Within the European Union, the (EU VAT) European Union Value Added Tax is the tax which is implemented on goods and services. EU VAT is charged by the organizations and is paid by its consumers. In different EU member state, different rates of VAT impose. The overall VAT that is collected by the member states is utilized as a part to determine what contribution each state is adding in the EU's budget. It is levied whenever a VAT registered company sells goods or services to the EU based customers. In VAT "Value added" refers to the quantity by which the value of a product is improved at each stage of distribution and production.
EU VAT Rules
It is compulsory that you register VAT in the EU state wherever your business exists. Depending on the services/ products you may have to register for VAT in that EU member state. You can opt between two options for registering in member states:
- Either you can register for the VAT in each EU member state where you are selling your products.
- Or you have to register for the VAT MOSS, in case you sell the digital services online to multiple EU member state.
In case your customer is from the EU member state where your organization is located then the VAT rate of that member state will be levied, irrespective of the customer being a consumer or a business.
In case your customer is from some other EU member state then the VAT rates will depend on the type of services you are offering:
- Your customer’s member states' VAT rates levy (destination based)
- In case you have not registered in your customer’s member state, the VAT rate of that member state is implemented (origin based)
- In case you have registered in your customer’s member state, the VAT rate of your customer’s country applies (destination based)
However, irrespective of the type of service offered, in case your customer is from a different member state and has a valid VAT number, VAT is not applied. This is in accordance with the reverse charge mechanism that puts the tax accountability on the business buying from you.Below given is the list of rates per EU Member state:
On the basis of EU VAT notice/announcements the rates are subject to change. Last rates are updated on 29th May 2019. We suggest that review the rates while setting up taxes to stay updated.
Location Validation (For Digital Services)
In case you sell the digital products, you have to store and collect proof of the location of your customers. Despite of helping to calculate an exact VAT rate, this information will be helpful in preventing fraud. Below given are the non-conflicting pieces of evidence that are accepted as the valid location proof:
- The billing address country of customer
- The IP address of the device used by the customer
- Bank’s location from which the payments were made
- The country code of customer’s SIM card
- The location fixed land line of the customer
- Credit Card's BIN
The IP Address and billing address country of the customer is collected by ChargeMonk and will store these details for a minimum of 10 years in compliance with regulation.
EU VAT Invoice
An EU VAT Invoice forwarded to a consumer must contain the following details:
- The address and trading name of merchant
- The VAT number of merchant
- Invoice Date
- The name or trading name and address of the buyer.
The invoice comprises of the pertinent VAT rate for each line item and the subtotal amount prior to applying VAT and a final invoice sum after VAT is included.
You can set up EU VAT invoices in Invoice Customization page. Go to Settings > Configure ChargeMonk > Invoices, credit notes and quotes.
Configure EU VAT
Step 1: Provide your Organization Address
Ensure that you have entered the address of your organization at Settings > Configure ChargeMonk > Business Profile. You cannot setup taxes in ChargeMonk without the address of the organization.
Step 2: Enable Tax
Go to Settings > Configure ChargeMonk > Taxes and click the Configure Tax tab.
Step 3: Choose a Price Type (Tax inclusive or exclusive)
When taxes are enabled, you will be forwarded to a page comprising of all the currencies that you have enabled for your site. This step determines to configure a price type for each currency. This helps in deciding if the price you quote for your service/product /add-on can either be tax inclusive, which means tax is included in the price, or tax exclusive, which means tax is added to the price. VAT invoicing rules needs your invoices to imitate the VAT rates which you are applying. That means you will have to configure your Price Type to Tax Exclusive in case you are selling to consumers residing in the EU.
Once done, click on I've Reviewed my Price Types button.
Step 4: Set up the list of Countries (as a part of Tax jurisdiction)
In the Add Region choose EU Region option in the dropdown menu that will forward you to a page where you can select what type of product you want to sell. You have to choose between I sell Non-Digital products and I sell digital products options in the EU VAT configuration page. This step will help ChargeMonk to apply an exact tax rate to your invoices, as EU VAT regulations identify different tax rates for physical and digital products.
Step 4a: If you sell Digital Products
In case you are selling the digital products to a various countries in the EU, registering for the VAT in individual member states could be a daunting task, with total of 27 different VAT rates and 28 countries. Instead you can also register for the optional program of EU to simplify the VAT process known as Mini One Stop Shop (MOSS) that helps businesses to register for one country and pay their dues with a single payment. The country mentioned in the billing address will be considering tax calculation. Know more about VAT MOSS.
