Value-added Tax (VAT) and how it works

Understanding VAT

  • What is VAT: Value-added Tax (VAT) is a type of consumption tax that is levied on goods and services and is determined by the national government of a country
  • Why is it passed along: Similar to employer taxes, VAT is passed along to your company because you receive the services provided by your team member
  • What is the VAT rate: The VAT rate will vary based on country and the type of services provided by the Team Member 
  • What is the VAT rate applied on to calculate the total VAT cost: The taxable portion of Service fee on which the VAT rate is applied is the gross monthly salary combined with any statutory costs like social security, pension contributions, and benefits. This excludes expense reimbursements and the Oyster subscription fee
  • How is VAT passed along: VAT will be passed along on the monthly invoice for customers with Team Members in the applicable countries 

Types of VAT Regimes

In general, there are three types of VAT regimes across the world. 

  1. Fully taxable

    This is when VAT is applied at full rate as long as the company receives services from a team member in the country, regardless of whether the worker provides services within that country, and regardless of the company’s business activity in the local market.

    Countries that adopt this practice include Brazil, Egypt, Paraguay, and Thailand.

  2. Limited application of use and enjoyment rules

    This is when tax is applied at full rate to inward-servicing team members only. No VAT if the team member is outward servicing. See FAQs below for definition on inward-servicing.

    Countries that adopt this practice include Turkey, and South Africa.

  3. Strict application of use and enjoyment rules

    This is when tax is applied at full rate to inward-servicing team members, or applied at full rate to outward-servicing team members IF the customer has sales or possible sales to the team member’s country of residence.

    Countries that adopt this practice include China, Israel, and Colombia.

Applicable countries and example calculations

  • The VAT amount is added to your monthly invoice and calculated on a per Team Member basis 

VAT amount per team member = VAT rate * Taxable portion of the service fee per month

  • So far, we identified 27 countries where VAT is applicable. Please refer to the table below for the tax rate in each country and how the tax is calculated. You can also check when the start of the application of VAT in Oyster has started.

Learn about the definitions of inward and outward servicing here.

Country

VAT Regime

VAT rate 

 

(VAT rate is determined by the national government of each country)

Taxable portion of the service fee per month 


(The values below are examples)

Total VAT amount per Team Member per month = VAT rate*taxable portion of the service fee



(The values below are examples with only the VAT rate as fixed)

Start date of application

Albania

Fully taxable

20%

USD 5000

USD 5000*20% = USD 1000

November 2022

Brazil

(In Brazil, we will pass along ISS which is sales tax on services and not VAT)

Fully taxable

5% (ISS) if the team member is hired through an Oyster partner

2% (ISS) if the team member is hired through an Oyster entity

USD 5000

USD 5000*5% = USD 250 (indirect TMs)

USD 5000*2% = USD 100 (direct TMs)

November 2022

Egypt

Fully taxable

10%

USD 5000

USD 5000*10% = USD 500

November 2022

Russia

Fully taxable

20%

USD 5000

USD 5000*20% = USD 1000

November 2022

Armenia Fully taxable 20% USD 5000 USD 5000*20% = USD 1000 March 2023
Belarus Fully taxable 20% USD 5000 USD 5000*20% = USD 1000 March 2023
Paraguay Fully taxable 10% USD 5000 USD 5000*10% = USD 500 March 2023
Cameroon

 

Fully taxable

19.25%

USD 5000

USD 5000*19.25% = USD 962.5

August 2023

Malaysia

Fully taxable

8%

USD 5000

USD 5000*8% = USD 400

August 2023

(8% from March 2024, before 6%)

Zambia

Fully taxable

16%

USD 5000

USD 5000*16% = USD 800

August 2023

Turkey

Limited application of use and enjoyment rules

20% (only on inward servicing Team Members)

USD 5000

USD 5000*20% = USD 1000

November 2022

(20% from July 2023, before 18%)

Thailand

Fully taxable

7%

USD 5000

USD 5000*7% = USD 350

"Fully taxable" from January 2023

(before "Limited application of use and enjoyment rules" since November 2022)

Taiwan

Limited application of use and enjoyment rules

5% (only on inward servicing Team Members)

USD 5000

USD 5000*5% = USD 250

March 2023

El Salvador Limited application of use and enjoyment rules

13% (only on inward servicing Team Members)

USD 5000 USD 5000*13% = USD 650 March 2023

Costa Rica

Limited application of use and enjoyment rules

13% (only on inward servicing Team Members)

USD 5000

USD 5000*13% = USD 650

March 2023

Guatemala

Limited application of use and enjoyment rules

12% (only on inward servicing Team Members)

USD 5000

USD 5000*12% = USD 600

March 2023

Kenya

Limited application of use and enjoyment rules

16% (only on inward servicing Team Members)

USD 5000

USD 5000*16% = USD 800

March 2023

South Africa

Limited application of use and enjoyment rules

15% (only on inward servicing Team Members)

USD 5000

USD 5000*15% = USD 750

March 2023

Bangladesh

 

Limited application of use and enjoyment rules

15% (only on inward servicing Team Members)

USD 5000

USD 5000*15% = USD 750

August 2023

Moldova

Limited application of use and enjoyment rules

20% (only on inward servicing Team Members)

USD 5000

USD 5000*20% = USD 1000

August 2023

Nigeria

Limited application of use and enjoyment rules

7.5% (only on inward servicing Team Members)

USD 5000

USD 5000*7.5% = USD 375

August 2023

Senegal

Limited application of use and enjoyment rules

18% (only on inward servicing Team Members)

