The European Union Value Added Tax (or EU VAT) is a Value Added Tax on goods and services within the European Union (EU). The EU's institutions do not collect the tax, but the EU member states are each required to adopt a Value Added Tax that complies with the EU VAT code. Different rates of VAT apply in different EU member states.
An Intra-Community (Intra -EU) acquisition of goods is a taxable transaction for consideration crossing two or more EU member countries. The place of supply is determined to be the destination member state, and VAT is normally charged at the rate applicable in the destination member state.
When selling to a VAT registered Customer or Vendor in another EU country, there are specific rules for these Intra EU transactions:
For sales and procurement transactions for which the physical nature is goods, this determination is made based on whether each trading partner is registered in the ship to country, the ship from country, or both, taking into account the rules that apply both within and outside of the EU:
If the trading partner is registered for VAT, the following rules apply:
Reverse Charge is a tax schema that moves the responsibility for the accounting and reporting of VAT from the seller to the buyer of goods and/or services. Therefore, recipients of goods and/or services report both the output VAT (in the role of a seller) and the input VAT (in the role of a purchaser) on their VAT statement. The buyer is totally responsible for filing VAT on the transaction
For purchases under the Reverse Charge schema, the purchaser who receives the invoice that has the reverse charge acts as a buyer and a seller for VAT accounting purposes. When a purchase invoice that has the reverse charge is posted, two sales tax transactions are created. One transaction has the VAT Output tax direction. The other transaction has the VAT Input tax direction.
For sales under the Reverse Charge schema, the seller doesn't charge VAT.
If the trading partner is not registered for VAT, VAT is normally charged at the rate applicable in the destination member state. There are certain trading thresholds that determine whether the local member state VAT rate or the destination member state VAT rate is charged.
Setup requirements for Intra-EU VAT transactions
In order to track and record Intra-EU transactions, specific VAT class / Tax locations are required:
Enter an appropriate VAT Class name & description (for e.g. "Intra EU-VAT")
Ensure that the Intra-EU Community VAT field is checked [TRUE]
Enter the local VAT percentage applicable for Reverse Charge liability in the Intra-EU Community VAT Percent field. This is the rate at which the purchases under the Reverse Charge Schema will be levied at
Once the appropriate VAT Class / Tax location is assigned to the relevant transaction, the following will occur upon processing:
Sales Orders - where an Intra-EU VAT Class or Intra-EU Tax Location is assigned, VAT will be levied at a 0 % rate
Purchase Orders - where an Intra-EU VAT Class is assigned, VAT will be levied at a the Intra-EU Community VAT Percent as setup in VAT Classes. Both the Reverse Charge entries will be processed - Dr Input VAT and Cr Output VAT [calculated using the Intra-EU Community VAT Percent]
Where the customer or Vendor are not VAT registered:
Sales Orders - Sales are levied at the appropriate VAT rate depending on the threshold achieved. Rootstock does not automatically manage the thresholds and a user would need to override / select the appropriate VAT class / tax location applicable for the sale.
Purchase Orders
Where the Vendor is from within the EU and not registered for VAT, there will be no VAT levied on the Purchase Order. The appropriate VAT class will need to be manually entered / selected
Where the Vendor is outside the EU, no VAT will be charged on this transaction by your Vendor. Instead, import VAT will have to be paid before the goods will be released from customs.The appropriate VAT class will need to be manually entered / selected on the Purchase Order.
Other than the above, the rest of the Purchase Order and Sales Order process remains unchanged.
