The taxation of international SaaS transactions is complicated and not all worked out, but I thought I would summarize a few key points from a recent Grant Thornton article on the subject.
Here are a few key things to think about:
Permanent Establishment – this is accounting speak for do you have enough of a presence in a country for the country’s tax authorities to tax your SaaS offering.
The main factors are:
- Is there a fixed place of business in the country? [BTW, owning hardware in country = fixed place of business]
- Is there a dependent agent in the country (‘dependent agent’ is not the same as ‘independent agent/contractors’)?
If there is a PE, then
- You will be taxed by the local authorities on the income generated from that location.
- The transfer pricing rules apply (we can figure this one out another day, but here is some info on it from Wikipedia).
Sales and VAT Taxes – these taxes often apply, even if you don’t have a PE in a country.
- SaaS is considered taxable for VAT purposes in the European Union (in the country where your customer is located).
- Your customer should pay this, so make sure in your contract that your clarify that you customer is responsible for any sales, use, VAT and other similar taxes.
If you look at the history, most tax regimes were originally setup to tax tangible goods (i.e. not software or software services) so trying to fit SaaS in does not work that well (at least not right now). Ok this is messy and complex, so don’t be surprised if you are a little confused by all of this. Even though it helps to learn the basics, I highly recommend you talk to your tax accountant or attorney about these issues, as this is beyond my pay grade.
Great Tax Article on SaaS Taxation Issues (even though it is from 2008)
Disclaimer: This post is for informational and educational purposes only, and is not legal advice. You should hire an attorney if you need legal advice, which should be provided only after review of all relevant facts and applicable law.