Tax Registration Thresholds: What Are They and What Are Your Obligations?

February 22, 2021

For tax compliance, sales thresholds are a key principle: ultimately, they will determine whether you need to register your business and charge consumption taxes (such as VAT or GST) in a specific territory. If you fail to comply with tax registration requirements, you’ll be liable for indirect taxes (VAT, GST, sales tax) you didn’t collect from your customers when you needed to, and you might also need to pay fines. 

In this article, we‚Äôll discuss tax registration thresholds‚ÄĒand what you need to do once you reach them.


What Is A Tax Registration Threshold? 

A tax registration threshold is a fixed amount in the country’s currency. Once you reach it, you need to complete the local tax authorities’ registration process and start collecting and remitting indirect taxes for your sales: VAT, GST, or sales tax.

In most cases, this threshold applies to products or services you‚Äôve sold to the residents of a given country‚ÄĒexcept for Switzerland, where the threshold is based on your sales worldwide, over a 12-month rolling period. The limit itself is CHF 100,000‚ÄĒafter which you need to register for and start charging VAT in the country.


What Do You Need to Do Once You Reach The Tax Registration Threshold? 

The threshold usually applies to sales you’ve made in the past 12 months, or to your projected sales over 12 months. In short, it’s a rolling period of 12 months. 

Once the threshold is reached, there are several things you need to do: 

  1. Register at the tax office. In most instances, foreign companies can complete the tax registration process online, meaning that you don’t need to appoint a local accountant or a tax representative. In some cases, you might still need a representative to handle local taxes for you. 
  2. Start charging indirect taxes (VAT, GST, or sales tax) to your customers who are residents of the country in question on each sale where an indirect tax applies. For B2B customers, you might not have to do that, if the reverse-charge mechanism applies. 
  3. On each invoice, you need to specify the tax rate, type of the tax and the tax amount. Some countries have specific requirements regarding the formatting, language, and details of each invoice.
  4. Keep track of all of your invoices and the indirect taxes you’ve collected. 
  5. File a tax return. Each country has its own requirements to comply with, and deadlines to respect. 

If you haven’t reached the sales threshold within a 12-month period, you don’t need to register, collect taxes and file a tax return. 


Distance-selling Thresholds

Most countries have a so-called distance selling threshold, which covers foreign companies selling products to domestic customers. In other words, if you reach the distance selling threshold prescribed by the country, you will need to register for VAT purposes in that country and start charging indirect taxes on every sale to the customer in that country.

That is why it is important to always monitor your sales projections and your sales totals per country, so that you can be ready, and react quickly when you do reach the limit. This means that you need to keep detailed records per country, so that you can make informed predictions and be ready to comply with local tax regulations as soon as you need to.

Please note that some countries do not have a tax registration threshold. This is the case for digital goods sold in India, Russia, and South Korea, and it means that you need to complete your tax registration beforehand (before you start selling to residents of these countries). 


Here Is Where Fonoa Tax Comes In Handy

Our tax calculation solution automatically takes into account your existing sales levels to different countries across the globe, and then keeps track of all new sales anywhere in the World in order to automatically start applying the local indirect tax rate to sales to countries where relevant tax thresholds have been breached.

What’s more, the importance of proper tax rate calculation for marketplaces selling in the EU will become even more pronounced after the new VAT E-commerce rules become live after July 1st 2021. Fonoa is ready to support the e-commerce ecosystem with these new regulations - stay tuned for more product updates.