How to Handle International VAT Compliance

International value-added tax (VAT) is a consumption tax applied to goods and services in over 170 countries. For U.S. businesses familiar with sales tax, VAT presents a different system. Unlike a sales tax collected only at the final sale, VAT is levied at each stage of the supply chain. As global commerce expands, any U.S. company selling to international customers may be obligated to register for, collect, and remit VAT in the countries where those customers are located.

Determining Your VAT Obligation

VAT compliance depends on “place of supply” rules, which dictate where a transaction is taxed. These rules differ based on whether you are selling goods or services and whether the sale is to a business (B2B) or a consumer (B2C). For B2B services, the place of supply is the customer’s location, often handled through a “reverse-charge” mechanism where the customer accounts for the VAT. For B2C transactions, particularly for digital services and goods sold online, the tax is based on the customer’s location, requiring the seller to charge VAT.

To determine a customer’s location, businesses must collect and retain evidence such as the consumer’s billing address, IP address, or bank details. The nature of the service or good is also a factor, as some countries have specific rules for certain products, such as electronically supplied services.

A primary trigger for a VAT obligation is crossing a country’s registration threshold. In the European Union, if a company’s total B2C sales of goods and digital services to customers across all EU member states exceed €10,000 in a calendar year, the business must register for VAT. Once this threshold is surpassed, the seller is liable for charging VAT at the rate applicable in the customer’s EU country.

Outside the EU, rules require individual attention. The United Kingdom, for example, requires most overseas businesses to register for UK VAT from their first sale, as domestic registration thresholds do not apply to them. Other countries have their own specific thresholds, such as Norway’s 50,000 NOK for low-value goods over a 12-month period.

The VAT Registration Process

Registering for VAT requires gathering specific corporate information and documentation. You will need to provide your business’s legal name and address, a certificate of incorporation, identification for company directors, a description of your business activities, and bank account details.

For businesses selling into multiple EU countries, choosing the right registration scheme is important. The traditional route is to register for VAT directly in each country where you have an obligation. This approach can be administratively burdensome, requiring separate dealings with each nation’s tax office, but is often necessary if a business holds stock in a foreign country.

To reduce this administrative load, the EU offers streamlined systems. The One-Stop Shop (OSS) allows businesses to register for VAT in a single EU member state and use that registration to declare and pay VAT for all B2C sales across the entire EU, avoiding the need for multiple registrations. A similar system, the Import One-Stop Shop (IOSS), is available for importing goods valued at €150 or less to EU consumers.

In some countries, non-resident businesses must appoint a fiscal representative. This is a local entity that becomes jointly and severally liable for the business’s VAT debts. The requirement is not universal but is mandated by certain jurisdictions as a formal condition of registration for foreign companies.

Ongoing VAT Management and Operations

Once registered, a business must follow specific rules for invoicing. A VAT-compliant invoice has several required elements, including:

• The seller’s VAT registration number
• The date of issue and a unique invoice number
• A clear description of the goods or services supplied
• The customer’s VAT number (for B2B sales)
• The net amount chargeable
• The VAT rate applied and the final VAT amount

Applying the correct VAT rate is another operational task. Rates vary between countries and by product type, with standard EU rates ranging from 17% to 27%. Many countries also have reduced rates for items like food or books, while some goods may be zero-rated or exempt. Businesses must correctly classify their products to apply the rate of the customer’s country.

Record-keeping is required for VAT compliance. Businesses must retain copies of sales and purchase invoices, a summary of VAT known as a VAT account, and proof of goods transport like shipping documents. These records are necessary for filing accurate VAT returns and for verification during a tax audit. The retention period for these records varies by country but can be up to 10 years.

Filing VAT Returns and Remitting Payments

The frequency of filing VAT returns depends on the country and registration scheme, with many jurisdictions requiring monthly or quarterly filings. For businesses using the EU’s OSS scheme, a single quarterly return is submitted. This consolidated return covers all eligible sales made across every EU member state during that period.

The filing process involves submitting collected data to the relevant tax authority through its online portal. For an OSS return, a business logs into the portal of its registered member state. The filer enters the total value of its sales and the corresponding VAT collected, broken down by each EU country of consumption and the applicable VAT rate.

After the return is filed, the final step is to remit the total VAT due. An OSS user makes a single payment to the tax authority in their country of registration, which then distributes the funds to the appropriate countries. Adhering to payment deadlines is necessary to avoid interest and penalties.

Even if a business makes no sales during a reporting period, a “nil return” must still be filed. If an error is discovered in a previously filed return, a correction must be made, which often involves amending the next return to account for the underpayment or overpayment.