Today’s post comes to us from Jennifer Sokolowsky at Avalara. AvaTax for WooCommerce is a seamless integration for Avalara’s tax calculation services. Automatically calculate tax rates, submit documents to Avalara for transactions, and enable address validation at checkout for supported countries. Give it a try today to get tax right no matter where you’re selling.
International markets can offer big opportunities for store owners. Selling across borders can offer growth potential when local sales have plateaued, as well as a way to get an edge on competitors. It can also offer a way to diversify your business.
However, selling internationally can be more complicated than doing business domestically. One of the major considerations to keep in mind is how to deal with taxes — specifically VAT.
Here’s what you should know about the value added tax (or VAT), when and where it applies, and how you can make sure you get VAT right when you begin selling internationally.
Value added tax (VAT) explained
For any company doing business outside of the United States, three little letters — VAT — can make a big difference to your business.
VAT stands for value added tax. It’s also known as goods and services tax (or GST). VAT is the equivalent of sales tax in the United States… but with many major differences.
Knowing the VAT rules for any country where you want to expand is crucial for successful navigating international markets. We’ll get into those rules in a bit — but first, let’s take a deeper dive into what VAT is and how it’s different from the taxes you’re probably used to.
How sales tax and VAT differ
While sales tax and VAT are related — both are sources of revenue for governments based on consumer consumption — they entail completely different rules and processes.
In the United States, sales taxes are only charged at the final point of sale, so resellers and wholesalers are exempt from paying tax.
In most of the rest of the world, however, tax is charged and collected at each point in the supply chain, rather than the final point of sale.
While the end user will ultimately pay the same amount of tax whether it’s 10% sales tax or 10% VAT, the process and documentation are quite different.
For VAT explained in further detail, see this video from Will’s Whiteboard:
A world of VAT
If you’re selling into a foreign country, it’s essential to scout out the VAT landscape there. More than 160 countries charge VAT, including China, India, and most of Europe.
For a complete list of countries and their rates, go here, or have a peek at the map below:
The VAT rules for every country are different. But there are some basic factors that will determine whether you will have to collect VAT within a certain country, including:
- Where you are based
- Where your customers are based
- Whether your customers are consumers or businesses
- What you are selling
- How your products or services are being delivered
- The amount of your sales
If you are a business selling to other businesses, the VAT that you pay may be recoverable via refunds. However, the VAT that you collect from consumers for goods or services must be remitted to the government in order for you to be in compliance.
This means that VAT must be added to your product prices and passed on to your customers, or you must pay the VAT yourself. This is an important point to consider in planning to sell internationally — and it may merit an increase in prices to cover the increase in taxes.
Registration and compliance: how to get VAT right
While determining the right VAT rate for a country is generally fairly straightforward compared with figuring out U.S. sales tax rates, VAT compliance can be quite complex.
To make compliance easier, it’s important to know which specific countries you’re selling into, and to have an understanding of their requirements.
There are some precise steps you’ll need to take to register and file your VAT returns. As an example, here’s what someone selling into the United Kingdom would need to do to be compliant:
- Register for VAT
- Charge the correct amount of VAT to UK customers at checkout
- Pay any VAT due to Her Majesty’s Revenue and Customs (or HMRC, the department of the UK government responsible for the collection of taxes)
- Submit your VAT returns by the due date
- Keep proper VAT records and an up-to-date VAT account
This is just an example of the steps required in one country — while the general process is similar elsewhere, you’ll need to have an understanding of each country’s requirements before you start selling to customers located there (and charging them VAT).
If your sales meet the criteria for collection of VAT in a particular country, you generally must register as a VAT seller in that country and submit returns. In some cases, a company must have an agent or a fiscal representative within the country where they are doing business, or even be required to incorporate in that country.
For each country, there are different rules on everything, from how invoices must be presented and which exchange rate to use to the format for documentation. In some places, copies of documents are acceptable, for example, while in others, documents might need to be original and notarized.
How payment is processed is another factor that must be considered. For example, in France, a business must pay via direct debit, and in Romania, payment must be in the local currency.
Reporting frequencies vary as well, based on the country as well as factors such as the nature of the business, and whether the amount of business exceeds certain thresholds. Sellers could be required to file returns monthly in Germany, bimonthly in Ireland, quarterly in the UK, or every six months in Denmark, for example.
The challenges of complexity
Unfortunately, getting clear guidance on the various countries’ reporting and payment portals and procedures can be a challenge, and language barriers can present an additional hurdle to understanding requirements.
However, it’s crucial not only to know the specific rules where you are selling, but to analyze how these options will work with your business model.
When you are preparing to sell into a particular country, for example, there could be different ways of clearing the products across borders. In some situations, a business could take it upon itself to act as the importer, which could require registration and make the business responsible for duties, taxes, and customs.
The seller could also place the burden of importing goods on the customer, which would mean extra costs and time delays for them. Other options would be delivering goods through dropshipping or via a platform that collects VAT on behalf of the seller. Each of these options would have different consequences for your business and the amount of VAT that is paid and reported.
What happens if you get VAT wrong
Every country imposes penalties on businesses that don’t comply with VAT regulations, but again, these vary widely according to the country.
When a business has a fiscal representative within a country, that representative and the business could be jointly liable for any unpaid VAT or penalties stemming from noncompliance. However, this is only the case in some countries.
In cases where a business is located in the U.S. and is not registered for VAT in the destination country, penalties can still apply, but enforcement may be more difficult.
The best thing to do here? Use a proven solution or partner with a tax professional to ensure you get your ducks in a row right away. That way no penalties will apply to you, your employees, or your business.
Resources to help you get it right
For companies that are expanding internationally, VAT can’t be an afterthought. It needs to be a consideration in any plan for doing business internationally.
If you’re looking for resources to help you answer VAT questions, there are plenty to go on. These include the official websites for VAT government agencies, the Value Added Tax Blog, and Avalara Vatlive, which offers updates on the latest VAT news and country-by-country guides on compliance.
As far as solutions go, the AvaTax extension for WooCommerce can provide a one-step solution for dealing with VAT. This integration quickly and accurately determines VAT for transactions in 193 countries, leveraging a constantly updated database of rules and exceptions.
Make VAT a priority when expanding internationally
Value added tax (VAT) isn’t something you can guess at and hope to get right. With preparation, a thorough understanding of the proper processes in the country or countries you’re selling into, and the right resources behind you, you’ll be able to stay compliant and avoid confusion as your store — and its reach — grows.
Have any questions about VAT, international taxes, or selling overseas? Let us know in the comments and we’ll be happy to assist.