Step 4b: If you sell Physical/Other Products
In case you are selling physical products to a various countries within the EU, the VAT rate of your country is levied. Just enter the region where you are residing with your VAT Number in ChargeMonk and it will calculate what rates are applicable to your invoices.
For the calculation of tax, ChargeMonk will consider the region mentioned in the shipping address. However, if there is no shipping address, the billing address of the country will be taken into account.
In case you go through a certain threshold of sales per annum (the threshold figure varies from country to country) you need to register for VAT in the member states where you have a commercial existence.
- ChargeMonk will levy the origin based tax if you have not crossed the threshold of sales to a specific EU Member State, i.e., in case you have not registered in the country.
- ChargeMonk will levy tax based on destination if you have crossed the threshold of sales to a EU Member State, i.e., in case you have registered in that country.
You can choose and add the countries where you are accountable to pay taxes.
- Tax Registration Number:
Configure the tax label as EU VAT and type your VAT Number here. This will be shown in the invoices sent to your consumers.
Step 5: Configure taxes
You can set up the validation options you need to enable and the information you want to get when your users’ checkout:
- Location Validation:
Select this option if you want to get validation for the location information of your customer by ChargeMonk. Learn more.
- EU VAT Number Validation:
Select whether to execute EU VAT Validation against VIES or not whenever the customer enter the VAT number.
In case you sell to organizations, it is suggested that you should collect the VAT Number of your business customers and make sure that it is valid. ChargeMonk confirms the validity of a VAT number added against VIES.
- Enable the VAT number validation for the Country of Business:
Enable this option in case you are selling to Spain and Italy. Refer FAQ for more info.
- Collect Tax Registration Number:
Enable this option in case you are expecting your customers to enter their VAT Number while creating a subscription.
- Generate VIES VAT Consultation Number
whenever this option is enabled, an advanced VAT validation is performed. Get more info in this section.
- VAT Exemption Note:
Add the VAT Exemption note to be shown in the invoices whenever sale is made to other businesses (reverse charge scenario). This VAT Exemption Note will be shown at the bottom of the invoice.
- VAT Exemption Note for Exports:
Export goods from the EU country to any place outside the EU is not subject to VAT according to Article 146 of the EU VAT Directive. In case you export goods to some other countries from the EU as part of your business, enabling this option will automatically add a note in the respective invoices that refers to the VAT exemption for export transactions. You can also edit the note to add/edit the text.
- Export VAT will not be exempted in case of other country, tax is implemented on the same invoice.
- Consider that the address of your organization must be in EU for the VAT Exemption Note for Exports to work.
ChargeMonk considers the following location/ address information as an evidence of the place of residence of the customer in accordance with the EU VAT location needs. In case you disable this option, you need to collect the following evidences by yourself, to make sure that your customer is from EU.
Customer's IP Address:
- Hosted Pages: In case you have associated with ChargeMonk using the hosted pages and the customer’s IP Address will be collected automatically.
- API: In case you are using the ChargeMonk API, you need to pass the IP Address of the consumers to ChargeMonk by using the User Details Header API.
Card BIN of the Customer:
The first six digits of a card constitute the Bank Identification Number (BIN). BIN gives us the information about the card issuing bank and hence can be used as a way to determine the customer's location.
- Hosted Pages: If you have integrated with ChargeMonk using the hosted pages, the BIN of the customer will be collected automatically.
- API: If you use the ChargeMonk API, you need to pass the BIN of the customer by using the card [number] parameter in the Create a customer API.
In case the Location Validation tab is enabled and the validation fails, the consumer will not be able to complete the order.
Location Validation Failure
In case the location validation your customer fails, they will not be able to complete the order. Then they will get the following error message:
In case a customer register for a trial plan that involves no immediate fee, the subscription is generated irrespective of whether there is a successful location validation or not. The information of the customer is marked with a warning signifying that the location validation failed, as shown here:
EU VAT Validation
The policy updates were applicable from the August 22nd, 2017 onwards.
ChargeMonk authorizes VAT Number by forwarding a validation request to VAT Information Exchange System (VIES), which is a search engine owned by the European Commission.
Merchant VAT Validation
As a merchant you may have a tax registration number in the different EU member countries. On the other hand, for offering the digital services across the EU region more conveniently, you need to register for VAT MOSS.
The VAT number(s) you provide will get validated automatically.
