As an e-commerce expert with the role of managing a global brand, it can be quite tricky to recognize and understand the different international tax requirements and customer expectations. When you know the different tax and VAT legislation, your brand will not only reap the benefits of international sales but by adhering to the different tax legislation around the world, your business will avoid huge fines.
In the US for example, customers are accustomed to finding additional costs for tax at checkout and they are familiarized with not seeing the full price on product listings. Whereas in the U.K., customers would be taken back by an additional fee at the checkout. This is because, in the U.K, it is a legal requirement to include taxes in product listings and customers know what to expect throughout their shopping experience.
This article provides all the juicy detail into tax legislation around the globe so that you have something to refer to when setting up international taxes in your e-commerce store.
The different tax and VAT legislation in E-commerce
In order to set up your international e-commerce store correctly, it is extremely important to consider and abide by the different international tax and VAT legislation.
If you don’t consider the different rules, you probably won’t attract many customers from overseas. You will, therefore, lose out on sales, potentially have to pay extortionate fines and get a bad reputation for your brand in some countries.
European Union Tax & VAT Legislation
In the European Union, it is a legal requirement for e-commerce stores to include the Value Added Tax in product listings. This makes it easier for customers to calculate what they will owe before they reach the checkout with no unpleasant surprises. And, according to Tax News, VAT fraud costs EU member states as much as €50 billion each year.
Additionally, VAT rates may differ per country in the European Union and there are e-commerce distance selling rules to consider. If your annual turnover is below the VAT registration limit of the country where your store is based, then it is not VAT registered. This means that you do not charge VAT on your sales regardless of where your customers come from.
Distance Selling for EU-based Retailers
If your e-commerce brand is EU-based and selling products to customers in EU countries other than your own, you are obliged to charge and collect local VAT. Distance selling has been created by the EU in order to simplify the administration when trading between European countries.
Each individual European country has a unique “VAT revenue threshold” and if your e-commerce sales exceed a threshold in a particular country, you will be required to VAT register in that country. Luckily, each EU country has the same revenue threshold which is usually €35,000 per annum or in some EU countries it is €100,000.
If you’re based outside of the country in which you have exceeded the threshold, you will need to register as a non-resident VAT trader in that country.
Non-EU Retailers Selling to Europe
E-commerce businesses based outside of Europe selling to European consumers will need to charge and collect local sales taxes. And, if you are exporting products directly to Europe, once your products are in Europe, there are revenue thresholds which dictate your tax obligations in other countries in relation to European tax laws.
European Business to business sales
European businesses are legally exempt from paying taxes such as VAT when buying products that will be used to run their business. Merchants based in the European Union do not charge VAT to VAT-registered businesses in European countries.
Customers with a disability
In the U.K, customers with a disability or customers with a long-term illness should not pay VAT when shopping for items that are adapted for their personal use in order to provide them with a higher quality of life.
United States Tax & VAT Legislation
As specified above, it is rare for US retailers to display sales tax in their product listings. Customers don’t expect to see the full price (including taxes) until they get to check out.
Similar to Europe, each state in the US has a different tax rate but in addition, some US states have different sales tax nexus laws. These tax nexus laws mean retailers must have a significant presence in a state before they are required to collect sales tax from buyers in that state.
Canada: GST, PST and HST
E-commerce businesses based in Canada will be classified as a small supplier until they go beyond a minimum revenue threshold of $30,000 CAD within a calendar quarter.
Once a business exceeds this threshold, it is mandatory for the business to either charge a combination of Goods and Services Tax (GST) and Provincial Sales Tax (PST), GST only or Harmonised Sales Tax (HST) only. It depends on where in Canada you are operating from.
More simply, if your e-commerce business is not GST or HST registered you do not charge GST or HST to your customers even if you are selling internationally (delivery outside of Canada).
Check this website regularly to find out more about the GST, PST and HST rates per Canadian province.
Under Section 87 of the Indian Act, indigenous customers should be GST and HST exempt within your online store.
Australia Tax & VAT Legislation
When managing an e-commerce store in Australia, you will not be required to register for GST or charge customers GST on products until your business exceeds an annual minimum turnover of AUD $75,000. When your e-commerce business exceeds AUD $75,000, you must register for GST and charge 10% GST to your customers.
Since the 1st of July, 2018, businesses outside of Australia wanting to sell goods into Australia must charge GST on products valued at AUD $1,000 or less. And, merchants that sell more than $75,000 a year to consumers in Australia will need to register with the Australian Taxation Office (ATO) and charge GST on these sales.
GST- free products
In Australia, some products are GST-free and e-commerce stores should not charge GST on the sale of these types of products. This can be products in relation to health, food, charitable services, digital goods (such as ebooks, music, online courses), education and more. Although GST registered businesses are now required to charge GST on all digital products.
New Zealand Tax & VAT Legislation
In New Zealand, Goods and Services Tax (GST) is 15% on most products and services and GST is usually included in the price or clearly stated with “plus GST” or “GST exclusive”. If you manage an e-commerce store based in New Zealand, you are not required to register for GST until your annual turnover exceeds NZ $60,000 in any 12-month period.
Non-resident businesses supplying remote services
If you are a non-resident business receiving goods or services in New Zealand but don't make or intend to make taxable supplies in New Zealand, your business may be able to register for and claim the GST paid.
Visit the Inland Revenue website for help and more information on GST in New Zealand.
India Tax & VAT Legislation
India’s tax legislation changed on the 1st of July, 2017. As of July 1, 2017, Goods and Services Tax (GST) is now required to be charged on all goods and services provided by online stores in India.
Online store owners in India who turnover more than the threshold in a financial year are required to register for GST. India’s threshold limit for persons making supplies from any of the special category States is INR1 million. For all other merchants, the threshold limit is INR2 million.
Due to the fact that India is a federal country, both the governments for the Centre and the States hold the power to levy and collect taxes through appropriate legislation. And, for that reason, a dual GST model is used in India. Taxes are levied by both Central and State Governments on a common base.
There are three different taxes united under GST:
- State Goods and Services Tax (SGST) which is collected by the State on intra-state sales.
- Central Goods and Services Tax (CGST) which is collected by the Centre on intra-state sales. These sales are transactions carried out within one federal state
- Integrated Goods and Services Tax (IGST), collected by the Centre on inter-state sales. IGST also applies to imported goods and services. These sales are those transactions that happen in between states.
Non-resident taxable person
Merchants who do not have a fixed place of business or residence in India but occasionally undertake transactions involving the supply of goods or services need to register for GST in India if they make a taxable supply in India.
Exemption from registration
These people are not obligated to register for GST:
- Any person engaged exclusively in the business of supplying goods or services that are not liable to tax or that are wholly exempt from tax.
- An agriculturist (farmer), to the extent of the supply of produce resulting from the cultivation of land.
Do these two things before setting up your international e-commerce store...
- If using Shopify, you can set customers as tax-exempt in the admin and set eligible customers as tax-exempt automatically.
- Follow this guide to modify your store theme so that you can display prices including VAT on product pages and still keep taxes excluded from your product prices.
E-commerce experts that are planning to scale their brands to a global scale, absolutely must know and understand the different international tax and VAT legislation in order to follow all the different rules without risking big fines and preventing a loss of international sales.
By reading this article, you should hopefully understand the different tax legislation in the European Union, the United States, Canada, Australia, New Zealand and India. And, with hope, you know how to set up taxes to include or exclude tax from your product prices and how to set some customers as exempt in Shopify.
For more information, you can read this tax guide for Shopify stores.