What is a threshold and why does it matter in cross-border sales?
Dealing with cross-border sales involves more than just managing multiple currencies and adjusting marketing strategies to different countries. It also requires dealing with an essential yet sometimes overlooked matter – taxes, especially consumption taxes.
Consumption tax is a type of tax that is levied on the purchase of goods and services. Unlike income tax, which is based on the income earned by individuals or businesses, consumption tax is applied when goods or services are consumed or used. There are various forms of consumption tax, and two common types include VAT (Value Added Tax) and sales tax. Many countries, especially in Europe, Asia, and Africa, have adopted the VAT system, while sales tax is more popular in the United States. Canada uses the Harmonized Sales Tax (HST), which combines the federal Goods and Services Tax (GST) with provincial sales tax. Some provinces have their own separate sales taxes. It’s important to note that the distinction between sales tax and VAT can sometimes be semantic, and different countries may use different terms for similar consumption taxes.
Tax calculation and reporting are not particularly difficult when you sell goods within the same country. However, when you start selling internationally, things get much more complicated. Different countries have different tax systems with varying rules, rates, and regulations.
Another reason why international sales require extra attention to tax issues is the revenue threshold that you have to control in each country where you sell your goods and services. So, let’s look at the threshold issue in more detail.
To keep it simple, we will use the term VAT for all references to consumption tax.
What stands for VAT threshold?
The VAT threshold is the point at which you must begin to charge tax based on either the volume of sales or the number of transactions. In most countries the tax threshold is determined by volume of revenue, however, in certain jurisdictions, you may be deemed to surpass the tax threshold even with just a single transaction.
E.g. one of the Canadian provinces, Saskatchewan, applies a consumption tax, the PST, with no threshold at all. That means that starting with the initial sale in the province, you are accountable for Saskatchewan PST.
Below are the thresholds for digital products in force in the listed countries as of January 2024.
European Union | 10 000 EUR |
United Kingdom | 85 000 GBP |
Canada * with exception of Quebec, Saskatchewan, British Columbia and Manitoba | 30 000 CAD |
Egypt | 500 000 EGP |
Australia | 75 000 AUD |
Table 1. Threshold limits for digital products (as of January 2024)
When should you register for VAT threshold?
If, during any 12-month (in some countries 3-month) period, your activities exceed the VAT threshold or are expected to do so in the next 30 days, you must register for VAT. This period does not have to match the tax year, meaning that the threshold limit is calculated on a rolling basis, so you are required to track your taxable turnover over a consecutive 12-month period. The VAT taxable turnover threshold is the same for all self-employed as for limited liability companies. The tax authorities systematically review and update the tax threshold. Therefore, it is important to monitor at regularly whether your VAT taxable turnover has exceeded the current VAT registration threshold.
However, you have the option to voluntary register for VAT even if your turnover doesn’t exceed the VAT threshold. You may choose to do this because it brings a number of benefits such as:
- tax reclaim: VAT registration allows you to reclaim VAT paid on business expenses, contributing to cost savings and improved financial efficiency.
- credibility: getting registered for VAT boosts your business’s credibility, making it more reliable and trustworthy for buyers, lenders, suppliers, and clients.
- business opportunities: VAT registration enhances prestige for your company as a lot of buyers and suppliers deal exclusively with VAT-registered businesses.
Necessary steps for VAT registration
The terms and procedures for VAT registration vary based on the legislation of different countries. However, for the sake of clarity, let’s look at an example of VAT registration in France, which may provide some insight into the general process.
The process for VAT registration in France typically involves the following steps:
- Step 1: Determine the need for registration: estimate the amount of revenue you have received from your customers in France in the last 12 months. If it exceeds €10,000, you will need to obtain a VAT number in France.
NOTE. The €10,000 VAT threshold also applies within the EU. Once this threshold is reached throughout the EU, for example, for sales to France, Spain and Germany combined, VAT registration is required in all of these countries at the same time. The good news is that being registered in at least one European country is enough to ensure VAT compliance. For instance, if you already have a VAT number in Germany, there is no need to obtain a VAT number in France or Spain.
