What is a tax registration threshold?
In the wild and crazy world of consumption taxes, thresholds are a relatively straightforward concept. Phew!
But don’t confuse simple for insignificant; sales thresholds are one of the most important parts of tax policy. They determine whether you must register and charge tax or not. Overlook a threshold, and you’ll inadvertently break the law. Plus your business will have to fork over all the sales tax that you forgot to collect from your customers.
Here’s everything you need to know about how tax registration thresholds work.
(And if you need a quick refresher on various consumption taxes, check out our explanation of VAT, GST, and sales tax.)
What is a “tax registration threshold” or “sales threshold”?
The threshold is a fixed amount of money in that country’s currency. When your sales pass the threshold amount, your business is required to register for local taxes.
Where? Typically, just sales made to residents within a certain country.
An exception to this rule is Switzerland. The Swiss registration threshold applies to global sales, to customers anywhere in the world. If you sell internationally and your worldwide turnover is above CHF 100,000, then you must register for Swiss VAT.
When? Within any twelve-month period. Threshold definitions often refer to “annual sales,” but this can be misinterpreted as sales within a single calendar year. In fact, thresholds apply to the total amount of sales you’ve made in a year-long period. This could be the amount you sold in the last twelve months — or are projected to sell in the next twelve months.
What happens when you reach a sales threshold?
When you reach a sales threshold in a country, here’s what needs to happen:
- You should register for their national tax system. There’s often a special scheme for foreign businesses, which allows for convenient online registration and doesn’t require a local tax representative. However, some countries do require you to register via a local rep.
- Once you have your tax identification number and all that jazz, you must start charging tax to your customers who live in that country (or US state). On every applicable sale, you should add the correct tax rate. (We say “applicable” here because some countries require you to add tax only to B2C sales. In these regions, B2B transactions involve a different sales tax process, the reverse-charge mechanism.)
- You should record the tax rate and amount on your invoices, plus keep detailed records of how much you have sold and the tax you’ve collected.Some countries are very particular about the information you include on invoices, also known as tax receipts. For example, India requires ## different details about the transaction. To make this easier on yourself, create an invoice template that covers all the bases. We recommend a template for you in this post, the four receipts you must know.
- Finally, you’re expected to file tax returns. Each country has their own cycles and deadlines.
For detailed and up-to-date tax information about each country, check our post on digital taxes around the world.
What happens if you don’t pass a threshold?
You’re on Easy Street! You don’t need to register for local taxes in that country, so you don’t need to collect or remit taxes there either.
However, you should keep an eye on your sales totals — and sales projections — so that you’re prepared when and if your business approaches the threshold. Remember the threshold applies to any twelve-month period, past or future.
Note: Some countries allow foreign businesses to register for taxes anyway, even if they fall below the threshold. Why would you elect to do this? Here are some reasons:
- You want to claim tax refunds.
- You’re positive your business will pass the threshold, and you want to stay ahead of the game.
What if there’s no threshold?
If a country does not have a sales threshold in their tax policy, you must register for local taxes. Ideally, you should register before your first sale.
For example, this is the case in India, Russia, and South Korea, when it comes to digital goods. If you plan to sell to customers in those countries, you must register for GST/VAT and play by the rules.
To learn more about VAT rules in the EU, check out what you must know if you’re selling in the EU.
Not sure what “digital good” actually encompasses? It can be tricky! Read our helpful explanation: What is a digital good, anyway?
Tips for tracking sales thresholds
Make sure your accounting practice includes records by country. A reporting tool can really help with this, especially since you need to monitor past sales as well as projected future sales.
A tax compliance software (yes, like Quaderno!) will stay on top of tax registration thresholds for you. The app notifies you before you hit the no-tax limit, so you can prepare your tax registration in the given country. Or, if you make a sale in a brand new country that doesn’t have a threshold, the app will notify you to register for taxes ASAP.
If you want to see such threshold management in action, try Quaderno free for a week. Set up is easy, and we’re happy to answer any questions you might have.
|Bolivia (Plurinational State of)||1 transaction|
|Bosnia and Herzegovina||50000 BAM|
|Costa Rica||1 transaction|
|Côte d'Ivoire||200000000 XOF|
|Czech Republic||1 transaction|
|Dominican Republic||1 transaction|
|European Union - VAT OSS/IOSS||1 transaction|
|Korea (Republic of)||1 transaction|
|Lao People's Democratic Republic||400000000 LAK|
|Moldova (Republic of)||1 transaction|
|New Zealand||60000 NZD|
|Puerto Rico||100000 USD|
|Russian Federation||1 transaction|
|Saudi Arabia||1 transaction|
|South Africa||1000000 ZAR|
|Spain – Península y Baleares||1 transaction|
|Taiwan, Province of China||480000 TWD|
|Tanzania, United Republic of||1 transaction|
|United Arab Emirates||1 transaction|
|United Kingdom||1 transaction|
|United States||Varies based on state|