You may think that selling outside the U.S. spares you the complexities and headaches of sales tax thresholds. And you’d be right – except that in many countries you’d instead run into value-added tax (VAT) on transactions.
VAT is applied at each stage of the supply chain and is recoverable by most businesses and, similar to American jurisdictions’ sales tax, rates are generally applied at a country level with exceptions on certain products. VAT is an indirect tax on consumption, ultimately payable by the final consumer of the goods or services.
The VAT is charged by the supplier and the supplier can recover or deduct the VAT it incurs on purchases on its VAT return. Each party in the supply chain charges, remits and recovers VAT until the transaction reaches the final individual consumer. A private individual cannot recover the VAT.
Let’s look at how VAT might apply in European transactions where it’s charged as a percentage of the price at a rate determined by the European Union member state. Of the 27 members of the EU, Hungary (27%) and Denmark, Croatia and Sweden (25%) have the highest VAT. The lowest VAT rates are in Luxembourg (17%), Malta (18%) and Romania, Germany and Cyprus (19%).
When Does VAT Apply
Place-of-supply rules dictate where and when VAT applies and who is responsible for reporting. There are also different place-of-supply rules for goods versus services and whether the recipient of the supply is a business or a private individual. (This is VATs’ equivalent of U.S. nexus rules.)
Goods. When goods are not transported, the general place of supply is where the goods are physically located at the time of supply. When the goods have been dispatched or transported, it’s where the transportation begins. For goods that are installed or assembled, it’s where they’re installed or assembled.
For example, a French supplier sells and ships goods to an established business customer in Ireland. The place of supply is France. However, as this is a business to business transaction, 0% French VAT will be applied and the Irish business customer will self-account for Irish VAT on this supply in its Irish VAT return
Services. Place of supply is where the business recipient is established – which can mean the place where the recipient’s business is established, where the fixed establishment is, where the permanent address is, or where the recipient usually resides.
For example, a French consultancy (supplier) provides advice to an Irish established business customer. The place of supply is Ireland; no French VAT is charged at all.
Again, there are a lot of exceptions to these general rules.
Determining your VAT obligations involves answering several questions:
- Do you have taxable supplies in Europe?
- Are you importing goods into Europe and then selling there?
- Do you hold stock/inventory in Europe?
- Are you purchasing goods locally in Europe for onward supply?
- Do you have a supply contact that includes installation in Europe?
- Do you provide consultancy services that are connected to immovable property (a land-related service)?
- Do you provide digital services to consumers in Europe?
- Do you hold conferences in Europe and charge admission? Do you attend conferences in Europe?
There is a standard VAT registration for each country but in some cases you can use a simplified registration – One Stop Shop, or OSS, registration – to register in one EU state and report all sales to all member states. You file VAT returns monthly, bi-monthly, quarterly or bi-annually or annually depending on the country and other factors.
You may also need to file other statistics declarations, mainly relating to cross-border trade in goods, on such information as type and weight of goods, mode of transport and country of origin, among other details. (And yes, it can get burdensome if you have VAT obligations in multiple jurisdictions).
You pay any VAT liabilities to the tax office of the appropriate country.
Late assessment of your VAT obligation. This can lead to late filing – and penalties and interest. It’s important to assess your VAT impact whenever you have a new transaction flow of business activities into other countries (including Canada and Mexico).
Lack of understanding of differences of rate thresholds, return deadlines and invoice requirements. Or even an understanding of the differences: All businesses operating in Europe, for instance, struggle with the lack of VAT harmonization between member states. It always pays to closely monitor changes in local tax legislation when you do business overseas.
Not deducting your input VAT. As a fully taxable business, you have a right to deduct your input VAT. You can also deduct VAT on legitimate business expenses.
(Check out our recent webinar on VAT, featuring guest Lisa Dowling, senior global director – head of indirect tax, advisory and compliance with Taxback International in Kilkenny, Ireland.)
If you sell into another country, whether you have employees or an office there or not, you may have to collect and remit VAT and other taxes if you hit economic thresholds. Contact us to learn about the latest developments in sales-tax nexus and what they mean to your company.