Expanding Into New Global Markets – What Is VAT Registration?
When you are expanding into global markets, one of the first things you need to look into is the tax system. From withholding tax laws for payroll to service taxes, there are several taxation requirements you must fulfill in order to operate in a new country. It starts with getting a Tax Identification Number (TIN), or a variation of it, from the country’s authorities. But for a lot of countries, especially in the EU, there is another tax requirement you must register for, which is a value-added tax (VAT). Here are a few things you should know about VAT and VAT registration.
What Is VAT For Consumers?
From a consumer’s perspective, VAT or Value Added Tax is a tax they pay on goods or services that they consume. The calculation of this tax varies from country to country. Some countries simply calculate it as a flat percentage amount of the product that the consumer needs to pay, in addition to its actual price (though it’s usually included in the final price). Other countries have a sliding scale, and the percentage is calculated based on every stage where value is added to a product or a service, i.e., from manufacturing to delivery/availability.
VAT is different from other taxes that are levied based on income as it’s a tax that’s levied on consumption. However, in some countries, a consumer might have options to reclaim part of the VAT they have paid if their income falls below a certain level.
What Is VAT For Businesses?
If you are expanding your business into another country, you need to identify whether a VAT system exists or not. Aadmi’s expansion services can walk you through the VAT registration requirements and answer any questions or concerns involved with the process. You may find different labels for this tax, and the underlying principle might be the same. About 170 countries, including all European Union countries (and the UK), have VAT on most products and services.
Your goal, as a business, is to collect an adequate amount of VAT from the products and services you are selling to your consumers.
VAT Registration – What Do You Need to Know?
Different countries have different requirements for VAT registration. In the UK, for example, you have to go through the VAT registration process if your yearly taxable turnover exceeds £85,000. This is called the VAT threshold. The threshold for EU countries is €10,000.
It’s important to note that VAT applies to a wide variety of “expansions.” Even if you are not registering as a new business entity in a country or establishing a branch, but you are directly selling your products (through e-commerce) or services in the country, you may have to go through the local VAT registration process. With Aadmi’s network of in-country partners and specialized services, we will make sure your business is VAT compliant so you can focus on your global expansion.
Even if you haven’t reached the VAT threshold in the country you are expanding to, you can voluntarily register for VAT. There are both pros and cons to such voluntary registration. The benefits include the ability to reclaim some of the VAT you have paid on goods that you need for your business. The negatives include an inflated cost on the product or services when you price in the VAT.
VAT Exempt Products and Services
There are several VAT-exempt products and services (they vary by country), and if you are offering them to your consumers, you may not have to register for VAT even if your taxable income grows beyond the threshold. Similarly, VAT may be different for different product categories, as partial VAT applies to some products and services. But it’s important to note that when you can’t register for VAT, you can’t make any reclaims as well.
VAT Registration Process
The VAT registration process is different for each country, but there are some general steps:
- Make sure you can apply for VAT. If you are only in the business of tax-exempt products or services, you may not qualify for VAT registration.
- Determine if you have enough turnover income to register for VAT. You may register even if your income is below the threshold, but you may not be legally required to do so.
- Make sure you have a taxation number from the country you are expanding to. If you are not directly operating in the country, the system for VAT registration may be different.
- Use your online filing system account to register for tax. There are manual alternatives/forms, but they can be needlessly time-consuming.
- You will get a VAT registration number which qualifies you to charge VAT on your products and services and reclaim VAT.
If your turnover income goes beyond the threshold and you haven’t yet registered for VAT, you may face fines and other legal penalties. There is usually a grace period, but your goal should be to register for VAT as soon as you are eligible.
One core benefit of VAT registration is that you can reclaim the VAT that you, as a business, have paid toward your business expenses. This includes a diverse range of business expenses, from fuel and service plans to travel expenses. You may be able to reclaim VAT for goods you bought before registering for VAT (in some countries) because you wouldn’t have charged your consumers VAT for products or services offered using those goods.
You may also be able to reclaim some or all of the VAT you paid on capital expenses related to your business. The process of reclaiming VAT may differ for each country, and it’s important that you familiarize yourself with the specifics since it may allow you to significantly lower your bottom line.
VAT Registration with Aadmi as your Expansion Partner
Even if you are familiar with VAT in your home country, there might be different rules and practices in the country you are expanding to. And to ensure that you are remaining compliant and taking full advantage of the VAT registration, it’s a smart idea to go through this important step with Aadmi as your expansion partner, where we can provide in-depth knowledge of the country’s tax laws and regulations. You can schedule a free consultation here.