In this article
- When do I have to register for sales tax in a foreign country?
- How do I register for sales tax in a foreign country?
- When do I charge sales tax?
- What’s the right tax rate?
- Are shipping costs taxed, too?
- What should I include in a receipt, bill, or tax invoice?
- When and how do I file tax returns in a foreign country?
- What tax records should I keep?
- What can make this easier for me?
Selling physical products abroad involves so many different factors: warehousing and supply, proper shipping, delivery method, customer’s location, and…tax. When we say “tax,” we mean VAT, GST, and sales tax, the three standard forms of consumption tax used by major economies. When you’re selling to customers in another country, you better be sure you know their local tax laws. You just might be on the hook.
“Sales tax across the globe” may sound like a huge, unwieldy topic. And it is, usually! Luckily, since we at Quaderno spend so much time studying and monitoring tax policies from various countries, we figured out how to take all the information and boil it down to basic principles.
Here’s a tax compliance framework for how to approach sales tax in a foreign country if you’re selling physical products to its citizens. We’ll take you through step by step, question by question. By the end, you’ll know exactly what to consider, research, and double check.
When do I have to register for sales tax in a foreign country?
Typically your business has to meet a few conditions in order to qualify for mandatory tax registration. Here’s how to determine if you should register in any particular country:
1. Know what’s taxable. Are the products you’re selling actually taxable, or might they be exempt from tax altogether?
2. Know the sales thresholds.* Many countries have a tax registration threshold in place. If your annual sales in the country pass the threshold, then you probably have to register with their local tax system. (If your sales stay under the threshold, then you don’t have to worry! This is to protect small businesses from the disproportionate burden of tax compliance.)
For example, overseas businesses who sell more than A$75,000 in Australia must register for Australian GST. In Canada you have to register if your sales exceed $30,000 CAD. The EU thresholds vary from €35,000-100,000. In the US, the economic nexus law has a dual threshold: either 200 transactions or $100,000 in sales. Either mark counts. (Not every state has an economic nexus law, though. For up-to-date info, check out our guide to US economic nexus!)
If you only sell B2B, then tax thresholds may not apply to your business. Check on this point!
Also check to see if your “annual sales” total includes the costs of shipping and insurance that you apply to transactions. The EU and Australia both count these costs toward your threshold, since they’re part of the value you’re providing the customer.
Finally, many different interpretations of the time period for “annual sales” exist around the world. Here are some we’ve found:
- Current or previous calendar year
- 12-month period, past or future
- Last 4 consecutive quarters
*If the country has no tax registration threshold, that may mean you must register for sales tax after just one sale.
3. Know if you’re operating in the country. Operating in the country can mean anything from having a physical presence there, like storing goods in a warehouse, to using a local bank account to process payments. This condition doesn’t apply as universally as the two above, but you should still know all about it.
In the EU, if you store inventory in a country, you have an obligation to register for VAT there. Amazon Fulfillment centers and any other third-party warehouses count. There are no tax registration thresholds for you in this case. The physical presence of your business operations automatically qualifies you for VAT. If your stock is several EU countries, then you might need to register separately in each member state where it’s held. The exception is if you register for the EU VAT One-Stop Shop (OSS) or the Import One-Stop Shop (IOSS). This could make your life much easier! Read on about the OSS vs. IOSS and how to comply with European taxes.
The same applies to US sales tax. If you have a physical presence, including a warehouse supply (such as Amazon), then you must register for a tax permit in that state.
Canada’s laws go a step further. If you ship through Amazon FBA, use third-party logistics, Canadian bank accounts or “use any local advertising,” then you must register for Canadian GST.
How do I register for sales tax in a foreign country?
Take a look at the country’s tax agency website. You may have to search various names: Department of Revenue, Ministry of Revenue, Ministry of Taxes, etc. They should provide information online about how to manage sales tax as a foreign supplier.
Many countries also offer online registration specifically for foreign businesses through a dedicated tax portal. Score! Other registration processes require email correspondence, and even fewer still operate through hard-copy documents. Some countries may require you to hire a local tax representative, though this is less and less common.
Ultimately, your business will be assigned a tax identification number, which you’ll use for every step of tax compliance.
When do I charge sales tax?
First things first, if you sell through an online marketplace like Amazon, check with each country’s tax rules. The tax responsibility may fall on the marketplace, and not on your business!
Otherwise, charge sales tax at the point of sale. Also, clearly communicate to the customer that you are applying sales tax to their purchase. Some countries have laws about this! In the EU, include tax in the initial price shown to the customer. In the US, it’s acceptable to advertise the product cost, and then add tax later upon payment.
In some countries, such as Australia and the EU states, you don’t have to charge sales tax if the transaction is B2B. If you’re selling to a fellow business, you could use the reverse-charge mechanism. Just be sure to verify the buyer’s tax registration number to confirm that no tax needs to be collected.
