ability to make your VAT payments for free in the required currency. After you receive your marketplace payout, keep some of the payout in local currency. Then when you’re ready to pay your VAT, just transfer the money (which is already in the correct currency) to the VAT authority.
This article was written with expert advice from our partner SimplyVAT. Get in touch with them to learn more or ask a VAT question.