Many businesses have expanded their operations to multiple countries. While this provides the opportunity to increase revenue, it can also create tax complications.
For growing businesses, being aware of the specific tax laws for each country where sales are made is the best way to safeguard against tax compliance issues. As tax is a complex topic, we've created a guide covering what you need to know about value-add tax (VAT), including when you should be collecting VAT from your customers, how to register to collect VAT and what to do when it's time to file and remit.
Related report: Global tax trends and changes for 2024
What's in this article?
- What is VAT?
- When am I required to collect VAT from customers?
- How do I register to collect VAT?
- How to file and remit VAT
- Value-added tax vs sales tax
What is VAT?
VAT stands for “value-added tax”, and is a type of indirect tax that applies to physical goods or services. It’s called value-added tax because it’s charged whenever value is added to the product throughout the supply chain, from production to the point of sale. The business collects the tax from the customer and is responsible for sending (remitting) the tax to the appropriate government agency at a set due date. As of June 2023, VAT has been adopted by 175 countries around the world. In some Asia-Pacific countries, it is known as goods and services tax (GST).
When am I required to collect VAT from customers?
In many countries with VAT, foreign businesses (remote sellers) are required to register to collect VAT as soon as they perform their first taxable transaction in a country. However, some countries (for example, Australia, Japan, Canada) have monetary registration thresholds. Businesses with turnover below the registration thresholds are not required to register.
The tax collection obligations vary depending on the buyer country, product sold and buyer status (consumer or business). For example, foreign businesses must collect tax on sales of digital products to consumers located in the EU, but if the customer is a VAT-registered business, it is the customer’s responsibility to account for tax.
How do I register to collect VAT?
The first step to registration is to determine where you are required to collect VAT and register with the appropriate tax authority. Once registered, you can begin collecting and remitting VAT.
Many countries provide simplified registration processes for foreign sellers. A major benefit of these simplified registrations is that foreign businesses can complete all registration formalities online and do not have to appoint a local tax representative.
The European Union (EU) introduced Vat One-Stop Shop (VAT OSS) to simplify the registration process across EU countries. VAT OSS includes three separate registration options: OSS Union, OSS Non-Union and Import OSS. If you sign up for VAT OSS, you don’t have to register with each country within the EU where you sell goods or services remotely. If you are based in an EU country, you can register with your home country’s OSS portal. But if your business is based outside the EU, you can choose any European country to register for OSS. All non-EU-based businesses selling in the EU may register for OSS, but the OSS registration is not mandatory. A business may opt for a domestic registration instead. Post-Brexit, the UK now has a VAT registration process that's separate from Europe's VAT OSS. Learn more about registering for VAT in Europe here.
How to file and remit VAT
Submitting a VAT return is the final step to compliance. If you have not collected VAT from customers in a period and have no VAT to pay, you may still need to file your return by the due date. Unlike sales tax, VAT returns require businesses to report two types of VAT: the amount charged to your customer (output VAT) and the amount paid to suppliers (input VAT). The VAT to be remitted to the government is the difference between the VAT that you collected and the VAT that you paid to your suppliers.
Each country has their own return forms and filing frequency. Your due date and how often you file could be dependent on your annual sales revenue. An OSS registration requires you to submit a quarterly OSS return in the country of registration.
Once you have paid all the VAT in the country where you registered for OSS, your local tax authority will redistribute the VAT revenue to the other countries on your behalf. Failure to file and remit the correct amount of VAT can result in interest and penalties.
Value-added tax vs sales tax
Sales tax is another type of indirect tax levied on the sales of certain goods and services in the US. Sales tax is different from VAT in that it is a single-stage consumption tax imposed on retail sales; it is only levied once in the supply chain. Unlike VAT, the sales tax system does not allow for input tax deduction to claim back the sales tax businesses pay on their purchases. Instead, sales tax operates with exemptions.