As your company grows and expands into international markets, understanding global tax obligations is critical. Two of the most common international sales taxes are Value Added Tax (VAT) and Goods and Services Tax (GST).
These taxes operate differently from U.S. sales tax, and navigating them can be challenging. This guide provides a straightforward introduction to VAT and GST. We’ll explain what they are, how they function, and when they apply to your business.
What Are VAT and GST?
Value Added Tax (VAT)
VAT is a consumption tax used by many countries around the globe. It is applied to most goods and services, including digital products.
Unlike U.S. sales tax, VAT is applied at every stage of the supply chain where value is added. This means that tax is charged at each transaction level, from manufacturing to retail. Businesses can claim credits for VAT paid on their purchases, so the end consumer ultimately covers the full amount.
Goods and Services Tax (GST)
GST is similar to VAT in that it’s also a consumption-based tax applied to goods and services. The difference lies in how it’s structured. GST is often referred to as a simpler, more uniform tax because it consolidates multiple indirect taxes into a single system.
Some countries use GST as an alternative to VAT, but others use both.
GST Vs. VAT: Similarities and Differences
- Both VAT and GST aim to tax consumption and generally place the burden on the end consumer.
- VAT is more commonly used in Europe and is typically collected at each step of the supply chain.
- GST is often applied in a single stage, usually the point of sale, and is common in countries like Australia, New Zealand, and Canada.
“It’s important to understand the differences between VAT and GST and ensure you’re complying with tax regulations in each market where you have customers. Even if you sell exclusively online, you may have tax obligations overseas.” – Gareth Kobrin, Global Tax Expert
How to Manage Your VAT and GST Obligations
For companies entering regions with VAT or GST, compliance involves registering for tax, collecting the right amount, and filing regular returns. Many regions require foreign sellers to register even if they have no physical presence, especially for digital goods and services.
When Do You Need to Register?
- Physical Products: Many countries set revenue thresholds for foreign businesses. If your sales exceed this threshold, the company must register and collect VAT or GST.
- Digital Services: Digital service providers often need to collect VAT/GST regardless of revenue thresholds.
Not complying with VAT/GST obligations can lead to penalties, reputational risks, and potential barriers to market entry. Ensure you monitor your global sales and register in each country as soon as you pass the economic threshold.
Many businesses use an automated tax system to monitor their obligations and apply the correct tax rates to products. Find out how Yonda Tax could streamline your global sales tax process.
Regions Requiring VAT or GST Collection
The chart below highlights some of the countries that require foreign sellers to collect VAT or GST. This list isn’t exhaustive, but it includes many of the key markets for global businesses.
VAT and GST rules and rates can change very quickly. This chart is intended to provide an overview and should be verified with local authorities or a tax professional.
VAT/GST Tax Compliance Tips
- Consult Global Tax Experts: Working with tax professionals or managers can ensure accurate tax compliance and reduce potential errors.
- Use Tax Automation Software: Tax software can simplify VAT and GST collection, reporting, and filing, making it easier to manage your obligations in multiple jurisdictions.
- Stay Updated on Tax Laws: VAT and GST regulations change regularly. Some regions might introduce new thresholds or rules, especially for eCommerce businesses, so make sure you stay up to date.
Conclusion
These international taxes are complex but manageable with the right knowledge and tools. By familiarizing yourself with the basic principles, knowing when and where to register, and working with global tax professionals, your business can navigate VAT and GST obligations smoothly and confidently.
Need help from our global tax experts? Get in touch and book a free consultation.
The information in this article is true to the best of our knowledge at the time of writing, but sales tax regulations can change very quickly. You should always consult a tax professional for legal advice.