VAT (Value-Added Tax) and SaaS (Software as a Service)

VAT (Value-Added Tax) and SaaS (Software as a Service)

Last Edited May 14, 2018 by Garenne Bigby in Business

When launching your business, one of the most important things to decide is how much to price your products. For SaaS companies, those selling internationally, this is a tough question to answer. Each nation has its own VAT, GST, and/or sales tax codes. To be clear—GST, VAT, and sales tax are all forms of taxes and will be referred to simply as “sales tax.” A SaaS company must charge the correct sales tax to each customer in the region in which the products are sold—how can this be possible? What if one area charges 20 percent and another location no tax at all?  How are you to remain in compliance with the current tax codes?

To help this—some SaaS companies charge the highest possible sales tax and then include this in the price of the product. Some companies use an approach where they take an average rate and include that into the price of the product. Other companies don’t include sales tax at all; rather apply additional fees at checkout, depending on location. What is best for your company? To help this decision, there are a few possible options below.

Maximum Sales Tax Possible

The easiest way is perhaps to include sales tax in the price your product and still remain sales tax compliant to charge the highest sales tax possible for your products. This means that the price the customer sees is not only the price of the product you’re selling, but included in that is the maximum sales tax from the place where your product is able to be purchased.

Using this method, all consumers would pay the same price, even if the product were purchased from a region that doesn’t have sales tax. The only downside to this model may be that you overprice your product compared to your competitors.

Mosaic Sales Tax

Another way to include sales tax would be to calculate the average sales tax based on potential sales taxes, and then add that to your price. For example, if you sold your product in regions with a 10%, 15%, and 20% sales tax rate, you could add a rate of 15% to every product you sold. The downside for this, however, could be undercharging some customers, affecting your profits, and also the fact that you are not being transparent with your customers.

Excluding Sales Tax When Pricing

A third possibility would be to exclude any sales tax when pricing a SaaS product. In this scenario, you’d have to apply the correct sales tax during checkout. The benefits of this are apparent—each person is charged the correct tax for their region. However, a downside to this approach would be the unenjoyable customer service when they notice a 20% increase in price upon checkout.  

VAT and SaaS


EU VAT (Value-Added Tax)

VAT is known as Value-Added Tax, and is applied to each sale in the EU.  As it is a “consumption tax,” it means that it is paid not by the business owner, but by the consumer who buys the product.  The rate can vary from 17-27% depending on the country of sale. The EU VAT tax only applies to digital goods—something to consider. What is a digital good? There are a few helpful guidelines below:


The Digital Good

A digital good is a product that is delivered, stored, and used in the electronic format. These products may be received via email, downloads from the Internet, or through a website login.


The European give four criteria to certify if something is a digital good:

  1. It is not a tangible, physical good.

  2. The offering is based on IT. It could not be offered without technology.

  3. It is provided through the Internet or another electronic network.

  4. It involves minimal human intervention or is fully automated.


It can include:

  • Online games.

  • Images, E-books, movies, and videos are available on Netflix or Amazon.

  • Downloadable music, whether buying an MP3 file or using a service such as Spotify.

  • Software-as-a-Service—also known as SaaS.

  • Site hosting services, Internet service provider, or websites.


Digital goods may also be referred to as “digital services,” “e-goods,” and “e-services.”


Charging EU VAT

Knowing when to charge VAT is extremely important because it is not always necessary to charge VAT. Consider it with every sale, certainly, but don’t collect it from every customer each time.

It basically comes down to two factors:

  1. Where is your customer located?

  2. Is the transaction B2B or B2C?

As a European business, always charge VAT to customers residing in your home country. You charge it to every sale of a digital good. When you sell elsewhere in the EU, note the differences between B2B and B2C.  

With B2B don’t charge VAT—there is something called a reverse-charge where the buyers pay to their own government. This will save you the trouble and allow you to avoid making separate tax returns to each country wherein you may make a sale. Simply receive a valid VAT identification number from each buyer.  

For B2C, charge the VAT, and apply the local rate from the country of the customer’s residence. The same rules apply to non-European businesses.  


