You have received a request from a potential customer outside the United States. As the excitement wears off, you ask yourself “What do I need to do to make this transaction happen?” There are a host of issues, including tax and compliance, that you will need to consider and address as part of your decision to do business with this customer.
Getting Starting With International Tax
One item you will need to address is whether the potential customer is included on any sanctions list maintained by the U.S. Treasury Department.1 The Treasury Department maintains a list of foreign persons that U.S. persons are generally prohibited from dealing with.
Once you have determined you can work with this potential customer, you need to determine if an export license will be required for the product(s) or service(s) you have been asked to provide. The key questions will be “What is being shipped/provided?” and “Where will it be sent.” You may need an advisor that specializes in export matters.
After you have addressed these initial barriers, you now have to determine how to get your product/service to the customer. If you are providing a tangible product(s)2, you will need to address custom/import duties in the foreign country.3 Will you be the importer of record? Will your customer be the importer of record? Will you use a third party to be the importer? Who is responsible for shipping costs? What are the shipping terms? If you are providing a product or service via the internet,
Do You Need to Register for VAT and GST?
Another issue to be addressed is whether value added taxes (VAT), or goods and services taxes (GST) have to be paid at the time or import, at the time of sale or both. If VAT or GST has to be paid at the time of import, who will be responsible for paying the tax: the seller or the customer? If you as the seller are responsible for import VAT or GST, you will likely need to register to do business in the foreign country. Registration for VAT or GST purposes is important as it may allow you to claim a refund of the import VAT or GST when you file your VAT or GST tax return.
If your transaction is not subject to import VAT or GST, you may have to collect VAT or GST from the customer at the time of the actual sale and file a VAT or GST tax return in the foreign jurisdiction. Note, as the seller of the product(s) or service(s), you should never be out of pocket for the cost of VAT or GST as your customer should being paying the VAT or GST as part of the purchase price. As part of the VAT or GST return process, the amount of any VAT or GST you paid will be offset by the VAT or GST you collect from the customer. Any VAT or GST you collected in excess of the amount you paid will be remitted to the foreign government by you when you file your return. Thus, the cost of this tax is borne by the customer.
If you are required to register for VAT or GST, some countries will require your business to be registered with the income tax authorities. This may result in you have to file a foreign income tax return similar to what you file in the United States.
While this may seem like a lot to manage for the first sale, working with the proper tax advisors will assist the development of tax processes and procedures required to expand your global footprint and to meet your compliance obligations with a foreign government.
How We Can Help Guide Your International Expansion
Cherry Bekaert provides guidance and support that helps you protect your investments while achieving organizational goals. For assistance or questions regarding specific risks and opportunities to your international expansion plans, please contact your Cherry Bekaert advisor or a member of the International Tax Services practice.
References
1 https://home.treasury.gov/policy-issues/office-of-foreign-assets-control-sanctions-programs-and-information
2 Generally, materials downloaded from the Internet are not subject to customs and duties. However, they may be subject to VAT and GST discussed infra.
3 Customs duties are not imposed on products delivered by electronic transmission (i.e., the internet).
