Legal, Tax, and Accounting July 29, 2020

How to automate VAT/GST/Sales Tax Compliance for Global SaaS (B2C)?

Phil_vH

So you've been working for months on exciting new features for your SaaS, and you're just about ready to launch. All you've got to do is integrate Stripe to take payments and ... oh yeah, there's also tax to think about. What a nightmare. That's pretty much the situation that we are in, so I've been doing some research and thought it would be useful to share.

Everyone knows that taxes are complicated, but if you want to sell SaaS to consumers globally, you'll be surprised just how complicated. Many countries are implementing taxes on digital services that apply to SaaS, no matter where your company is based. Depending on the country, this type of tax will be called VAT (value-added tax), GST (goods and services tax), sales tax, etc.

  • In the US and Canada, you'll have to deal with a patchwork of different rules and rates for each state or province.
  • In the EU, you can register for the VAT MOSS (Mini-One-Stop Shop) program to simplify things a little, letting you register and pay VAT in a single country. You charge VAT at the rate of the county where the customer is located.
  • For other countries you'll be registering with each one.

Luckily some countries have thresholds that need to be exceeded before VAT/GST/Sales tax needs to be paid. So if your revenue is less than $75k in Australia, you're not liable for GST there. But some countries — like India, South Korea, Indonesia, or Albania — have no thresholds, so as soon as you have a single customer in one of those countries, you're liable for VAT/GST.

There are several steps in dealing with VAT/GST/Sales taxes:

  • Invoicing/Billing: Determine correct VAT rates by location, calculation of tax using customer location & rate, create compliant invoices, verifying the location of the customer, validate VAT-Number in B2B invoicing - reverse charge.
  • Reporting - Extract data from billing platform to create return-ready reports for filing
  • Collection, filing, and remittance (payment) of VAT/GST

How to simplify or automate this mess? Here are some options I've identified and that we're considering (in order from least effort to most effort):

  1. Use a Merchant of Record(MoR) who acts as a reseller for your SaaS and takes care of all tax requirements for you. Examples: Paddle, Fastspring.
  2. Use a tax specialist to outsource all or some of the taxation processes from invoicing and reporting to tax collection, reporting, and remittance. These providers will make tax payments for you. Examples: Avalara, Taxamo, TaxJar.
  3. Use a service that integrates with your payment provider (Stripe in our case) that automates invoicing at the correct rates as well as reporting of tax liabilities. Do the tax registration and remittance of taxes yourself. Examples: Quaderno, Octobat.
  4. Do it yourself (DIY) solution: Input the relevant tax rates to the payment provider. Potentially using APIs from Taxlayer or Avalara. Register and remit yourself.

We're not big fans of the MoR option, because we're not sure we want a middle man in between us and the customer. The outsourcing option is tempting but surely expensive (exploring this) and potentially not tailored to the needs of a startup. The DIY solution would probably work as long as customers are concentrated in a few countries, but could easily get overly complex. It seems like we're tending to option 3.

Surely, many of you out there have experience with this and can share your experience?

Note: I am not an accountant or tax advisor. I'm just someone trying to figure all this out.

  1. 2

    Hi Phil,

    I’m developing Abowire, an all-in-one Subscription Management software (www.abowire.com) to solve exactly what you posted. We want to unify online with the offline subscriptions globally and reduce the complexity of running a scalable subscription business, by integrating all the tools you need in one solution at a fair price.

    I am one of the Co-founders of the startup and we are looking for early adopters to work together through this initial phase. We are based in Berlin.

    In Abowire we handle payments, banking sync, recurring billing, collections, customized checkout, as well as VAT Compliance & Moss Reports, Invoicing and some basic analytics. We are also planning to support taxes of the US, Canada, Australia and Latin America.

    Let me know if you are interested or if I can be of your help.

    Great thread - BTW

    pd. my email is [email protected]

    1. 1

      Interesting! I can see that you support EU tax (VAT MOSS), are you planning to add support outside the EU as well?

      1. 1

        Yes, currently are working with some startups of the US to support also their cases. We are adding support and tax compliance on demand of our customers. Let us know if you are interested. Happy to work together!

  2. 1

    Super helpful Phil. Echoing the sentiment regarding the complexity of this part of establishing a scalable SaaS platform. Part of my challenge has been making sure we assess platforms that truly are global and without the US centricity that some of the solutions seem to have. After a lot of research and wrangling my mind around the variables I'm pursuing your Option 3, with the inclusion of Airwallex to add geolocated bank accounts so I can maintain Stripe's domestic fees and avoid their international card fee rate.

  3. 1

    Heya! I noticed you posted this almost two weeks ago but I just stumbled across it this morning. I wanted to mention that I'm a Product Manager at Stripe who is working on better tools and functionality for taxes overall, specifically option 3 as you've described it. If you're interested in learning more about what we're doing or if I can help with any combination of Stripe+tax, please shoot me an email: [email protected]

    1. 1

      Thanks Kelly! I'll do that!

    1. 2

      Hey Christopher - nice post. I like how you've created a visualization of the SaaS payments landscape - very useful!

  4. 1

    Thank you for this summary about this problem. I have nothing to say for now but, again Thank you, When you find out your solution, please keep us update.

  5. 1

    Good summary. I assume MoR aggregates sales so all clients lose their tax threshold benefit and pay global tax from 1st sale.

  6. 1

    I went with Gumroad. It allow me to focus on my product instead of worrying about tax.

    1. 1

      Looks like Gumroad acts as a Merchant of Record (MoR). They say: "Gumroad is the entity with whom your customers are doing business, so we are responsible for VAT, not you."

  7. 1

    As far as you know, what are the penalties/consequences for not complying with these tax rules if you are incorporated (and tax resident) outside of the jurisdiction in to which you are selling? For example: company is incorporated and tax resident in Ireland with €100k of revenue generated in the EU (therefore has compliant VAT arrangement in Europe), but also has €10k sales in India (or other country with no VAT/GST threshold).

  8. 1

    It is a truly horrific situation. Frankly I also keep wondering how other people deal with this. For now I am building to use MoR, to avoid the hassle or otherwise the steep costs for services.

  9. 1

    Hmm, the third option seems like something I have been looking for as well. Being located in Finland where the VAT for sales inside Finnish borders is 24% etc and the amount of market potential is quite small I have started to look a bit at other countries like the united states and Canada as well as the UK. The taxation process has stressed me out a lot since I'm young (19) and lack the legal knowledge in any of this and also lack the savings to be able to cover if something would go wrong.
    Going to look into the Octobat for sure.
    Seems like Octobat and Quaderno got quite large plans, do you know about any similar service for freelancer level people?

    1. 1

      Quaderno has got what they call their Hobby plan (€ 29 per month), but you are limited to less than 25 transactions per month, so that's more than €1 per transaction

      1. 1

        That could work, I would mainly use it for my web design freelancing business since it’s very unlikely and almost impossible to complete 25 or even close to that amount of websites per month considering that most of the clients are paying €2000+ so the €1 charge on that would not be too bad.

        1. 1

          Agreed, if you're in a low volume, high-value business then it might be worth it. Since your customers are probably mostly B2B it's the validation of VAT numbers that's most important for you. I think you'll be reverse changing VAT (customer pays) in most cases, so the invoicing services like Quaderno may not even be necessary.

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