Complying with EU VAT

The whole process sounds complicated, but can be understood in five easy steps:

  1. Register your business to obtain a VAT number.

  2. Verify where your customer lives.

  3. Charge VAT when you need to.

  4. Keep detailed records and invoices.

  5. Submit a VAT return every quarter.


Registering Your Company

Your business must be registered to legally sell digital goods of any kind in the EU. This can be one or two steps, depending on where you reside.

  • If your business happens to be in the EU, then simply register for VAT according to your home country.

  • If your business is outside of the EU, then you are able to choose any of the 28 EU countries that host VAT processes for your tax registration.

    • Look for a common language in this process. Ireland is the best bet for an English-speaking country.

  • Receive a VAT number – it is important to realize that there is a difference between a local tax number and a VAT number.  A VAT number will allow sales to take place across borders with other EU countries. Some countries may automatically give your business a number, but others only when you register.  Some give a local number at first and then require an extra step for the VAT number to be given.


Acquiring a Customer

This step is extremely important in order to stay EU VAT compliant, during and also after the sale. It will dictate everything about charging the digital tax itself as well as providing necessary information for all of your tax records. Be sure to answer two questions when you acquire a new EU customer:


Is it an individual or a business?

Determining this is very important because it will tell whether you charge VAT or not.  Ask the customer to give their VAT registration number. If the customer cannot—as businesses must have one—you can assume it is an individual. If the customer proves to be a business, ask for their VAT registration in order to confirm that it is a valid business. Some customers might actually pretend to be a business so as to avoid paying taxes! The best idea is to double-check a number using a tool available from the European Commission in order to validate it.


Where does the customer reside?

The customer’s location determines the amount of VAT you are able to charge. If you end up charging them too little, you’ll have to make up later for the missing money. It can already be a stressful situation doing taxes, so you don’t want surprises to come up. Collect evidence such as the following to confirm location:

  • Customer’s bank location

  • Billing address

  • Country where the credit card is issued

  • IP address of the buyer’s choice

  • Country where the SIM card is located (if the purchase is made on a mobile device)

Be sure to keep this evidence on file for at least 10 years. These records are a must in order to prove that you are tax compliant. Keeping digital files is really the best practice, either on cloud-based storage or in your account/tax software directly.


Charge VAT if You Need To

As a quick review—when should you charge VAT—if you’re B2C, you need to add VAT to every sale in the EU.  Make certain you are adding the VAT for the customer’s country. If you are B2B, add the VAT rate of sales in your home country. If the buyer resides elsewhere in the EU, make sure they have a valid VAT number and then you don’t need to add tax. There is a reverse charge mechanism that has been created to simplify everything for you. The buyer has the responsibility to hand the VAT charges for the transaction.


Provide and Keep Invoices After The Sale

Taxes can be tedious, but it’s important to keep valid records. Staying VAT compliant requires having a VAT invoice, and this will help you to stay organized for taxes when it comes time to file your returns. Each sale made in the EU must include a VAT invoice, including B2B sales when tax is not charged. A VAT invoice will contain the following:

  • The name of your business and its address.

  • The VAT number of your business (if applicable)

  • The invoice date

  • The sequencing number of the invoice

  • The buyer’s name and address.

  • The buyer’s VAT number.

  • Rate of the VAT charged.

  • Amount of VAT added

  • Final charge after VAT is added.

Keep each invoice for five years in order to help you stay tax compliant. These records should be available electronically in case requested by any EU official institution. The easiest and best way to store these invoices would, of course, be digital files—try PDFs—in case you need to access them quickly.


Submit Returns Every Quarter

This is the final step, and pretty straightforward at that. You are able to file your VAT returns online with a MOSS website where you are registered. This website will be able to tell you the information you need to enter for each of the countries where you sold products, and it will also calculate how much of the VAT you need to pay. Here you could pay the entire bill through MOSS, which will, in turn, pass this along to the various EU countries for you. It is best to file them at the end of each quarter. After the end of the quarter, you will have 20 days total to file and then pay what you owe. Thus, the VAT deadlines are the following:

  • 20th April for the first quarter (concludes 31st March)

  • 20th July for the second quarter (concludes 30th June)

  • 20th October for the third quarter (concludes 30th September)

  • 20th January for the fourth quarter (concludes 31st December)


What Are the VAT Tax Rates by Country?

