Expanding globally has the potential to bring incredible new opportunities for any business. But it will also bring new challenges, especially with regards to how you manage the complexity of registering for, charging and remitting international sales taxes, including Value Added Taxes (VAT).
If you’re selling digital goods and services, you generally won’t need to worry about duties, income taxes or the tax implications of stocking a warehouse. But you will need to know which sales and value added taxes (VAT) get applied on what products and how you need to pay them.
Functionally, a VAT is the same as a sales tax. However, the implementation and business implications vary, with the key difference being that with a VAT, the value of each intermediate product in the supply chain is taxed, rather than just the final value like with a sales tax. In practice, this means that taxes will apply differently if you’re selling to businesses rather than to consumers. For example, many countries don’t require you to collect taxes when selling to another business.
No matter what tax you need to collect - sales, VAT or otherwise - understanding a country’s tax law will ensure you’re collecting the correct amount of tax at the checkout from your customer. But each country has different tax laws, which also means you will be remitting your taxes in a different way. That’s why we’ve put together this high-level introductory overview of what to expect with regards to VAT in the European Union for when you start growing your business globally.
When selling to consumers based in EU countries, you’ll first need to consider a couple of things:
1. The type of good or service you sell
2. If you expect to have any physical presence outside of your home country
Answering those two questions will help you determine which taxes are applicable to you in which countries.
In 2015, the EU introduced new legislation that simultaneously standardized tax rules for companies selling digital goods to EU customers and established a clear(er) definition of the digital goods that would be taxable.
The EU now defines digital goods or ‘electronically supplied services’ as services delivered over the internet which are:
Drilling down a little, the United Kingdom’s Revenue and Customs office considers the following to all be examples of digital goods and, therefore, taxable:
As a result of the legislation, any provider of digital services must collect and pay VAT at the rate the customer is located in. But for ecommerce companies, the largest benefit to the new legislation is the creation of a “mini one-stop-shop” or MOSS. With MOSS, businesses only need to register with a single member state (of their choosing) and submit one VAT return (which is automatically distributed to required parties).
|Member State||Country Code||Standard VAT Rate (%)|
Source: European Commission
If you’re selling directly to a consumer in an EU country, you must charge VAT at the rate set by your customers’ current country. Crucially, you need to use two non-conflicting pieces of evidence when determining the location of your customers, like, for example, their billing address and IP address.
The EU’s tax model has served as a template for other countries developing their own legislation, especially across Europe.
As consumers increasingly make the switch towards digitally delivered goods and services, governments are reluctant to lose tax revenue. As a result, it’s no surprise to see Canada, China and countless other countries in various stages of incorporating cross-border digital goods explicitly into their sales tax policies. Especially after seeing the success other jurisdictions have had incorporating digital goods taxes into their larger sales tax structures.
As your business expands globally, alongside managing the growth opportunities of your new markets, it’s critical to stay on top of tax challenges. To avoid headaches, you can opt for a comprehensive ecommerce platform to automatically handle tax collection and remittance, letting you focus on what you do best – growing your business.