Value-added Tax (VAT) and how it works

Shruti Khaitan
Shruti Khaitan
  • Updated

 

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 

VAT calculation and VAT timeline by country

  • VAT will be invoiced starting from October 2022's invoice if you have Team Members in Spain who are eligible for VAT
  • VAT will be invoiced starting from November 2022's invoice if you have Team Members in any of these countries--Albania, Brazil, Egypt, Russia, Thailand, Turkey, China, and Israel who are eligible for VAT
  • The VAT amount is added to the 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

Let's look at VAT calculation examples per applicable country. Learn about the definitions of inward and outward servicing here.

Country

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)

Albania

20%

USD 5000

USD 5000*20% = USD 1000

Brazil

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

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)

Egypt

10%

USD 5000

USD 5000*10% = USD 500

Russia

20%

USD 5000

USD 5000*20% = USD 1000

Thailand

7% (only on inward servicing Team Members)

No VAT if the team member is outward servicing.

USD 5000

USD 5000*7% = USD 350

Turkey

18% (only on inward servicing Team Members)


No VAT if the team member is outward servicing.

USD 5000

USD 5000*18% = USD 900

China

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

Israel 

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

Spain

21% (if the Team Member is inward servicing)

21%*% of global sales made to Spain (if the Team Member is outward servicing) 

USD 5000

If the TM is inward:


USD 5000*21% = USD 1050


If the TM is outward AND the company makes sales in Spain (say % of sales in Spain is 20%)


USD 5000*21%*20%= USD 210

 

VAT calculation FAQs for Team Members in Thailand, Turkey, China, or Israel

  • 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 inward-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 and Israel. I also do not have existing business in China and Israel 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 or Israel then you have POSSIBLE sales and are therefore subject to local VAT

VAT calculation FAQs for Team Members in Spain

  • The VAT rate will be 21% if your team member in Spain is PRIMARILY focused on providing or supporting services within Spain (inward servicing), e.g. a Spanish salesperson who primarily sells within Spain.
  • The VAT rate will vary for Team members in Spain NOT PRIMARILY focused on providing or supporting services within Spain (outward servicing), e.g. a Spanish engineer who does not primarily build software for the Spanish market. The rate will vary based on the percentage of your global sales that were made to customers in Spain in the most recently completed fiscal year.
  • My Team Member in Spain sells to both Spain and EMEA companies. What will the VAT rate for them?
    • If this Team Member is PRIMARILY providing services for the Spanish market, the VAT rate would be 21% that will be applied on the taxable portion of the service fee. If they are NOT PRIMARILY providing services for the Spanish market, the calculation for the VAT rate would depend on the percentage of your global sales that were made to customers in Spain in the most recently completed fiscal year. Here is an example calculation.

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 these countries: Spain, Albania, Brazil, Egypt, Russia, China, Israel, Thailand, Turkey. In Brazil, only ISS is applicable which is sales tax on services. 
    • 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 Spain, 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 Spain, 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.