VAT (value-added tax) is the most common consumption tax in the world. More than 170 countries impose a VAT or a goods and services (GST) tax, which is very similar.
VAT is charged as a percentage of the sale price, and it's levied at every stage of an item’s production before finally being passed on to the end consumer. Businesses must collect VAT from customers and remit the collected amounts to tax authorities, so if your business is selling taxable products or services in a country with VAT, you'll have to understand and comply with local requirements.
Understanding VAT compliance high level
VAT and GST are very common consumption taxes, although they are not charged in the U.S.
GST and VAT are different from sales tax in the U.S. in that they are charged at each stage of the supply chain, rather than just being charged when the final product is sold.
If you do business outside of the U.S., you must ensure that you are in full compliance with VAT rules in the countries where you’re selling goods and services. This means you must:
- Understand when you owe VAT.
- Know and collect the correct amounts.
- Produce VAT invoices for all transactions liable for VAT. These invoices must contain all required information.
- File mandatory reports with the relevant taxing authorities.
- Remit VAT amounts correctly — on time and in full.
Unfortunately, VAT rules vary by country, which complicates compliance for businesses that sell to customers in multiple locations.
VAT registration: When and how to register
If you must collect VAT, registering is the first step. Registration rules vary by country, but you may be required to register in a country that collects VAT if:
- You have a permanent physical location in the country and/or are holding goods in a warehouse or on consignment there.
- Your business activities (including buying, selling, and importing goods) meet the country’s VAT threshold.
- You engage in specific business-related activities within the country's borders. For example, if you host a convention in Canada and sell books, posters, or educational materials, you may have to register there.
A VAT threshold is the amount of money you can earn in a country (over a 12-month period) before you need to register to collect VAT there. These thresholds vary by country and can change. They are also different for local sellers and foreign sellers. For example, in EU countries, foreign sellers are typically subject to VAT on almost all sales to customers, no matter the sales volume, while higher thresholds usually apply to domestic sellers. For example:
- In the UK, the VAT threshold for foreign sellers is £0. For domestic sellers, it is £90,000, as of April 1, 2024.
- In Italy, the VAT threshold is also €0 for foreign sellers sellers, and for domestic sellers, it is €85,000, as of January 1, 2023.
- In Ireland, foreign sellers must register before their first sale, while two different VAT thresholds apply to domestic sellers: €85,000 for those selling goods and €42,500 for those selling services.
Obtaining a VAT registration number
Once you meet the requirements to register, you need to obtain a VAT registration number. The process for doing this, and the type of registration you're eligible for, varies depending on the type of business you operate and your company's relationship with the country. That is, that there are different processes and requirements for:
- Domestic businesses.
- Non-domestic businesses selling into foreign markets.
- Businesses selling digital services (such as SaaS providers or content creators)
- Businesses selling physical goods.
In some countries, foreign companies that are required to register for VAT are eligible only for a local tax number. This allows the company to conduct VAT transactions locally but not to engage in intra-community trading.
Information needed to get a VAT registration number
While the specific requirements for getting a VAT registration number also vary by location, you typically must provide the following details:
- Proof of VAT registration in the country where your business is located (if you operate in any VAT countries).
- An original copy of your company's certificate of incorporation and/or articles of association.
- Proof of existence from the national company registrar.
- Proof of planned trade, such as invoices or business contacts.
Some countries also require you to appoint a fiscal representative, and provide a letter granting that representative power of attorney when you register. A fiscal representative is someone who is licensed in the country where you’re doing business. The fiscal representative agrees to share legal responsibility for any VAT your business owes, and it's their job to ensure that you comply with local rules.
Obtaining a VAT registration number can take much longer than registering to collect U.S. sales tax — around eight weeks in some countries. So it's important to start the process before beginning to sell goods or services.
VAT invoicing and compliance
In VAT countries, specific types of invoices may be required to ensure compliance. However, the specific rules for what is required vary by country, with some locations having much more complex requirements than others. The type of business also matters, as invoicing requirements may be relaxed for business-to-consumer (B2C) transactions, as opposed to business-to-business (B2B) transactions.
