VAT/GST Insights for B2B Medical Items Sold to Healthcare Providers

Supporting the medical community is especially gratifying but complicated, particularly for those who produce and deliver medical equipment, devices, and supplies. Beyond routine business practices and being part of a highly competitive industry, back-office teams need to understand medical terminology, acronyms, and healthcare use cases.  

Whether selling or buying expensive medical equipment or less expensive medical supplies in bulk, it can be a significant cost to determine the correct VAT/GST. This is not an area where you want to get it wrong. Those who rely solely on their ERP to provide accurate VAT/GST determination and rates (ranging from 4.5%–28% globally) may be overlooking a real opportunity to add organizational value, particularly if working across geographies. Medical items can often qualify for lower rates.

Across Europe it is common for standard VAT rates to be high: Hungary at 27%, Denmark, Norway, and Sweden at 25%. Healthcare is essential to the tax base in all countries. Like basic food and essential utilities, this means medical items often come with special taxation at reduced or zero rates. The trick is knowing when those lower rates apply to specific medical items. Monitoring country by country legislation and compliance practices is more than most selling or procuring organizations can manage without automation.

There are at least four complicating factors:
1.    Constantly evolving medical technology and healthcare practices
We are fortunate to live in an age where medical innovation breakthroughs are common using emerging technologies like genomics, artificial intelligence, robotics, and nanotechnology. This innovation often precedes tax legislation, leaving gray areas for finance, tax, and IT professionals who are trying to support indirect tax compliance.

2.    Transaction party complexity
The medical equipment supply chain often involves multiple parties (manufacturers, distributors, hospitals, clinics, and patients), each of whom may have different tax obligations. Indirect tax liabilities can change, especially in the EU, depending on whether the sale is direct or through a distributor, whether it is business-to-business (B2B) or business-to-consumer (B2C), or whether the end-user is a government institution or a private entity.

3.    Country specific technical qualifications to apply reduced or zero rates
The vast majority of jurisdictions provide reduced or zero tax rates for medical products, but they are often subject to specific conditions (e.g., the medical product must be registered in the State Register   of medicines or medical products and/or listed in a Government Resolution). Our Research Team learned that only 10% of countries globally treat medical items exclusively with standard VAT/GST rates. Within Europe, research shows that only two countries (Bosnia and Herzegovina and Denmark) treat all medical items with a standard VAT rate.  Determining whether a product qualifies for a reduced or zero rate can be difficult and requires constant monitoring of regulatory changes. Government approval lists are frequently updated in cycles that differ from tax rates and are often based on advice from healthcare specialists. It takes automation to monitor both the tax rates and the specific application of each government’s list of qualified medical items. Correcting invoices in the new age of e-invoicing increases costs and makes real-time accuracy imperative.

4.    HSN/CN classification codes drive accurate results
Medical equipment is often subject to different tax treatments depending on its Harmonized System of Nomenclature (HSN) or Combined Nomenclature (CN) classification. The VAT regulations of most countries treat medical products with reference to the HSN/CN codes, often with general descriptions (e.g., medical products from CN header 9018). Determination of HSN/CN classification for goods is a complex activity. Misclassification can lead to tax overpayments or underpayments and potential compliance issues that are challenging back office and/or advisory tasks.

So, What Does All of This Mean?
An indirect tax engine can help manage the complexity of selling and buying medical products, particularly in multi-national business-to-business (B2B) scenarios. Manufacturers and wholesalers want to provide the lowest, most accurate quotes possible to earn more business vs. competitors who do not have access to this deep insight.

Manufacturers and wholesalers often sell into multiple countries and to a variety of organizations and personas, so managing complexity with a source of truth is essential.  Healthcare organizations aim to minimize costs to prioritize their mission yet often face challenges in managing these expenses effectively.

Whether you are a manufacturer, distributor, or healthcare organization, if you recognize these complexities, Vertex offers Vertex O Series for Medical which aligns with major ERP systems. We can help your buying and selling organizations scale with confidence.