1. Is your product taxable in the country of sale?
First, check if the country where your customer is located taxes digital products when sold remotely. Definitions vary across individual countries, but here are some common types of digital goods and services:
- Downloading or accessing software (such as SaaS)
- Cloud computing services
- Streaming or downloading movies, TV shows or music
- Website hosting or remote maintenance
- Electronic supply of images, text, or information like e-books
- Downloadable or online games
If your product falls into one of these categories, you’ll need to confirm whether the country of sale has VAT requirements for remote sellers of digital products.
2. Have you crossed the country’s registration threshold?
International registration thresholds are somewhat simpler than US nexus rules, but they still vary from country to country. Typically, sellers are required to register with local authorities after reaching a certain volume of sales in that country.
It’s important to note that in some countries, including in the EU and UK, the threshold is $0—meaning your first sale to a customer located there could be subject to VAT.
Check local regulations to determine whether you’ve crossed the threshold for sales volume in that particular country. Often, registration thresholds depend on whether you’re selling to businesses (B2B transactions) or consumers (B2C), so pay close attention to the types of transactions included in the registration threshold.
3. Is this a B2B or B2C transaction?
One big difference between US sales tax and VAT is that many countries treat B2B and B2C transactions differently.
For example, Switzerland and South Africa tax both B2B and B2C transactions for example, whereas the UAE only taxes B2C transactions. Validated B2B sales aren’t taxable in Canada at the federal level, but may be subject to certain local-level taxes.
If you’re selling to consumers and the country of sale taxes B2C transactions, you should charge the appropriate VAT rate on B2C sales once you’ve crossed the registration threshold.
If you’re selling to businesses, and the country of sale does not tax B2B transactions, you usually aren’t responsible for charging VAT on B2B sales. But in many countries, you’ll need to collect the appropriate documentation—typically a registration number called a VAT ID—to validate that your sales meet exemption requirements.
4. Does your customer have a valid VAT ID?
VAT ID numbers help identify each party in a transaction (seller and buyer). Collecting VAT IDs from your customers is critical, as it can determine whether you’re required to charge VAT or not.
In many countries, B2B transactions are subject to a “reverse charge,” meaning that the seller isn’t responsible for charging VAT, but the buyer accounts for VAT on their own return.
To confirm that a B2B transaction meets requirements, you’ll need to collect and validate the customer’s VAT ID (often either by manually checking its format or using a country-provided API). If you do not collect a VAT ID on a B2B transaction, or the VAT ID isn’t valid, you are responsible for charging VAT on the sale.
Taking your first VAT compliance steps
Collecting VAT IDs is a critical first step for many software businesses selling internationally. Without VAT IDs, you won’t be able to understand the true scope of your obligations in a given country.
Work with your team to build VAT ID collection into the sales process—either adding a field to collect IDs during checkout or making sure they are added to sales order forms.
If your business is primarily B2B, it’s possible that VAT won’t apply to any of your sales when valid VAT IDs are collected. If your business is primarily B2C, it’s likely that you’ll need to register and charge VAT on those transactions sooner than later.
It’s important to note that you cannot collect VAT from customers without being registered in the country of sale. Delaying registration puts your business at risk of audit, reputational risk, and high out-of-pocket costs.
Given the complexities of VAT compliance, if your international sales are ramping up, it could be a good time to look into sales tax and VAT automation. A good automation platform will store and validate VAT IDs, accurately monitor your global exposure, and add the right VAT to transactions in real time.
And for more mature software companies with global sales in the locality, it could be worth conducting global tax compliance planning with an advisor to determine tax strategy and where to open up local selling entities based on your business and corporate direct tax needs.