Any company that's required to register for VAT must follow invoicing rules for qualifying sales of goods and services, and it must submit invoices by the required deadline. This deadline varies by country, but it’s usually 30 days or fewer from the earlier of two dates: the date when your business supplied the taxable goods or services, and the date payment was made.
Typically, VAT invoices must include specific information, such as:
- Seller details: This includes the company name and address, as well as a VAT registration number for the business.
- Customer details: This includes the name and address of the customer and their VAT number if they're also registered.
- Date: This is the date when the invoice was issued.
- Time of supply: This is also called the tax point; it’s the time when the VAT was charged.
- Information about the goods or services: The invoice should clearly describe what products the buyer purchased or what services they used. It should also specify the price per item or per service, including VAT, and specify the total value of the transaction.
- VAT rate: The invoice should state whether VAT was charged at the standard rate, was charged at a reduced rate, or was zero-rated.
- VAT amount: This is the total amount of VAT charged at each stage of the transaction. This is important, as each user is responsible only for the VAT on the amount of value they add.
- Gross total: This is the total amount the customer must pay, including the VAT.
You can also include other details, such as the terms of the payment or an invoice number identifying the document. These details can be helpful to buyers and sellers in tracking the transaction.
The goal is to ensure that you have a detailed record, so you can comply with your tax obligations and provide records of the transactions you took part in if you are audited.
VAT compliance challenges for specific business types
VAT compliance is especially challenging if you sell in multiple countries, as your business must register and follow local VAT rules in all of those locations.
The good news is that, depending on where you're doing business and the type of business you're doing, there may be tax schemes in place that simplify things. However, the options available depend on your industry and where your business is headquartered.
For example:
- If you have a location in the EU and are selling products across EU countries or if you are selling physical goods into EU countries, you can register for the VAT One Stop Shop (VAT OSS) scheme. This allows you to avoid registering with every EU country where you have VAT obligations. When you participate in VAT OSS, you pay all the tax you collect to local taxing authorities, who then distribute the funds.
- If your business is not an EU business, and you are selling SaaS or digital goods directly to customers, you can take part in the VAT OSS non-union scheme. To participate, you'll need to choose an EU country to register in. This would most likely be the country where most of your customers are based or where the registration portal is easiest to use.
EU and non-EU businesses can also register for the Import One-Stop Shop (IOSS) scheme, as long as their goods are imported in consignments that don't exceed €150 and they sell goods to consumers.
IOSS allows your business to avoid having VAT levied at the border when goods arrive in the EU, and instead allows you to charge VAT to customers at the time of sale. If you are not based in the EU, you can register for IOSS in any EU country, but must appoint an intermediary.
Understanding the programs that apply to different businesses will allow you to meet the requirements specific to your industry.
E-invoicing and real-time reporting
In an effort to use technology to improve compliance with VAT obligations, some countries now require e-invoicing, real-time reporting, or both.
E-invoicing means invoicing using digital files that contain data recognized by accounting systems and enterprise resource planning systems. Real-time reporting means automatically transmitting data on VAT transactions, either at the time of the transaction or shortly after.
When companies must send electronic invoices and report transactions in real-time, taxing authorities can find fraud more quickly and easily, track economic performance and watch for trends, and better estimate the VAT income that they will receive.
Sometimes, in countries with these mandates, an e-invoice is prepared, sent to the taxing authority, and then transmitted to the buyer after the invoice has been cleared by officials. However, the process varies by location. For example:
- In Spain, companies that do more than €6 million in annual revenue have four days from the time they issue or receive an invoice to report transactional data to the Spanish Tax Administration Agency (AEAT) but the invoice does not need to be approved by officials.
- In Italy, businesses registered for VAT in the country must submit e-invoices for B2B transactions. For certain types of retail trade, including most B2C transactions, e-invoices aren't required unless customers request them. When required, invoices must be submitted to the Sistema di Interscambio, which is an e-invoicing platform, and the government must approve them and apply a digital signature before the invoices can be exchanged between buyers and sellers.
