Global Tax Compliance: EU VAT 2024 News

As the saying goes, "new year, new challenges”, and  2024 is no exception. Starting with the 1st of January, new EU compliance rules will be mandated, ushering in a year filled with fresh regulatory demands.

Luckily, we are not here just to give you the bad news. 

We also have the solution to your VAT compliance problem: the Merchant of Record, a real partner in your global growth journey. Check out our guide on what the Merchant of Record represents and how SaaS and software companies can benefit from it. 

Let's dive deep into: 

The EU VAT 2024 Change

Important Facts To Remember About EU VAT Compliance

3 Implications For Your SaaS

5 EU Compliance Best Practices

The MOR Solution To Your Problems 

The EU VAT 2024 Changes

With less than a few weeks to make the necessary compliance adjustments, it’s time to cut right to the chase and find out what these are. 

Before we do that, though, it’s important to make one thing clear. 

The European Union value-added tax (VAT) is applied to goods and services within the EU space. So, if you are a US-based business selling software, SaaS, and digital goods in the European Union, you must charge local VAT based on your customers’ location. 

Reporting Cross-Border Sales To Tax Authorities

Starting on the 1st of January, payment processors must report cross-border transaction data to tax authorities. This disposition is part of a larger plan to fight international online fraud. 

In regard to cross-border online transactions, if you are a US-based software or SaaS business earning more than 25 sales per quarter within the European Union, your payment service provider will now need to log the number in the Central Electronic System of Payment Information (CESOP) database. 

This is where data will be stored, aggregated and verified with other existing EU databases. Additionally, all information in CESOP will be made available to EU member states anti-fraud experts. 

It's very important to collect and file the correct sales taxes, as these will be verified by the corresponding tax authorities based on the information sent to them by the payment processors, and they should match your own filings. 

Important Facts To Remember About EU VAT Compliance

No Minimum Threshold 

Unlike the US sales tax regulations, which typically require reaching a minimum of international payments before being financially liable, the rules in the European Union are significantly more intricate.

From the moment you make your first sale within EU territory, you become liable.

In simpler terms, EU VAT non-compliance consequences apply to you regardless of your transaction volume or the country where you conduct your sales.

The One-Stop Shop (OSS) Scheme

Instead of registering and filing into each country individually, businesses selling across the European Union can register for VAT and file VAT returns through the One-Stop-Shop (OSS) scheme. 

While switching to the OSS scheme is perceived as a major simplification for businesses operating within the EU, bringing about multiple benefits such as reduced compliance costs or administrative workload, it remains a complex system that should be reviewed carefully.

Reverse Charge Mechanism

In certain instances, when selling to other businesses based in the EU, the reverse charge mechanism comes into play. This is actually a VAT calculation method that switches the responsibility of tax registration and payment from the seller to the buyer. This mechanism is intended to simplify tax management for businesses. 

To correctly implement this change, you need to adapt your invoicing system for the B2B transactions where this mechanism applies, indicating when the customer is responsible for VAT. 

3 Implications For Your SaaS

It cannot be overstated that EU tax authorities are exceptionally thorough. 

Therefore, it's imperative to strictly adhere to regulations and carefully ensure full compliance with all your tax obligations. 

This diligence will help safeguard your SaaS business from any potential repercussions.

Bigger Compliance Headaches

Because there is no minimum threshold, non-EU SaaS and software businesses must make the required adjustments from day one. 

Easier said than done. 

Staying on top of VAT compliance and ensuring that the process follows the exact requirements now and in the future will be a huge undertaking for your finance team. 

Be warned, even though Payment Service Providers might calculate the sales tax from your online sales, you still remain liable, which means you are obligated to file and remit your taxes. Without the necessary expertise, it is exceptionally complex. 

Higher Compliance Costs 

It’s not just the intricacy of the VAT compliance process that can trigger real nightmares for software and SaaS businesses. The costs are equally as frightening. 

SaaS and software processes will be required to invest heavily in new systems and procedures that not only take care of the entire payment process but are ready to comply with all the VAT and sales tax management requirements. 

Additionally, if your payment infrastructure does not feature electronic invoicing, making a change in this functionality could also imply additional costs. 

Exposure To Potential Consequences

The new VAT and sales tax compliance process is complicated, to say the least. 

Without a strong payment solution in place, failing to comply with all existing regulations is a very real possibility for your business. Unfortunately, this can end up costing your business great losses in revenue and reputation. 

Asidet from potential fines, you also run the risk of having your sales terminated by payment processors until you are able to fix your tax and compliance issues. 

5 EU Compliance Best Practices

Without the help of financial service providers that are equipped to handle compliance with local and international laws, it will most certainly be a tremendous burden for your team. That’s why it is so important to be aware of all the steps you need to take in order to meet all of the new regulations.

1. Update your checkout process

When using the reverse charge mechanism, it’s essential to implement a system capable of correctly tracking the customer’s location during the checkout process. To do so, you may have to use dedicated geolocation tools that provide location details. 

2. Validate VAT Identification Number

During the checkout process, the customer should be able to enter their VAT Identification Number (VATIN). Considering that this is an important detail you will need to keep records on, you should also implement validation checks to ensure information accuracy.

3. Apply VAT rates

With EU VAT compliance based on the customer’s location, you need to be aware of local taxes and configure your system accordingly. 

4. Keep detailed records 

It is important to keep comprehensive records of all online sales, which includes customer data, as well as location evidence such as banking details, billing, or IP addresses. 

5. Constantly monitor 

Keep track of all regulatory compliance changes to ensure your business adheres to existing rules and regulations and is not exposed to potential costly consequences. 

The Merchant of Record Solution To Your Problems

Tax management is a serious part of managing your business, and given the latest EU VAT compliance changes, being careless with this task should never be an option. 

Of course, putting various tools to work to oversee your tax obligations for international customers could be a solution since these might partly reduce the workload and expenses involved. 

But there is still the issue of liability that needs to be managed. 

As a business owner, you know how serious this issue can be if left in the wrong hands. 

Luckily, there is a better way to handle regulatory compliance for your global sales. And that is the Merchant of Record. 

However, the success of any MOR partnership depends greatly on the partner you choose. Here is a guide on how to find the right merchant of record for your business. 

PayPro Global’s unique MOR business model takes care of everything related to international compliance, removing all tax-related frustrations and allowing you to focus on perfecting your SaaS products and keeping your customers satisfied. 

Offering complete tax management for your international online payments, including filing and remitting sales taxes in any market or jurisdiction your shoppers are in - locally and globally - PayPro Global is the most trusted partner out there. 

Moreover, by providing you with electronic invoicing, the right mix of local payment methods, dedicated customer support, sure to resolve all payment-related shopper issues, as well as access to local business entities which has many benefits, our payments infrastructure will increase profitability for all SaaS and software companies. 

With our Merchant of Record as your payment provider, safely accepting payments anywhere in the world will no longer be a challenge but a driver of significant global success. 

Find out more about how our complete payment infrastructure can strategically scale your business in global markets.