Are there import taxes that my customer will have to pay?
In the EU, if your business is not VAT-registered, then your customer will pay import VAT upon receipt of your product. This surprise additional fee can be a bit unpleasant for the customer. And we all know customer experience is crucial to maintaining a good reputation for your business!
In Australia, the buyer will pay import GST only if the customs value is above A$1,000.
Check with the country’s policies if you’re unsure. If there are import tax scenarios, then find a way to set expectations with your customer and avoid any frustration down the line!
What’s the right tax rate?
To determine the right tax rate to apply to the transaction, there are a couple different angles to consider.
Find the tax rate for your specific product. Countries might stipulate one blanket tax rate for imported physical goods, like Australia’s 10% GST. But there might be a special tax rate for the specific type of product you’re selling. For example, tax rates are often reduced for educational or healthcare-related items. They’re often higher for excise or “vice” products, such as alcohol and tobacco.
Find the tax rate based on the destination of your product. Most countries require you to charge their local tax rate...or rates. Sometimes several levels of sales tax apply, from a national tax rate down to a local municipality. In Canada, there’s a federal Canadian GST rate, plus province rates. (And some provinces have merged the two, calling the combo a Harmonized Sales Tax.) In the US, there is no federal tax rate, but each state has its own — plus there may be district or city level taxes, too. When a destination has several layers of tax, you add all the rates together, and apply the total rate to the transaction.
Are shipping costs taxed, too?
In the US, some states consider shipping costs part of the taxable total. Otherwise most countries do not include the cost of shipping as a taxable item.
What should I include in a receipt, bill, or tax invoice?
Providing proper documentation of the purchase is a crucial and often-overlooked part of tax compliance! Countries and provinces may have their own particular requirements for a tax invoice or tax receipt.
Surprisingly, the US is pretty lax in this area! All you need is a standard receipt with the tax listed after the price of the product. But in other parts of the world, tax receipts/invoices are a bit more complex.
Generally you should include the following information:
- Your business name and address
- Your business tax ID for the destination country
- The name and address of the company or customer
- A unique invoice reference number that can only refer to the invoice in question
- A date, usually the date the invoice was created
- A list of the products and/or services you’ve provided. (List these line by line, with a quantity and separate cost for each)
- The amount of sales tax, VAT, GST for each item — or the total tax amount for the whole invoice, if every item is subject to the same rate
- The total amount of the invoice
- The payment terms, such as how long a customer has to pay, the channel of payment, etc.
Of course, make sure to calculate everything in the destination country’s currency! Providing the documentation in the customer’s language is a nice touch, too.
When and how do I file tax returns in a foreign country?
Most countries allow you to file tax returns online these days. The tricky part is keeping track of how often you must file and when everything is due!
1. Note the filing frequency. Every month, two months, quarter, six months, year? There may be a frequency specific to foreign sellers. For example, in Australia, overseas sellers must file GST returns once a quarter.
2. Note the filing due dates and payment deadlines. Typically filing due dates are “the 20th day of the following month” after the reporting period, or some formation similar to that. After filing a tax return, you’re expected to pay whatever sales tax you may owe. Check if the filing due date is also a payment deadline, or if there are two different dates! And don’t forget to do the payment part. Foreign businesses are definitely still subject to penalties.
3. Note if there’s a rule about “zero return” or “nil return.” Some places require you to always file a tax return if you’re tax-registered, even if you didn’t make any sales or collect any sales tax. Canada and some US states require such returns, and there are penalties if you forget.
What tax records should I keep?
When it comes to sales tax, you’ll want to keep records of your sales in the country and the tax collected, filed, and paid. Keep all those tax invoices and receipts you sent and received. And keep them for a while! Canada requires GST-registered businesses to keep records for six years. The EU requires VAT-registered businesses to keep records for ten years, and to make them digital, too.
What can make this easier for me?
Whew. Everything we went through above is a lot to manage for a single country, even more so if you’re selling in multiple places around the world! Trying to keep your business tax compliant and keep up with policy changes is a separate full-time job in itself. We get that, and we want to help.
Quaderno is a tool that can handle the big and the small stuff for you. It automatically tracks your annual sales and tax thresholds, and you’re notified whenever you need to register for sales tax in a new country. Quaderno applies the correct tax rates, no matter where your customer is located. And it even sends automatic receipts/invoices in several foreign languages and currencies. All of your records are stored securely for as long as you need them.
With 15+ integrations, Quaderno connects to the other tools you use to run your business (Amazon, Shopify, PayPal, Stripe, Quickbooks, WooCommerce, just to name a few) — saving you hours of time and guiding your business through the global tax maze. See how it can help you with a free trial.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.