Once you update/add one of your VAT numbers on the screen above, it is validated using VIES and the results are displayed. The validation result can be one of the following:
VAT Number validation was successful and the number is valid
VAT Number validation failed
You can click on Mark as valid to ignore and override the VIES validation result.
No response from VIES, or other errors. ChargeMonk retries validation attempts periodically for such VAT numbers.
Customer VAT Validation
Your customers can add their VAT Number once you enable the Collect Tax Registration Number feature. You can confirm VAT Number validation by enabling the Enable VAT Number Validation option.
VAT Consultation Number
VIES can help you to prove to the Tax Administration Department that you have successfully validated the VAT number of your customer at a certain time. This includes using the special VIES validation enquiry upon successful validation, and creates a unique VAT Consultation Number. Once you enable this option in ChargeMonk, this number will be requested for and get stored for your convenience. (You can export/view these details under Settings > Import & Export Data > Export Data > VIES VAT Validation History.). In fact, this advanced VAT validation service verifies your own VAT number along with your customer’s, and both must be applicable for the consultation number to be created. In case this validation fails at any moment, then as a contingency, ChargeMonk performs thebasic VIES validation of the VAT number of your customer.
- During the VAT validation, in case ChargeMonk finds your VAT number to be invalid, which was valid earlier, the site owners and site admins are notified by an email immediately.
- The VAT Validation and Consultation Number attempt related to the details will be available from 30th Nov, 2018.
- In case you are using multiple tax profiles, the VAT numbers in your primary profile will be used for creating the consultation number.
When EU VAT Validation Service VIES is down
In case the VIES service will be down due to a VIES internal error, ChargeMonk will never be able to know, if the VAT Number is INVALID or VALID. In the absence of any status, you can setup one of the options:
- Allow storing the VAT number and proceeding with creating subscription - this setting is default in the ChargeMonk.
- Confine subscriptions from being generated if VAT number status is not known - contact email@example.com to setup this option.
On the basis of your choice, ChargeMonk generates subscriptions (or not).
In case you have chosen to gather and save the VAT numbers without any validation, when service (VIES) is down, ChargeMonk will verify for VAT number status later, every 24hrs. On the basis of response from the VIES, below given actions will be taken.
- VALID - In case the VAT Number is VALID, the VAT will not be implemented and subscription will be continuing to renewal.
- INVALID - In case the VAT Number is verified INVALID, the upcoming invoices will have VAT imposed. Additionally, ChargeMonk will forward emails with information of such consumers to the site owner and site admins.
Validate VAT Number Every 3 Months
During the renewal of subscription, ChargeMonk will verify the VAT number of your customers, if it was not verified in the last 3 months. In case a VAT number is found INVALID, VAT will get applied on the upcoming invoices.
EU VAT Exemption
There could be times when a business customer is not having a valid VAT number, let’s assume that when their sale is not above the VAT threshold or their VAT validation status is found to be INVALID and when the VIES database is not yet updated. In such instances, if you certify the consumer as a genuine business, ChargeMonk permits you to manually intervene and apply the reverse charge - with or without a legitimate VAT number. You can do so whilst editing/creating the records of Customer, under billing info, in the Customer details.
Under the VAT settings, permit these is a business customer and choose Enter the VAT Reg Number to identify the VAT number or choose this customer does not have a VAT number.
In both cases, your customers who belong to a different member state than yours will be exempted from VAT. This is to keep with the reverse charge mechanism and the relevant note will be shown in the invoice.
- "This customer is excused from tax payment" overrides the VAT settings where you can mark the customer as exempt from the VAT. For example, once the customer is marked exempt from the taxes, and again under the VAT settings, you choose this customer does not have a VAT number, then taxes will not be imposed and at the same instance the invoice will not be shown in the VAT Exemption (reverse charge) note.
- In case you update the VAT settings of customers or just remove their VAT number, a warning note will be shown. You might do changes in the ChargeMonk’s UI or your customer can make changes from the Portal; in any of these cases, the latest information will always be maintained for the VAT settings.
- Once you are applying for the VAT Exemption for your customers without any VAT number, don’t forget to edit the note that displays on the invoices for reverse charge from setup ChargeMonk > Taxes > EU Region > VAT Exemption Note. You need to remove the part that mentions "valid VAT registration number was provided.”
1. How to enable VAT Number to be shown on the hosted pages?
For any transaction, a valid VAT number is to be considered B2B, and has to be given by the customer. In case you use hosted pages of ChargeMonk, enabling the VAT number feature will be shown on the VAT Number field in the checkout pages.
