VAT and GST Thresholds for Non-Resident Sellers

Cross-border trade has become the norm rather than the exception in recent years, mainly due to the global growth of e-commerce. The expansion of international sellers led to an inevitable encounter with one of the most crucial regulatory checkpoints in modern taxation landscapes: the VAT and GST registration thresholds.

Once traditionally used to provide financial and administrative relief for small businesses, in today’s digital economy, thresholds are increasingly used as policy tools to enforce tax compliance on foreign suppliers regardless of their physical presence. Therefore, understanding when, where, and how to register for indirect taxes, such as VAT and GST, has become an essential part of the current tax compliance trends and commercial sustainability.

The Role of Thresholds in Tax Compliance

Tax thresholds are generally used as part of a progressive tax system, implying the usage of higher rates on higher levels of income or gains, or more valuable assets. Furthermore, they provide an exemption on the initial amount of income or profits, or an asset-based charge. Such exemptions provide simplification and reduce administration for those who remain under the threshold.

Therefore, exceeding the threshold not only incurs tax costs but also increases administrative burdens and expenses. With the complexities surrounding the taxation systems, taxable persons, including foreign e-commerce sellers, face a variety of tax thresholds.

From an indirect tax perspective, the thresholds determine the point at which a business or individual becomes liable to register for and charge VAT or GST in a jurisdiction. Moreover, the VAT or GST thresholds also imply a different basis of taxation once exceeded.

The VAT/GST thresholds play a delicate role in balancing the need to minimize the administrative and financial burden they place on businesses, especially smaller businesses, while ensuring the system remains fair and neutral by preventing market distortions and boosting government revenue collection.

Key VAT/GST Threshold Models Across the World

Non-resident sellers making taxable supplies internationally may face different approaches to VAT/GST thresholds. Non-resident e-commerce sellers that sell goods and services to Australian consumers, including digital products, such as software, e-books, or low-value goods imported into Australia with a customs value of AUD 1,000 or less, must register for GST if their sales are equal to or greater than AUD 75,000.

In Canada, e-commerce sellers who make taxable sales of goods and services must register for GST/HST, unless they are considered a small supplier or business. Therefore, if a non-resident seller carries out business activity in Canada and exceeds the CAD 30,000 threshold, it must fulfill all the GST/HST requirements and obligations.

EU countries, such as Ireland, do not have a VAT registration threshold for non-resident sellers. This means that they must register for VAT, regardless of their turnover, if they impose or sell goods to local consumers or engage in B2C distance selling of goods.

Unlike many other countries that typically have defined thresholds for domestic or foreign, or both, taxable persons, Mexico does not have a VAT registration threshold. Consequently, taxable persons are subject to VAT rules and regulations as soon as they make their first taxable sale in Mexico.

In general, e-commerce businesses must pay attention to local VAT/GST threshold rules and regulations to determine whether there are any applicable to non-resident sellers, and if so, what the thresholds are set at.

How to Calculate VAT/GST Threshold

Knowing whether there is a VAT or GST threshold is not enough to determine if the taxable persons should register for indirect taxes. The second part of the equation involves knowing how to calculate the threshold, specifically what is included in the taxable turnover and in which period it is calculated.

Generally, the threshold is assessed based on taxable turnover, which is the total value of sales subject to VAT or GST within a particular country over a specific period, typically the previous 12 months or the upcoming 12 months. Other examples of periods for which the threshold is calculated include annual sales, which can refer to either a calendar year or 12 consecutive months.

Regarding what is included in the thresholds, some countries may only include digital services, while others may include both goods and services.

For example, in Australia, GST turnover is a combination of the values of imported services, digital products, and imported low-value goods to Australian consumers. The GST turnover, not profits, represents the total business income relevant for the GST threshold.

Additionally, Australian GST regulations specify two relevant periods for calculating the GST turnover threshold. Therefore, if the threshold is exceeded in the current month and the previous 11 months, taxable persons must register for GST. The exact requirement applies if the e-commerce seller can project that its total turnover for the current month and the next 11 months will be above AUD 75,000.

Another vital point is currency conversion. Thresholds are typically set in local currencies, which means that non-resident sellers must monitor and report their sales using an accurate exchange rate.

Beyond the Threshold: VAT/GST Obligations

In addition to being obliged to register for VAT or GST in a particular country, non-resident sellers must also apply the appropriate VAT/GST rates to their supplies and collect and remit taxes to the competent government bodies, typically the Tax Authority or Department of Revenue.

One of the most significant effects of registering for indirect taxes is that they must be levied on all sales, leaving e-commerce sellers with a critical decision to make: increase sales prices and shift the tax burden onto consumers, or, instead, absorb it themselves and reduce profits. However, even an increase in prices may lead to a reduction in earnings due to customer dissatisfaction.

Additional essential requirements that VAT- and GST-registered businesses face include invoice issuing, reporting, record-keeping, and tax return submission requirements, which vary from one country to another. Furthermore, foreign sellers must determine whether they can complete the registration process and fulfill other VAT/GST requirements and obligations independently or if they need to appoint a tax or fiscal representative.

Risks of Non-Compliance with VAT/GST Requirements

Those who do not comply with local VAT/GST rules and regulations risk paying penalties and interest on due taxes. Additionally, non-compliance may trigger a Tax Authority audit or inspections, which could lead to the discovery of additional non-compliance issues.

Furthermore, some countries have established specific rules for individuals who repeatedly fail to comply with VAT/GST regulations, which may include increasing their VAT/GST return filing frequency or placing them on a watchlist.

In some countries, such as Mexico, the imposition of non-compliance penalties may also include blocking the e-commerce seller's website from internet access, that is, access to the Mexican market. The blockage may last until the non-compliance issues are settled.

In addition to all previously stated penalties and fines, legal representatives or individuals may face criminal charges for tax evasion or fraud.

Conclusion

The VAT and GST rules relating to registration threshold should be taken seriously by all taxable persons, especially those engaged in cross-border or international supply. E-commerce sellers should adopt a strategic approach to addressing this tax compliance issue.

Possible solutions for achieving compliance and staying informed include setting up systems to monitor threshold exposure in real-time, understanding how thresholds are defined in countries where their consumers are located, and anticipating the costs of registration and compliance before expanding into a new market.

FAQ

What is a VAT/GST registration threshold?

A VAT or GST registration threshold is the minimum turnover amount at which a business must register for indirect taxes in a particular country.

Do VAT/GST thresholds apply to foreign or non-resident sellers?

While some countries regulate AT/GST thresholds for non-resident sellers, particularly in the e-commerce and digital services sectors, others do not have such rules in place. E-commerce sellers should carefully determine which rules are defined in the countries from which their consumers come, and tailor their approach based on the type of supplies they offer.

How is the threshold calculated?

Threshold calculations are typically based on taxable turnover, which is the total value of taxable supplies made over a 12-month period. Each country defines what is considered a taxable supply, and whether the 12 months are calculated as a calendar year, consecutive past or future 12 months, or in some other way.

Can a business choose to register voluntarily before crossing the threshold?

Voluntary registration is permitted in most countries and may even be beneficial for businesses that wish to claim input tax credits or enhance their compliance credibility.

Does the threshold apply to both B2B and B2C transactions?

Most VAT/GST thresholds rules for non-residents apply to B2C sales, especially for digital services and low-value goods. B2B transactions may be subject to different regulations, such as reverse charge mechanisms.

Source: VATabout - How Registration Threshold Changes Impact Businesses, VATabout - Mexico's VAT Compliance for Online Vendors and E-commerce Platforms, Institute for Fiscal Studies, Australian Taxation Office, Government of Canada, Irish Tax and Customs