Before learning how to pay VAT between the U.S. and Germany, it’s important to know what it is. VAT, or value added tax, is a form of sales tax used across the European Union. It applies to both B2B and B2C transactions, although businesses should ultimately be able to reclaim all of the VAT they pay.
The intention is to demonstrate the ‘value added’ to a product with each link in the chain – from creation to business transactions to shipping – with the final cost of the item and its supply chain reflected in the price paid by the consumer.
How to pay VAT between the U.S. and Germany
The rate of VAT in Germany is 19%, with a limited number of goods being eligible for a lower 7% rate. Goods imported to Germany from outside the EU are subject to a different tax, called Import Turnover Tax, equal to 19% of the value of the items plus other import costs, such as shipping. Goods imported from within the EU apply VAT at the point of sale.
As a customs duty, this is ordinarily levied on the importer, but the exporter may be liable if they are declared as the ‘importer of record’. Entrepreneurs receiving goods for sale in Germany are also eligible to deduct Import Turnover Tax in the same way as VAT, with the costs passed through to the consumer. Exports from Germany to the US are VAT exempt.
Do I need to register for VAT in Germany?
Businesses trading physical goods in Germany that are not VAT registered elsewhere in the EU have no VAT threshold, and must register for a German VAT number. Businesses that are registered elsewhere in the EU have a distance selling threshold of €100,000 per annum. If this is exceeded, they must also register with the German tax authority.
US exporters can work around this process by appointing a principal, or what’s known as an importer of record. This third party will be based in the country you are exporting to, and will handle the import declarations and payment of the relevant taxes. The US based businesses will be unable to claim the VAT back, however, and this will often be included as part of the shipping fee to the importer of record.
Can I receive a VAT refund in Germany?
Wherever your business is based, you should be eligible to reclaim any VAT paid from B2B and B2C purchases and business expenses. If the ‘output’ (VAT lost to buying a product) exceeds the ‘input’ (VAT gained from selling a product), the local authority will make up the difference.
Businesses registered in Germany will do this using a VAT Return form, separate to the MOSS process, which only administers payments. Businesses registered elsewhere in Europe may follow the same process locally. This will often involve different processes and forms depending on whether the VAT refund is for domestic or European sales.
Businesses that are not VAT registered can only reclaim VAT under certain exclusive circumstances, where there is no need or possibility for the business to be VAT registered. These can include certain business expenses incurred in Germany, and the transporting of goods through Germany, but designated for sale elsewhere.
What is the EU VAT ‘place of supply’?
Where things become complicated is how to pay VAT between the U.S. and Germany on digital goods and services, such as music or eBooks. A 2015 EU directive on digital goods and services was designed to level the playing field for online businesses, in essence by preventing the abuse of ‘digital tax havens’.
What it means in practical terms is that wherever you are in the world, your business is responsible for reporting and paying VAT at the point of purchase to the customer. This applies to digital goods and services, including (but not limited to):
- TV shows
- Video games
This either requires registering for and paying VAT in each of the 27 member states in which you have customers; or using a VAT ‘mini one stop shop’ (MOSS VAT) solution. Your business must collect the data on customer locations and sales and submit this to your local MOSS, which in turn carries out the process of paying the VAT to each national authority.
What is MOSS VAT?
For an in-depth description of MOSS as it applies in the UK – a common destination for VAT registration – and how you can use it to pay VAT between the U.S. and Germany, you can read our dedicated MOSS page.
MOSS, or the ‘mini one stop shop’, is a Europe-wide system designed to streamline the process of paying VAT in multiple EU territories. It comes in two flavours:
Union scheme: you can register for this in a European territory where your HQ is based; or if your HQ isn’t in Europe, you can register in any EU country where you have offices.
Non-Union scheme: if your business is based entirely outside the EU, you can opt to register for the non-Union scheme in any EU country. Until now this has seen many US businesses use the UK MOSS scheme, due to the lack of language barrier and the ease of registration.
However, Brexit may result in the UK losing its MOSS Union scheme. As a result businesses may have to transition to another English speaking MOSS system, such as Ireland or Malta, or to another EU country.
Every EU member state has its own MOSS portal, and registering for MOSS means you apply its principles to VAT in all member states. You can register independently in every country for VAT, but if you’re registered with MOSS, you can’t pick and choose who you use it for.
MOSS is a system for paying VAT, and any overpayment of VAT will be addressed and repaid by whichever nation is liable. However, to claim on VAT deductibles you will still need to submit a separate VAT refund wherever your business is VAT registered.