The European Union Value Added Tax (EU VAT) is type of a tax which is levied on most goods and services that are traded for consumption within the EU. It is applied when a VAT registered business sells goods or services to buyers based in EU. "Value added" in VAT refers to the amount by which the value of a product is increased at each stage of production and distribution.
It is mandatory that you register for VAT in the EU state where your business is incorporated. Depending on the products/services you sell in an EU member state, you may have to register for VAT in that member state. You can choose between two options for registering in member states:
You can either register for VAT in each EU member state where you sell your products.
Or you can register for VAT MOSS (consider this option if you sell digital services online to more than multiple EU member state).
If your buyer is from the EU member state where your business is domiciled then the VAT rate of your member state is applied, irrespective of the buyer being a consumer or a business.
If your buyer is from a different EU member state, the VAT rates depend on the type of service you are providing:
If you are selling Digital Products/Services:
If you are selling Other services:
If you have not registered in your buyer's member state, the VAT rate of your member state applies
If you have registered in your buyer's member state, the VAT rate of your buyer's country applies.
If your buyer has a valid VAT number and is from a different member state, VAT is not applied. This is in keeping with the reverse charge mechanism which puts the tax onus on the business buying from you.
Here is the list of rates per EU Member state:
The rates are subject to change based on EU VAT Notice/ announcements. Rates last updated 12th Oct 2016.
How does Chargebee differentiate between a B2B and B2C transaction?
VAT numbers are used to distinguish between your individual customers and your business customers.
If you are selling to a buyer without a VAT number, the transaction is considered a B2C transaction and the buyer is considered an individual/consumer.
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. Tax rates, as applicable, are explained as follows.
Location Validation (For Digital Services)
If you sell digital products, you will have to collect and store proof of your customers' location. Apart from helping calculate an accurate VAT rate, this information will help prevent fraud. The following non-conflicting pieces of evidence are accepted as valid proof of location:
Chargebee collects the Billing Address country and IP Address of the buyer and will store this information for a minimum of 10 years in compliance with regulation.
EU VAT Invoice
An EU VAT Invoice sent to a consumer must contain the following information:
Merchant's trading name and address
Merchant's VAT number
Buyer's name or trading name, and address.
The invoice contains the applicable VAT rate for each line item and a subtotal amount before applying VAT and a final invoice amount after VAT is added.
You can configure EU VAT invoices on the Invoice Customization page. Navigate to Settings > Customize Invoice and Credit Note.
This section will walk you through configuring EU VAT in Chargebee:
Make sure you've added your organization address at Settings > Site info. You cannot configure taxes in Chargebee without completing this step as your initial setup.
Go to Settings > Taxes and click the Enable Tax option.
Step 3: Choose a Price Type for EUR
Once taxes are enabled, you will be redirected to a page containing all the currencies that you have enabled for your site. Step 3 is configuring a price type (the price that you quote for your product/service/addon can be either inclusive of tax, where tax is included in the price, or exclusive of tax, where tax is added to the price) for each of these currencies.
VAT invoicing rules call for your invoices to reflect the VAT rate that you are applying. This means that you will have to set your EUR Price Type to Tax Exclusive if you are selling to customers residing in the EU.
If you are selling to the EU in a different currency, check out how to configure price type for a region so your invoices are aligned with regulation here.
Choosing the EU VAT option in the dropdown menu here will redirect you to a page dedicated to countries in the EU.
Location validation: Enable this option if you are selling digital services.
Chargebee captures the following address/location information as evidence of a customer's place of residence in adherence with the EU VAT location requirements. If you would like to disable this feature, you will have to collect two pieces of evidence that your customer resides in the EU yourself (in order to stay compliant with the regulation).
Customer's IP Address:
Hosted Pages If you have integrated with Chargebee using the hosted pages, the IP Address of the customer will be collected automatically.
API If you use the Chargebee API, you will have to pass the IP Address of the customer to Chargebee 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 Chargebee using the hosted pages, the BIN of the customer will be collected automatically.
API If you use the Chargebee API, you will have to pass the BIN of the customer using the card [number] parameter in the Create a Customer API.