Each of the EU countries has its own tax rate, which varies from 17-27%. If you have to charge one VAT for a customer in Spain, you would charge a different rate for one in France or Belgium. Your product will thus be more expensive in one country than in another depending on their VAT rates.  However, remember that your competitors are also subject to the same tax rates, so it does not matter so much about this point. We’ve provided a table below to show the current VAT rates in each of the EU countries:


Country Vat Rate (%)

  • Austria 20%

  • Bulgaria 20%

  • Belgium 21%

  • Croatia 25%

  • The Czech Republic 21%

  • Cyprus 19%

  • Denmark 25%

  • Finland 24%

  • Estonia 20%

  • France 20%

  • Greece 24%

  • Germany 19%

  • Hungary 27%

  • Italy 22%

  • Ireland 23%

  • Latvia 21%

  • Luxembourg 17%

  • Lithuania 21%

  • Malta 18%

  • Poland 23%

  • Netherlands 21%

  • Portugal 23%

  • Slovakia 20%

  • Romania 19%

  • Slovenia 22%

  • Sweden 25%

  • Spain 21%

  • The United Kingdom 20%


How Does the "Reverse Charge" Mechanism Work?

In order to sell your product, you know that knowledge of the VAT rates is important. It may spark your curiosity why perhaps you wouldn’t need to charge VAT to a business in the EU. Here is an explanation of how this works. The reverse charge is designed in order that the buyer report VAT for their business purchases and thus cutting out the middleman (you!). It is logical and effective, so that the money goes in a straight line instead of a circle.  

In a normal business process—a B2B customer pays tax on your product; then you pay the tax to the government.  Further on, the customer would reclaim this same amount for a tax break and then would be reimbursed. The money goes in a circle from the buyer, to you, then to the government, and finally back to the buyer. The reverse-mechanism was born to make it one smooth step. Let the customer keep the money, then file a tax report appropriately…It is great for you as it means no need to register in every EU country where you may have a buyer of your product.


Software to Help

There are specific software programs available, such as one called Quaderno, which can help create a custom invoice automatically, which then applies the correct sales tax. It does this in real time, as your product is being sol. This would occur during the checkout process but before the customer is able to enter their payment data. This great tool, or others like it, will help you to price things seamlessly and charge the correct amount of VAT no matter which country your customer was purchasing from. It automatically includes the percentage of sales tax, so if the product price were $10.00 US, a person in France with a 20% sales tax would see a price of $12.00 US, the sales tax rate being automatically included. It is very helpful and recommended highly to consider software or a tool of this sort to help with the proper calculation of VAT.  


In Conclusion

When we started to take a look at these taxes, we discovered that knowing what to price your product is essential. It always remains that a customer has to pay a sales tax according to the regulations of the region in which they live. It is up to the business owner/operator to decide if they display the sales tax up front in the price or save it for the check out to be calculated. When sales tax is included in the price, there are no surprises because the customer knows the exact amount they are going to pay for the SaaS product you are offering because you’ve included this price in the taxes.

As with everything, knowledge is power, and preparedness is ideal. Knowing the rates, educating yourself on these matters, and making sure to stay tax compliant within your business practices will allow you to function smoothly and well as a business and make the most of your sales!  

Garenne Bigby
Author: Garenne BigbyWebsite: http://garennebigby.com
Founder @dynomapper
Garenne Bigby is freelance Chicago developer and founder of DYNO Mapper with over 10 years experience in both agency and freelance roles in design, development, user experience, SEO, and information architecture.

Back

Create Visual Sitemaps

Create, edit, customize, and share visual sitemaps integrated with Google Analytics for easy discovery, planning, and collaboration.

Popular Tags

Search Engine Optimization SEO Create Sitemaps Accessibility Testing Sitemaps UX User Experience Sitemap Generator Content Audit Website Content Audit
Create Interactive Visual Sitemaps

Discovery has never been easier.

Sign up today!