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How to Set Up VAT OSS Tax on Shopify

How to setup digital goods vat tax shopify
Published 11 December 2021

Last updated on 21 July 2022

Do you want to start tracking the VAT amounts on Europe sales? You can easily track this in Shopify. I am assuming that you are only selling digital products when you’re reading this, but I’m sure it can apply to physical product stores too.

Before we start, you will need a VAT number to apply the VAT calculations. It’s a requirement to enter it.

Why does every digital product company need to sign up for the OSS (One-stop Shop) scheme?

If you’re not aware, in the past few years it’s been a legal requirement for every store to collect VAT in all EU sales, even if your company is located outside of the EU. This was introduced because large companies such as Amazon sell eBooks worldwide and avoid paying massive amounts of taxes in the countries their customers are based in.

Unfortunately, these large companies have ruined it for many small businesses because now we need to pay the VAT in the customer’s billing country they enter at checkout. The OSS or MOSS schemes have been created to make it easier for companies to pay the VAT to each EU country.

How does the OSS VAT scheme work?

  1. Essentially your company needs to register for a VAT number in a single country EU country, then register for the OSS or MOSS scheme
  2. Once registered, you or your accountant will calculate all your customer’s billing countries and VAT rates, then total it up to find how much VAT you owe to each EU country.
  3. Then you will need to pay the OSS scheme the total payment of all the amounts you owe to each country
  4. The scheme will distribute the costs to all the other country’s governments. What a mess!

What does OSS or MOSS stand for?

OSS (One-stop Shop) and MOSS (Mini one-stop Shop). You can learn the difference between them below.

What’s the difference between OSS and MOSS?

The difference is simple – MOSS was what it was called until 21st July 2021, and then it converted into OSS.

How to apply for VAT OSS in the UK

The UK stopped the MOSS scheme on January 1st 2021. This caused an uproar because we had to re-register for MOSS/OSS in Ireland. Therefore we now need to pay our VAT bill in euros to Ireland for them to then distribute it to other EU countries.

You will still need to stay registered for VAT in the UK and do a separate VAT return. So essentially you need to do two VAT returns.

How to set up your digital goods VAT tax settings in Shopify

Step 1 – Enter your VAT number into Shopify

Go to Settings > Billing > Scroll down to ‘Tax registration‘ > Enter your VAT number

Billing shopify settings
Vat number in shopify settings

Step 2 – Go to ‘Taxes’

On the ‘Taxes‘ page, scroll down and enable ‘Charge VAT on digital goods‘.

Taxes
Charge vat on digital products

Step 3 – Go to ‘Shipping & delivery’

Shipping and delivery

Click on ‘Manage rates

Click on manage rates

Scroll down and click on ‘Create shipping zone

Create shipping zone

Step 4 – Add ‘Europe’ as a shipping zone

Click on ‘Europe’ so it selects all countries in Europe. Unfortunately, you cannot search in the search box ‘Europe‘ at this time of writing this blog. You will need to scroll down and tick the ‘Europe‘ checkbox and click ‘Done‘.

Click europe
Europe shipping

Step 5 – Go back to ‘Taxes’

Taxes shopify

Scroll down to ‘European Union‘, click the button ‘Set up‘.

European union

Step 6 – Click on ‘Collect VAT

Collect vat shopify setting

Step 7 – Click ‘One-Stop Shop registration

Once selected, click the ‘Next‘ button.

Oss shop registration

Step 8 – Enter VAT details and registration country

Once you enter these details, click the ‘collect VAT‘ button.

Enter vat details

Step 9 (Non-UK Users) – Set up UK if not included in Europe selection

You may need to set the United Kingdom up as a separate country to collect VAT. The UK are not in the EU anymore. I am based in the UK so I am unsure if it gets set up automatically with the EU setup above. Please comment and let me know below.

All done

That is everything pretty much. This will add all the European countries to be tracked for VAT on your digital goods.

How to allow customers to deduct VAT on their orders

If you want to add the ability for customers to automatically deduct VAT from an order by supplying their VAT registration number (Business to business sales), you can do so by the following:

Download one of these apps that suits you better:

Sufio and Exemptify are apps to help you achieve this. DO NOT use the Digital Takeout apps; they do not reply and are terrible.

Meanings for the taxes settings on Shopify

‘All prices include tax’ meaning

Taxes charged on shipping rates are included in the shipping price.

‘Include or exclude tax based on your customer’s country’ meaning

If you sell internationally, then you can include or exclude taxes in your product prices based on your customer’s location. If you enable this setting, then customers in countries or regions such as the United Kingdom see prices inclusive of their local value-added tax (VAT) or exclusive of taxes in countries or regions such as the United States, where buyers expect to see taxes added at checkout. Learn more.

‘Charge tax on shipping rates’ meaning

You can charge tax on your shipping rates if you have a physical product store.

‘Charge VAT on digital goods’ meaning

This means that Shopify will charge the digital VAT rate in the customer billing country. If a customer types in France, then Shopify will automatically add Frances’s 20% VAT rate on the sale. Learn more about digital goods VAT.

Summary

There you have it, how to set up your OSS or MOSS system on Shopify to collect VAT rates in your customer’s country. I hope it’s been really helpful. If you feel anything is missing from the blog, please let me know in the comments, and I will add it.

About Author

Will is a professional Ecommerce Shopify expert (7 years experience) & a professional Filmmaker/Video Editor (17 years experience). Now living between the Isle of Man & Brighton, UK. Highly experienced in Premiere Pro, DaVinci Resolve, After Effects, Shopify, WordPress & SEO. Owner of Teckers, Bounce Color, Stunt Camera Crew & more.

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