- Step 2: Gather required documents: collect necessary documentation, which usually include Articles of Association, proof of business registration (certificate from commercial register like certificate of incorporation), identity documents, confirmation of bank account details, and details about your business activities.
- Step 3: Complete the VAT registration form: fill out the VAT registration form, which is available on the website of the German tax authorities (Bundeszentralamt für Steuern or BZSt).
- Step 4: Submit the application: submit the completed form to the tax authorities via an online portal, “Guichet Entreprises” or “Business Formalities Center.”
- Step 5: Wait for approval: after the submission, the tax office will review your application. Once approved, you will receive a VAT identification number, which consists of 13 characters, e.g. FR01010101010.
- Step 6: Maintain compliance: ensure ongoing compliance with French VAT regulations, including timely filing of VAT returns and adherence to other obligations.
What happens if you don’t register for VAT on time?
In many jurisdictions, exceeding the VAT registration threshold requires businesses to register for VAT and comply with related regulations. If a business exceeds the threshold for VAT registration but fails to register, it may face legal issues.
The consequences vary and may include:
- Penalties: financial penalties can be imposed for failing to register for VAT within the required timeframe. Penalties can be based on the amount of VAT that should have been paid.
- Interest charges: businesses may face extra charges in the form of interest if they don’t pay their VAT on time.
- Legal Actions: tax authorities may take legal actions against the non-compliant business, including fines and possible legal proceedings to recover unpaid VAT.
- Trade ban: tax authorities may ban a business from trading for a certain period of time if it deliberately fails to pay VAT. The risk of a trading ban can affect any business, even sole proprietors.
- Reputation damage: Failure to comply with tax legislation can damage a company’s reputation. It can affect relationships with customers, suppliers and partners.
- Criminal charges: the consequences of deliberate VAT non-compliance are extremely severe. VAT fraud can be punishable by imprisonment.
In most countries, the penalty for late VAT registration varies, but depends on how late you are. For example, in the UK, the minimum fine is £50. One of the strictest penalties for VAT non-compliance is in Texas (USA): if you are found guilty of tax evasion for amounts between $1,500 and $20,000, you can be charged with a felony in state prison, potentially resulting in a minimum sentence of 180 days in jail. For amounts exceeding $20,000 but not exceeding $100,000, the penalty could result in two to ten years in prison.
Submission of VAT return
The procedures for VAT return differ globally. Businesses may file returns quarterly or annually, with variations in reporting frequency. Electronic submission is common in many regions. These diverse approaches highlight the variations in terms and procedures for VAT returns on an international scale.
Country | Deadline for VAT registration | Registration authority | Filing frequency | Annual return |
United Kingdom | Within 30 days of the end of the month when you went over the threshold. | HM Revenue and Customs (HRMC) | Quarterly | Not required |
Germany | within 30 days of exceeding the threshold | Bundeszentralamt für Steuern (BZSt) | Monthly | Required |
Canada | no later than the day of exceeding the threshold | Canada Revenue Agency (CRA) | Quarterly | Not required |
Egypt | within 30 days of exceeding the threshold | Egyptian Tax Authority (ETA) | Monthly | Not required |
Australia | within 30 days of exceeding the threshold | Quarterly | Not required |
Table 2. International VAT return matrix (as of January 2024)
How can Rainex help?
Rainex is a billing and subscription management platform that helps businesses manage routine workflows conveniently and efficiently.
One of the tasks that Rainex helps you manage is the automatic generation of invoices. Since the system helps you operate both locally and internationally, tax compliance is an extremely important element.
The default and custom tax rules of the Rainex system will ensure that invoices will always be correct and will not be out of compliance with legislation. And upcoming plans to develop a tax solution for our clients will make running your business much easier.
To learn more about our capabilities now and roadmap, book a demo or chat with our experts. Or register and try out the system for yourself in a free trial period!
