One particular challenge facing businesses expanding into new markets is dealing with overseas taxes. Local rules on VAT (or ‘GST’ in some countries) can cause particular problems and this is an area which businesses often overlook. Failing to deal with local VAT obligations can lead to issues including: VAT audits; backdated demands for tax (often over many years); having goods seized; or being slapped with fines and interest. An unexpected VAT bill can easily eat up your profit margin and significant professional fees may have to be incurred to sort things out.
The penalties for getting things wrong can also be significant. In Italy, for example, fines can be 200% of the unpaid VAT. However, it may be comforting to know that China has now repealed the death penalty for tax evasion.
Although it may be tempting for UK businesses to think that they are out of reach of overseas tax authorities, it is important to be aware of issues which could arise for your customers. For example, they could be pursued for local VAT that you should have paid on their purchases. Anyone who has ordered goods online and had the postman ask for payment before handing over the parcel will be familiar with the issue. This is becoming increasingly important for sellers, given the power of online reviews and feedback. Overseas businesses customers could even be subject to local VAT audits, assessments and fines if VAT has not been dealt with properly.
Most countries (with the notable exception of the US) have VAT or GST and some countries, including Brazil and Canada, have more than one type. Although these VAT regimes tend to have many features in common, there are always local variations which can catch out the unwary. Even in the EU, which is supposedly a ‘common market’ with a unified system of VAT, there are variations from country to country.
In order to start thinking about the VAT consequences of overseas sales, it is important to understand some of the common features of the tax.
As a basic rule, VAT is usually due where goods and services are consumed, even if the seller does not have a local presence. This means that imports are often taxed and exports are often relieved from VAT. Different rules apply to (tangible) goods and (intangible) services.
If you sell goods overseas then the VAT treatment depends on whether they are sent to customers inside or outside the EU and potentially whether they are businesses or private individuals.
When selling goods to private individuals in another EU country, you can normally charge UK VAT for sales up to a limit, but once this threshold is exceeded, you must register for VAT in the customer’s country. For sales of goods to business customers in other EU countries, the customer can often take care of any local VAT for you, but you may have to ensure that your invoices are correct and that other documents are filed with HMRC, in addition to your normal VAT returns.
For sales of goods to countries outside the EU, VAT is normally levied when the goods are imported – at the same time as the customs duty. Although it is often possible to get customers to take responsibility for this, it is important that the terms and conditions of the sale make clear who will declare the import and deal with any VAT (and duties). For private customers, the seller typically ensures that the customer’s obligations are fulfilled by the freight company. This means that if something goes wrong with the VAT and duty payments, the customer might not receive what they ordered (or at least not until they have paid the outstanding taxes).
Sales of services can also cause difficulties and the correct treatment can depend on a range of factors. In particular, VAT rules have struggled to keep up with sales of downloaded content and software. Recent changes to EU VAT law have meant that UK companies selling digital services to private consumers in other EU countries will be responsible for paying VAT in those countries.
There is no registration threshold for such sales, so even if only one private customer buys your app in, say, Latvia, then you will need to pay Latvian VAT on this. To avoid having to register for VAT in every EU country, a ‘one stop shop’ registration scheme has been set up. This allows a single return to be filed in one country through which VAT can be paid on digital services in all of the other EU countries. However, you must still ensure that all digital sales are properly reported, otherwise you could theoretically be audited by every EU tax authority. You must also consider the practical difficulties including: identifying where your customers are; working out whether or not they are in business; invoicing; and the impact of VAT on your pricing.
Countries outside the EU are also catching up on the taxation of digital services and many are introducing new rules to ensure that VAT is paid on downloads by their residents.
These are only a few of the areas of VAT which can cause problems when trading abroad. There are others such as trade promotions; rebates; storing or processing goods overseas; returns/refunds; property transactions; leased goods; running overseas exhibitions/training sessions/conferences; employing staff abroad; installing or assembling goods in other countries; and many other common business practices. As with many other areas of business, it is important to try to understand the local VAT rules as early as possible to avoid unexpected costs and it is usually prudent to take local advice.
Steve Henshaw, VAT Director of Ernst & Young LLP