Once e-invoicing and real-time filing are implemented, businesses benefit because they can easily track transactions and ensure VAT compliance. However, understanding different requirements and setting up the process initially can be challenging.
VAT returns: Filing and reporting process
Businesses must report their taxes due and file VAT tax returns. Most often, you can do this by uploading the required paperwork to an online platform operated by the local taxing authority. Steps involved include:
- Calculating your VAT liability: The amount you owe is the difference between your output VAT and input VAT. If the amount you owe exceeds the amount you can reclaim, you owe taxes, while you are owed a refund if your input VAT is higher than your output VAT.
- Submitting through the appropriate online portal: You may need to submit multiple VAT returns to different countries.
- Paying the amount due: Usually, this can be paid via bank transfer, credit card, or direct debit. Late payments will result in fees and penalties.
The specific forms you must submit vary depending on where you're filing returns. You may also need to include documentation in addition to your VAT form. For example:
- VAT-registered businesses in the EU must submit an EC sales list detailing the goods and services they sold or provided to other businesses within the EU.
- Companies that meet Intrastat filing thresholds must submit filings detailing both dispatches and arrivals of goods sent to other EU countries. Filings must include a description of the goods sold or purchased, the item commodity codes, the quantity and value of the items, the country codes for the countries of origin and arrival, and shipping costs and delivery terms.
Unfortunately, complying with these obligations can present many challenges, including:
- Ensuring the accuracy of data.
- Correctly calculating VAT when multiple tax rates apply.
- Understanding special rules and requirements for cross-border transactions.
Outsourcing tax compliance or implementing automated VAT return filing solutions can help your company overcome these obstacles.
Paying VAT and handling cross-border compliance
Your company must comply with VAT rules and make required payments everywhere it does business. There are different rules in different locations, which can make this process very challenging for companies that do business in many countries.
Typically, you can pay VAT by electronically transferring the amount due to the relevant taxing authority, but it's important to keep in mind that, generally, amounts must be stated in the currency of the country where the payment is due, and amounts must be paid in that currency.
The use of a centralized VAT payment system can streamline this process and ensure that you submit your payments on time and pay the correct amount after accounting for foreign currency conversions.
Tax audits and VAT investigations
Taxing authorities conduct audits to ensure compliance with VAT rules. Any business can be audited, but there are certain factors that increase the chances of being investigated. They include:
- Type of business: Larger companies, and those that import or export large volumes of goods, are more likely to be audited.
- Unusual patterns: Tax authorities compare the performance data of businesses within the same sector. If there are unusual patterns, such as an above-average number of refund requests, this could trigger an audit.
- Cross checks: Taxing authorities can also compare data from different parties in a transaction. If discrepancies arise, this raises a red flag that could lead to an investigation.
Keeping careful records and effectively managing and storing data can help your business be prepared for an audit if one occurs.
The role of VAT compliance solutions
VAT compliance software can simplify compliance by automating many parts of the process, including:
- Automated VAT return generation.
- Automated nexus study for jurisdictions in the EU and UK to determine whether you are required to register.
- VAT ID validation for applying reverse charge mechanism to determine which transactions require VAT collections and which are exempt.
- Currency conversion to see your VAT obligations in multiple currencies.
- Tools to help in-house teams and external tax consultants collaborate.
Finding one platform, such as Numeral, that takes care of all of these tasks enables you to reduce the time that it takes to fulfill your obligations, helps ensure accuracy so you don't trigger an audit, and maximizes the chances you'll be found in full compliance if an investigation occurs.
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Final thoughts
Being able to do business across the globe can be key to company growth, but the VAT obligations that result can be a major challenge.
You don't want to risk falling out of compliance and facing an audit and penalties, which can be extremely expensive, as the highest VAT rate in the EU is 27% (calculated based on sales, not profits). That's why it is so important to explore compliance solutions early on if you hope to become a player on the international stage.
Automated tools and expert advice from VAT-compliance specialists can make complying with tax rules almost effortless, so you can focus on making your business a success.