VAT number validation: Enable this option if you sell to businesses.
If you sell to businesses, it is recommended that you collect the VAT numbers of your Business customers and ensure that it is valid. Chargebee verifies the validity of a VAT number entered using the European Commission's VAT Information Exchange System (VIES) .
Enable this option if you sell to Italy and Spain.
For certain countries such as Italy and Spain, the VAT numbers of businesses that trade within the country are not automatically available in the VIES database. Such businesses need to explicitly register their numbers in VIES if they trade with EU countries outside of their country of business. In such cases, Chargebee will not allow subscriptions to pass through since the VAT number status will be unverified and, therefore, invalid. Use this option to disable VAT Number validation for your country of business, and Chargebee will allow subscriptions to pass through.
Up next, choose between the I sell digital products and the I sell other products options in the EU VAT configuration page. This will help Chargebee apply an appropriate tax rate to your invoices, as EU VAT regulations specify different tax rates for digital and physical products. Additionally, this choice sets your next step up - 6a deals with digital products and 6b deals with physical products.
You have the option of entering the single registration number of your member state or the multiple registration numbers of the member states where you are selling. Chargebee will apply your local VAT rate to invoices when appropriate (when you are not registered in the customer's country), your customer's VAT rate to invoices when appropriate (when you are registered in your customer's country) and the reverse charge mechanism to invoices when appropriate (when you are selling to a business).
When is the Reverse Charge Mechanism applied?
In keeping with VAT regulation, Chargebee applies the the reverse charge mechanism only when:
You can alter the rates, names and schedules of these taxes after you have entered them.
If you are selling digital products to a large number of countries in the EU, registering for VAT in individual member states could be a difficult task, with 28 countries and a total of 27 different VAT rates. Instead you can register for the EU's optional program to simplify the VAT process called the Mini One Stop Shop (MOSS), which enables businesses to register in one country and pay their dues with a single payment. Learn more about VAT MOSS .
Non-VAT MOSS Registered Merchants
If you have not registered for VAT MOSS you will be given options to select the countries in which you have a presence and manually enter the VAT registration number each country has assigned your business.
You can alter the rates, names and schedules of these taxes after you have entered them.
VAT MOSS Registered Merchants
If you have registered for VAT MOSS you will need to enter the single registration number you've been provided.
If you are selling physical products to a number of countries within the EU, the VAT rate of your member state is applied to your invoices. Simply enter the country where you are domiciled and your VAT number here and Chargebee will calculate what rates are applicable to your invoices.
If you cross a certain threshold of sales per annum (this threshold figure differs from country to country) you will have to register for VAT in the member states where you have a commercial presence.
If your customer's location validation fails, he will not be able to complete his order. He will receive the following error message:
If a customer signs up for a trial plan which involves no immediate payment, the subscription is created irrespective of whether the location validation was successful or not. The details of the customer are marked with a warning indicating that the location validation failed, as shown here:
For a transaction to be considered B2B, a valid VAT number has to be provided by the customer. If you use Chargebee's hosted pages, enabling the VAT number option will display the VAT Number field in the checkout pages.
To enable VAT Number in the hosted pages,go to Settings > Hosted Pages Settings > Field Configurations and enable the VAT Number field under the Tax Information section.
Chargebee makes use of VAT Information Exchange System (VIES) to validate the VAT number entered by your user. EU commission mandates that any VAT number entered must be validated.
If the VAT number is invalid, the transaction will not go through.
If we're unable to connect with VIES to validate a VAT number, the status of the VAT number is marked as "Undetermined" and the transaction is allowed to go through. The validation process of the VAT number for this customer will be retried.
Once a successful retry is made, the customer's VAT number status is marked valid/invalid based on the result of VIES. You will be able to filter the customers with an invalid VAT number and get in touch with them, asking them to update a valid VAT number.
Filtering based on VAT number can be done as follows,
If the customer has confirmed that the provided VAT number is valid and VIES shows that it is invalid, as per the following European Commission FAQ the customer will be required to contact their fiscal administration.