- Harri Lauslahti
Taxation of international sales generates nasty surprises for thousands of companies!
Taxation of international sales generates nasty surprises for thousands of companies selling products and services online.
At the moment companies are widely not aware of country-specific tax regulations with respect to different thresholds for registration, registration obligations, taxability of sales and other obligations that the company must comply with after the registration. Companies should ascertain under what circumstances they are able to sell tax-free. Notwithstanding that does the merchant sell directly or by using a platform, when the sales exceed the local sales tax threshold the company has an obligation to register as a taxpayer in the country of sale. If the company does not register, the local tax authority will intervene.
If the company does not do its homework well, there will be negative tax consequences. We believe that nine out of ten players in the SME sector are not aware of the ongoing changes in international sales taxation.
Every company that sells software, services, or products cross-border today must ensure that sales taxes are calculated and accounted according to the country of the buyer. Kohtas Co. estimates that only in Finland, this group of taxpayers includes 4,000–5,000 companies and 25,000-30,000 companies in the Nordics.
There are already companies in trouble
A good example of this phenomenon is the army surplus and outdoor specialty store Varusteleka. In October 2021, merchant selling millions to the U.S. told how it collided with state-specific sales tax thresholds. It eventually accumulated a tax debt of about $ 100,000 and filling out all the forms yielded painful extra work. It has now a system for handling sales taxes in the United States.
According to Varusteleka, "the controller and the CEO lost a total of at least five years of their lives to settle the matter."
“If you sell to America, it’s worth looking in advance at how little you can sell tax-free. There is not a single country that does not collect tax debts,” Varusteleka communicates to other entrepreneurs.
Your local sales tax policy is not the correct default practice for cross-border trade
Online marketplaces and other electronic platforms are often considered as sellers of a good or service, and therefore they are obliged to collect and remit sales taxes internationally. And if they are not, then the merchant is liable to collect and remit the applicable taxes. This is where the problems arise. Unfortunately, far too many SMEs believe that everything can be taken care of according to the tax regulations and policies of the state where they are established. They are very likely to be in trouble when they do not understand the applicable international tax obligations and fit their operations with them.
We suspect that the accounting firms are not always able to advise their clients on the twists and turns of international sales taxation. Specially if the merchant's target countries are the United States or other non-EU countries, the company should especially be prepared for surprises. The tax regulations are to SMEs like a jungle difficult to navigate. It is easy for legislators to enact new tax legislations, but much more difficult for the taxpayers to apply.
Previously everything with sales taxes was simpler: the buyer was considered as an importer; in which case the freight forwarder often arranged the import. Now the seller or marketplace are considered to be taxpayer. Sellers should ensure from their agreement with the marketplace who will ultimately be responsible for the collection and remittance of sales taxes.
The global trend of sales taxation seems to be that more and more countries and tax areas will be tightening the regulations and the difficulty to comply with the rules will continue to grow.
Kohtas Co. can help merchants
Kohtas Co. provides Feasibility studies, i.e., answers and recommendations on how an online marketplace fits into market of the company in question. As a result of the Feasibility study Kohtas Co. provides a clear business plan, mockups of the company’s marketplace, and a comprehensive market study – all with one goal: profit. After the Feasibility study Kohtas Co. is also able to design and deliver the online marketplace based on the study and can support customers in managing their online marketplace.
One specialty of Kohtas Co. is the Kohtas Tax Engine, which is a software that handles international sales taxation for the customer. The software automatically provides you the information with respect to the thresholds for registration, calculates and collects correct tax rates and handles the remitting of taxes to local tax authorities.
Kohtas Tax Engine already covers 106 countries and about 170 tax areas. It has a total of about 3.6 million different tax rules. Kohtas Co. sells the tax rule database to accounting firms and information service providers. In addition, it provides Kohtas Tax Engine API directly to companies that sell their products and services internationally.