Whether they intend to be or not, Software-as-a-service (SaaS) businesses are global from day one. Anywhere with an internet connection is a potential market and almost anyone can be a potential customer. 2020 has demonstrated this global opportunity like never before, as ambitious companies seized on the heightened demand for their products created by the Covid-19 pandemic. In the last 12 months, we’ve seen hundreds of SaaS companies, from the already established like Zoom to fledgling startups such as Hopin, scale seemingly overnight to compete and sell in new markets around the world.
However, international expansion isn’t just about lands of opportunity and unchartered frontiers. With new markets come new compliance requirements and it’s imperative that software businesses get to grips with this quickly and effectively. The software sector is no longer the total free market that it once was. Software is now a regulated industry and that has major implications for businesses and their ability to scale and sell internationally. As software sellers’ customer bases grow, so too does their compliance burden, and the consequences of any mistakes can lead to shrinking revenues or even worse, legal repercussions.
Looking ahead to 2021, software sellers must balance scaling internationally without falling foul of tax regulations or leaving themselves exposed to lawsuits, or even, in extreme cases, imprisonment. At the same time, they also cannot allow compliance to become an unsustainable burden on the business.
Here are four things that sellers should bear in mind when expanding internationally.
1. Your sales are taxed where your customer is located, not your HQ
Since the 2018 South Dakota v. Wayfair US Supreme Court ruling, software has been taxed wherever the customer is, not where the company’s HQ is, setting legal precedent for thousands of tax jurisdictions worldwide.
This means that SaaS companies selling in the US, for example, must stay completely up-to-date on tax regulations and, crucially, charge the correct rate of sales tax, across all US tax jurisdictions. This is no simple task. The US alone has over 11,000 different tax jurisdictions, and there’s no unified tax filing process globally. It goes without saying that the burden this places on teams within fast-scaling, software businesses can quickly become overwhelming.
Globally-minded teams are also required to stay up-to-date with rules across thousands of jurisdictions to charge, register, file and remit the correct rates of sales tax beyond the US. These include:
- Europe’s VAT MOSS system, introduced in 2015. This means your SaaS business will have to know the rates of VAT in every European country you sell to, as well as collecting and retaining evidence of each sale and allocating sales by country for your filings
- The Gulf Cooperation Council in the Middle East, which has introduced a unified VAT system across its member states
- Countries including Japan, Russia and South Korea have also started requiring overseas sellers to register for sales tax
More than 40 countries now charge sales tax on digital goods and software, with added complexity based on different variations of products, different tax thresholds and international barriers like language, currency, and time zones.
2. Take stock of what you’re selling and where you’re selling it
To comply in new markets, you will also want to consider what type of software your business is actually selling. In some countries, there are different rules for sales tax on software and SaaS products, depending on whether your customers are individuals (B2C) or businesses (B2B). B2C transactions are, for the most part, taxable, but B2B is not always taxed.
It’s also important to check whether a new market is a sanctioned or restricted market, earmarked by international authorities for money laundering or poor financial practices. These markets are considered economically and politically sensitive, and are often not supported by any sort of payment providers or compliance tools that you may choose to use.
3. Don’t take the risk of non-compliance lightly
As with the regulations themselves, the penalties for non-compliance vary considerably globally. In general however, honest mistakes or seemingly small infringements - such as filing or paying late - will incur fines and interest. Larger mistakes can earn much more punitive fines and even imprisonment for appointed customer officers.
Tax liabilities can also delay or block key business events such as a merger or acquisition, a public listing, or even taking investment. These issues can often emerge late in the day as a deal is being finalized, and can prove hugely costly.
4. Choose the right partner
Choosing the right partner for compliance can make all the difference if your business has big plans for international expansion.
For even the best in-house teams, managing tax compliance is extremely time and resource intensive as it requires in-house specialists who will have to register for, file and remit sales tax in every single international jurisdiction. Working with a partner or specialist revenue delivery provider can help limit that business burden, reduce your liability and allow you to draw up more aggressive expansion strategies without falling foul of regulation.
By helping SaaS companies register with tax authorities, calculate tax owed, and handle filings and audits, a revenue delivery platform can keep your business up to date with any regional changes in tax laws, and can handle compliance with data laws and payment regulations for you. In facilitating compliance operations, this can take off the pressure of internal expansion, and allow your SaaS business to focus on the areas that will truly differentiate you to customers; product development and go to market strategy.
The global opportunity for SaaS is enormous, and it is set to grow rapidly in 2021. In such a competitive climate, ambitious vendors know that they cannot afford to move slowly - but they also cannot afford to get compliance wrong. By keeping these four things top of mind, software companies can ensure every dollar, peso, and rupee of sales is tax compliant globally.
Christian Owens, CEO and Co-founder, Paddle