USD 5000

USD 5000*18% = USD 900

August 2023

Vietnam

Limited application of use and enjoyment rules

8% (only on inward servicing Team Members)

USD 5000

USD 5000*8% = USD 400

August 2023

China

Strict application of use and enjoyment rules

6% (If the Team Member is inward servicing)

6% (If the Team Member is outward servicing AND the company makes existing or has potential sales in China, else 0%)

USD 5000

If the TM is inward:


USD 5000*6% = USD 300


If the TM is outward AND the company makes sales in China:


USD 5000*6% = USD 300

November 2022

Israel 

Strict application of use and enjoyment rules

17% (if the Team Member is inward servicing)

17% (if the Team Member is outward servicing AND the company makes existing or has potential sales in Israel, else 0%)

USD 5000

If the TM is inward:


USD 5000*17% = USD 850


If the TM is outward AND the company makes sales in Israel:


USD 5000*17% = USD 850

November 2022

Colombia

Strict application of use and enjoyment rules

19% (if the Team Member is inward servicing)

19% (if the Team Member is outward servicing AND the company makes existing or has potential sales in Colombia, else 0%)

USD 5000

If the TM is inward:

 

USD 5000*19% = USD 850

 

If the TM is outward AND the company makes sales in Colombia:

 

USD 5000*19% = USD 850

March 2023

Bolivia

 

Strict application of use and enjoyment rules

13% (if the Team Member is inward servicing)

13% (if the Team Member is outward servicing AND the company makes existing or has potential sales in Bolivia, else 0%)

USD 5000

If the TM is inward:

 

USD 5000*13% = USD 650

 

If the TM is outward AND the company makes sales in Bolivia:

 

USD 5000*13% = USD 650

 

August 2023

 

VAT calculation FAQs for limited and strict VAT regimes

  • Who are inward-servicing Team Members? 

If a Team Member is in Turkey for example, they will be inward-servicing IF: Their work IS providing or supporting services within Turkey. Examples include a Turkish engineer who is building software for Turkish companies or a Turkish salesperson who is selling your product to Turkish companies

  • Who are outward-servicing Team Members?

If a Team Member is in Turkey for example, they will be outward-servicing IF: Their work IS NOT providing or supporting services within Turkey. Examples include a Turkish engineer who is NOT building software for Turkish companies or a Turkish salesperson who is NOT selling your product to Turkish companies

  • Is it possible for me to have Team Members in a specific country who are NOT inward servicing?

Yes, totally. If those Team Members in that country DO NOT provide or support services within their country then they are NOT inward servicing. Example includes a Team Member in Israel who DOES NOT sell to customers in Israel or builds software for the Israel audience, but instead sells to or builds for companies in other countries. 

  • I have outward servicing Team Members in China, Israel, and Colombia. I also do not have existing business in China, Israel, and Colombia and I am not sure if there is a potential business. Will my outward servicing Team Members be applicable for VAT in this case?

If your company's product is accessible from China, Israel, or Colombia, then you have POSSIBLE sales and are therefore subject to local VAT.

 

General VAT FAQs

  • Which of my Team Members is VAT applicable for?
    • VAT is applicable if you have Team Members hired using Oyster in any of the countries listed in the table above. 
    • VAT is applicable for Full-time employees.
    • VAT will also be applicable for contractors but since contractors are responsible for their own taxes and the content of their invoices, each individual contractor may or may not include VAT on their invoice.
  • Are you going to invoice VAT costs for historical periods?

No, we will only invoice VAT costs on a go-forward basis.  

  • Why is VAT applied on team member services? 

Oyster provides workforce and consulting services to you through our global employment platform.  These services, provided by your team members, are taxable in some countries.  These are not additional payroll taxes that are being levied, but are instead “use” taxes on services provided by Oyster. 

  • Is VAT recoverable? 

No. These VAT costs are not recoverable because they are payable by Oyster and passed along to you in the form of service costs. Since you are not paying the taxes directly, you are not eligible for cost recovery. These VAT charges are also not recoverable by Oyster because Oyster’s invoicing entity is registered in the United States and, therefore, Oyster will not be able to recover and refund any excess VAT.

  • How will VAT for my future team members in the applicable countries work?

Starting November 2022, when you engage the services of a new Team Member, you will be asked for the information needed to calculate the exact VAT costs while filling out the “New hire” form on the platform. Please note that since the VAT calculation for Colombia, China, and Israel is also dependent on the global revenue or sales in the most recently completed fiscal year that comes from these countries, Oyster will reach out to collect information on revenue or sales from Colombia, China, and Israel on an annual basis to calculate the most up to date VAT amount.


VAT Terminologies 

  • Passing along VAT: 

Your Team Member may be employed through Oyster’s local or Oyster’s partner entity and, therefore, VAT is payable by Oyster, in certain countries, and passed along to you in the form of service costs. Similar to employer taxes, VAT is passed along to your company because you receive the services provided by your team member.

  • VAT rate:

VAT rate is the country-specific VAT percentage that is determined by the national government of a country and can either be a flat rate or can differ based on certain factors like the type of services offered by your Team Member and the revenue or sales you make in the specific country. The VAT rate is applied on the taxable portion of the service fee to calculate the total VAT amount you will be pay.

  • Applying VAT to the taxable portion of the service fee: 

Oyster will apply the VAT rate on the taxable portion of the service fee. The taxable portion of Service fee for each Team Member is the gross monthly salary combined with any statutory costs like social security, pension contributions, and benefits. The taxable portion of the service fee only excludes expense reimbursements and the Oyster subscription fee. The VAT amount will be generated as a part of your monthly invoice. 

 

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