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Your company is constantly looking for ways to grow your revenue potential and reach the next stage of growth. One viable strategy is to invest resources in international markets since cross-border ecommerce can boost sales revenue by exposing your software and digital products to a new cohort of international shoppers.
But wait, before you dive head first into a new round of marketing strategy, you should be aware of one of the risks that come with cross-border sales: proper tax collection and remittance! Each market has its own unique rules around digital tax compliance which is why your company should avoid a “one size fits all” approach.
For example, in the name of fairness to EU sellers, countries under the European Union will apply different Value-Added Tax (VAT) rates on all imported digital goods and services.
Understanding VAT is integral to your company’s success in the EU. Keep reading to learn more about maintaining proper VAT compliance and how you can preserve the reputation of your software company while selling to customers in the EU.
What is VAT?
Foremost, VAT stands for “value-added tax” and it’s a consumption tax that applies to all goods and services sold in the European Union. Value added tax works very similarly to sales tax in the sense that every time a customer makes a purchase in the EU, they are also expected to pay the Value-Added Tax during the transaction too.
One important thing to remember is that VAT applies to all goods sold, regardless of whether or not customers are purchasing a physical or digital product from your online store. Additionally, your company’s physical location doesn’t exempt you from VAT responsibilities either! If you’re supplying software, SaaS, or any other digital product to E.U. customers, it’s your responsibility to make sure you’re collecting and remitting VAT to the appropriate authorities—even if you’re based outside the EU.
Taxing physical products when they’re going through customs is a pretty straightforward procedure. But thanks to the internet and digital file delivery services, taxing digital products is often a bit more complicated since these digital files don’t necessarily have to clear any borders. Moreover, making foreign digital products VAT exempt could have negative implications by making them more attractive than domestic products. Imagine if you’re an EU resident in the market for photo editing software. All things being equal, a domestic software solution would appear comparably more expensive than a VAT-free version of the same software.
Levying VAT digital products not only increases tax revenues but also allows domestic and international software vendors to compete on equal footing.
Handling VAT Collection and Remittance
We’ve established that your software company is responsible for collecting value-added taxes on all purchases made in the EU. But how exactly does the process work?
Foreign companies selling their software or SaaS in the EU serve as a “VAT middleman”. Every time an EU resident purchases your digital product, your company holds onto a portion of the sales revenue to later pay to the government. You’re not using your own money to pay for the VAT, however, if your business fails or forgets to collect the value-added tax, you are required to cover the missing amount out of your own pocket.
Proper VAT compliance really boils down to four important steps:
- Identifying your customers and their physical location.
- Determining location-based VAT rates and charging it when applicable.
- Keeping a detailed record of the transaction.
- Reporting Value-Added Tax.
Check out the VAT tax rate for each of the 28 EU countries below:
- Austria: 20%
- Belgium 21%
- Bulgaria: 20%
- Croatia: 25%
- Cyprus: 19%
- Czech Republic: 21%
- Denmark: 25%
- Estonia: 20%
- Finland: 24%
- France: 20%
- Germany: 19%
- Greece: 24%
- Hungary: 27%
- Ireland: 23%
- Italy: 22%
- Latvia: 21%
- Lithuania: 21%
- Luxembourg: 17%
- Malta: 18%
- Netherlands: 21%
- Poland: 23%
- Portugal: 23%
- Romania: 19%
- Slovak Republic: 20%
- Slovenia: 22%
- Spain: 21%
- Sweden: 25%
- United Kingdom: 20%
Who is VAT Exempt?
The most important aspect of the entire VAT collection process is determining who your customer is when they are making a purchase.
Scenario #1: Transactions Involving a VRN
Typically businesses will have a VRN (VAT registration number) while individual consumers will not. Supplying a valid VRN during a transaction will exempt a customer from paying the VAT due to the reverse charge mechanism.
- The supply of good or services from EU VAT registered businesses to another EU VAT registered business in another state.
You can use this VIES Validation Tool from the European Commission to validate a VRN.
Scenario #2: Activities in the public interest.
EU countries must exempt certain transactions that are considered to be in the public interest.
Often times, these activities are carried out by public bodies but exemption can also be extended to bodies in the private or charitable sector.
Some examples of services that provide a public good or aid the public interest include:
- Providing education to children or young people.
- Providing vocational training or retraining.
- Hospital and medical care and closely related activities.
Navigating VAT Tax Compliance
Your company has finite resources and we get that. The last thing you want to worry about is how you’re going to allocate more of those precious resources to keep up with the latest rules and regulations surrounding VAT.
That’s where we can help! Avoid the headaches of maintaining proper VAT tax compliance altogether with FastSpring’s full-service ecommerce platform.
FastSpring simplifies VAT by:
- Staying on top of any tax policy or tax rate change to ensure your business maintains proper compliance at all times.
- Appending the correct VAT amount to each purchase based on your customer’s IP address.
- Verifying VAT registration numbers you receive from customers and providing VAT exemption where applicable.
- Simplifying the accounting process by allowing you to easily track all sales made through our platform.
Looking for more information on VAT and sales tax? Download our free ebook: Understanding International Tax/VAT Compliance to learn how to successfully navigate your company through tax regulations and procedures in today’s global marketplace.