Updated on July 19, 2022
Avalara’s Jennifer Sokolowsky is the author of this week’s blog piece.
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For retail owners, international marketplaces can provide a wealth of opportunity.
When local sales are stagnant, selling outside borders might provide an opportunity for growth, as well as an opportunity to get an advantage over your competitors. Diversifying your business can also be a benefit.
It is more difficult to do business abroad than it is in the United States, though.
Taxes, notably VAT, are a crucial factor when planning a business.
Value added tax (VAT) explained
With just a few letters, VAT, you may make a major difference in your business while doing business outside of the United States.
Value-added tax is referred to as VAT. In the United States, it’s also known as a G&S tax (or GST).
Taxes in the United States are referred to as “VAT.” but with a slew of important distinctions.
It’s critical to understand the local VAT laws in any place where you plan to do business internationally.
First, let’s take a closer look at what VAT is and how it differs from regular taxes.
How sales tax and VAT differ
Despite the fact that both VAT and sales tax rely on consumer spending to generate income for the government, each has its own set of rules and procedures.
Re-sellers and wholesalers in the United States do not have to pay sales taxes.
At the point of sale, tax is collected in most other nations, where it is collected at each stage of the supply chain.
Both VAT and sales tax have a 10% rate, but the procedures and paperwork are radically different, yet the end user pays the same amount of tax in each case.
VAT is explained in further detail in a video from Will’s Whiteboard:
A world of VAT
Educate yourself on the country’s VAT regulations if this is where you plan on selling your products. Only a handful of countries tax goods and services.
You can choose to view the data as a map or by country.
These are the countries that charge VAT.
Many countries, such as the United States, do not impose VAT on goods and services sold.
It’s crucial to keep in mind that each country’s VAT regulations are unique. Before a country can begin collecting VAT, a number of conditions must be met:
Please let me know if this is in fact your permanent home.
Those places where your customers can be located
When it comes to satisfying your customers, it doesn’t matter if they are people or corporations.
You appear to be underestimating your own abilities, to put it mildly.
How and to whom do you market and sell your products and/or services? Exactly how do you plan to accomplish your objectives?
Being your own boss and making money from it
As a business, you may be able to get back some of the VAT that was incurred when you sell to other firms. A business must legally remit every cent of VAT it gets from customers.
It is entirely up to you whether or not VAT is included in the pricing of your products, but it must be clearly mentioned. If you plan to sell your products internationally, you may be able to justify a price rise.
Registration and compliance: how to get VAT right
Many countries have difficulty complying with VAT, even if they are straightforward to calculate..
To make compliance easier, it’s critical to know which countries you’re selling to and what criteria they use.
In order to complete the registration and filing of VAT returns, particular steps must be performed. The following is an example of what must be done when selling into the United Kingdom:
Register your business for VAT.
Customers in the United Kingdom should be charged the correct amount of VAT at the time of purchase.
Reimburse HMRC for any VAT that is past due (or HMRC, the department of the UK government responsible for the collection of taxes)
The deadline for submitting your VAT returns is approaching.
To avoid any fines or penalties from the tax office, keep accurate VAT records and an up-to-date VAT account.
When it comes to selling to customers in other countries, you’ll need to be aware of local legislation before you can use this as an example of the steps required in one country (and charging them VAT).
If their sales meet the standards for VAT collection in that jurisdiction, a VAT seller is required to register and file returns. It may be necessary for a company to have an agent or a fiscal representative in a foreign country, or even to incorporate in that country.
From the format required for documents to the manner invoices are presented, every country has its own set of rules. For instance, copies of documents may be acceptable in some locations while originals and notarizations are necessary in others. This is because each jurisdiction is different.
Whether you’re selling overseas or domestically, you’ll need to account for value-added tax (or VAT) at some point.
It should go without saying that staying in line with VAT regulations can be a bit… challenging.
Another issue that must be taken into account is the method of payment.
As an illustration, businesses in France and România are required to make payments via direct debit in local currency.
Depending on the country, the nature of the business, and whether the amount of business reaches particular levels, reporting frequency varies. It’s possible that sellers in Germany, Ireland, the UK, and Denmark will be forced to file returns on a bimonthly, quarterly, or even six-monthly basis, depending on local regulations.
The challenges of complexity
Unfortunately, gaining clear information on the various countries’ reporting and payment websites and procedures can be a struggle, and language barriers can offer a further impediment to comprehending requirements.
However, it’s vital not just to know the specific restrictions where you are selling, but to examine how these possibilities will fit with your business strategy.
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 supplier might also impose the burden of importing products on the client, which would mean extra expenses and time delays for them. Other solutions would be supplying items through dropshipping or via a platform that collects VAT on behalf of the seller. Each of these solutions would have distinct ramifications for your organization and the amount of VAT that is paid and recorded.
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.
The penalties for noncompliance vary based on where you are located, and where you are selling into.
The consequences for noncompliance differ based on where you are located, and where you are selling into.
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.
VAT should be a priority, not an afterthought, for businesses operating worldwide.
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If you’re seeking for materials to help you answer VAT questions, there is plenty to go on.
These include the official websites for VAT government agencies, the Value Added Tax Blog, and Avalara Vatlive, which delivers updates on the latest VAT news and country-by-country recommendations 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 assesses VAT for transactions in 193 countries, leveraging a continually updated database of rules and exceptions.
Make VAT a priority when expanding internationally
There is no room for error when it comes to calculating value-added tax (VAT).
As your store grows, you’ll be able to stay compliant and avoid confusion if you plan ahead and have the right resources at your disposal.
Ask about VAT, international taxes or selling overseas if you have any questions. You can reach out to us in the comments if you need help with anything.