To allow VAT Number in the hosted pages, if you're using:
- Hosted Pages v2: Go to Settings > Configure ChargeMonk > Checkout & Portal > Field Configurations and choose the VAT Number field under the Tax Information section.
- Checkout Pages v3: Go to Settings > Configure ChargeMonk > Checkout & Portal > Fields > Billing and choose the VAT Number field.
2. How does ChargeMonk apply taxes when Shipping & Billing addresses are present?
For the tax calculations, ChargeMonk will consider the country given in the shipping address allied to the subscription.
If shipping address is not present, the country in the billing address will be considered for tax calculation.
If both are not given, tax will not be applied/ calculated.
3. Can I change the Tax Inclusive/ Exclusive settings?
Yes, you can amend the Price type, i.e., whether the prices displayed during the checkout should be Tax Inclusive or Exclusive.
4. What is the difference between non-MOSS and VAT MOSS registered merchants?
- VAT MOSS Registered Merchants: In case you have registered for the VAT MOSS you have to enter the VAT MOSS registration number. ChargeMonk will impose the destination based tax for the VAT MOSS registered businesses, i.e., then the VAT rate of the EU Member State where the sale is made, irrespective of the region you are registered in.
- Non-VAT MOSS Registered Merchants: In case you have not registered for the VAT MOSS you will be provided options to choose the countries in which you have a existence and enter manually the VAT registration number for each of the country where you sell.
5. When is the Reverse Charge Mechanism applied?
In order to conform the VAT regulations, then ChargeMonk imposes the reverse charge mechanism only when:
- The customer holds a valid VAT number (signifying that you are transacting with the business) and
- The customer is registered in some different EU country.
6. How does ChargeMonk distinguish between a B2C and B2B transaction?
VAT numbers are used to differentiate between your business customers and your individual customers.
- In case you are selling to a customer without a VAT number, the transaction is taken as a B2C transaction and the customer is considered as a consumer/ individual.
- If you are selling to a buyer with a valid VAT number, on the other hand, the transaction is considered B2B and the buyer is treated a business.
7. How to view customers who’s VAT Number is invalid?
ChargeMonk will mark the VAT number status of customer as invalid/ valid based on the response from VIES. You will be then able to pick out the customers having an invalid VAT number and get in touch with them for asking them to update a valid VAT number.
On the basis of VAT number filtering can be done as follows,
- Go to Customers
- Choose the VAT Number status of Customer as the filter criteria
- Select "Invalid" from the dropdown menu
- Customers with an Invalid VAT Number will be shown
In case the customer has confirmed that the given VAT number is valid and VIES displays that it is invalid, according to the following European Commission FAQ the consumers have to contact their fiscal administration.
8. What is the importance of enabling the location validation for the Country of Business?
For some countries like Spain and Italy, the VAT numbers of organizations that trade within the country are not available in the VIES database automatically. Such businesses have to openly register their numbers in the VIES in case they trade with EU countries which are on the outside of their country of business. In such instances, ChargeMonk will not permit subscriptions to go through since the VAT number status will be unconfirmed and invalid. Use this feature to hinder VAT Number validation for your country of business and ChargeMonk will let the subscriptions to pass through.
9. How does ChargeMonk manage the location validation when there are multiple payment methods for a customer?
In case there are more than one payment methods present against a customer, ChargeMonk will follow this procedure:
ChargeMonk will use the IP address of the customers to regain the customer’s physical address. Then it will attempt to confirm the physical address and the billing address of the customer.
In case the country of the physical address that is retrieved by the IP addresses matches the billing address country that the customer has given, the location of the customer will be marked as VALID.
In case the customer’s IP addresses cannot be found, ChargeMonk will try to confirm customer location by matching the issuing country (of the payment methods added) with the billing address.
In case the issuing country of any of the payment methods of customer matches the billing address, the location of the customer will be marked as VALID.
In case the above fails, the location of customer will be marked as INVALID.
- In case the billing address of the customer is changed, ChargeMonk will execute its validation checks again. In case the recorded IP address details doesn't match the updated billing address, the location of the customer will be marked INVALID and you will be informed.
- ChargeMonk performs the location validation at the time of a charge. A location of the customer will not be marked as INVALID/ VALID when they register for a trial plan or if their payment is not charged on registration. Upon charging the card, ChargeMonk will confirm the customer’s location and attempt to collect the payment. The payment will fail only if the location validation of the customer fails.