European Union Value Added Tax regulations stipulate that if your business sells digital goods to European consumers, you have to charge them local VAT based on their locations.
After you’re done managing and collecting the correct amounts of VAT rates from each of your WordPress product sales to consumers in Europe, you still need to submit quarterly reports to the tax authorities. To that end, anyone who is not a resident of a European country, but is selling a product to a consumer in a European country, must register a VAT Mini One Stop Shop (MOSS) to be able to submit their quarterly reports from all over Europe, in one place.
Historically, businesses used to charge VAT on the sales they had made based on the accustomed rate in the seller’s country. This enabled certain larger entities to save tax money by locating their businesses in countries with relatively low VAT rates. By doing so, they paid less taxes and were able to route that extra money directly to their pockets.
The aim of the EU VAT regulations — which bases the VAT rate on the consumer’s location — is to level the playing field. Unfortunately, these new regulations end up affecting micro-businesses in a less than desirable manner, forcing them to manage all of the different VAT rates of their European customers. Quite the headache.
You can read the European Council’s official document here.
In the checkout screen, we detect the consumer’s location using their IP address (geolocation).
All the necessary information — location, VAT amount, business VAT ID — is recorded by Freemius.
