Are digital products taxable in Palau?

Digital products sold by nonresident businesses to customers in Palau are subject to Goods and Services Tax (GST). The standard GST rate in Palau is 10.00%. B2C transactions are taxable, while B2B transactions are handled through a reverse charge mechanism. The registration threshold is USD 300,000. This means that foreign businesses must register for GST in Palau once their sales exceed this threshold to customers in the country.

Determining if your digital product is taxable in Palau

To determine whether GST applies to the sale of your digital product or service, there are three main factors to consider:

1. Customer's location: You need to identify the location of your customer, as tax regulations vary by country. Common pieces of evidence for customer location determination include billing address, customer account address, IP address, and credit card country.
2. Taxability of your product: Your digital product or service needs to qualify as a digital good or service for GST purposes. This typically means that it is delivered electronically over the Internet or an electronic network, is automated, relies on technology, and is not a physical good.
3. Customer's tax registration status: If you sell to other businesses located in Palau, you should collect and validate their tax registration numbers (GST IDs). In Palau, sellers are not responsible for TAX on B2B transactions with the proper documentation, and the responsibility of accounting for tax is transferred to the buyer through a reverse charge mechanism.

Getting GST compliant in Palau

To ensure compliance with GST regulations, here are the general steps that a US-based company selling software or other digital products should take:

1. Collect customer addresses and GST IDs: Even if you are not registered for GST, collecting customer GST IDs can save you expenses in the future. This step can be taken right away for customers outside the US.
2. Understand your GST obligations: Determine where you have GST obligations by cross-checking customer locations and the product taxability and registration thresholds in each country. Each country has its own registration threshold, which triggers the requirement to register for GST.
3. Monitor GST exposure and register in exposed jurisdictions: If your sales reach the registration threshold in Palau, you are required to register for GST in that jurisdiction.
4. Apply GST where necessary: Identify transactions that require GST collection and apply the correct rates to those invoices. Though Palau utilizes the reverse charge mechanism for B2B transactions, you should still validate GST IDs for B2B transactions to confirm the customer's status, but charge GST if a valid GST ID is not provided.
5. File GST returns, make payments, and keep records: Periodically file GST returns with the jurisdictions in which you sell, reporting the GST collected and remitted. Be prepared for foreign exchange conversions and cross-border payments in various currencies. Many countries also have a legal requirement to keep GST records for a certain period of time.

Risks of delaying compliance

Delaying GST compliance can expose your business to various risks:

• Audits: As GST legislation for digital goods is relatively new, audits for international sellers are increasing. Facing an audit for which you are not prepared can result in fees and penalties that can significantly impact your business.
• Paying out of pocket: Regardless of whether your customers pay GST, you are responsible for the GST on the sales you make. If you are audited or register late, you may have to pay the GST out of pocket, along with penalties and fees.
• Reputational risk: When expanding internationally, your compliance with GST rules may be questioned by potential business partners or customers. Failure to comply with GST regulations can harm your reputation and even lead to blocked business opportunities.

To learn more about VAT rules and regulations for nonresident businesses around the world, explore Anrok's VAT index for digital products.