With e-commerce transactions expected to reach a record $5 trillion globally this year, it is no surprise that many companies have boosted their online sales capability. COVID-19 caused a cultural shift taking online buying to the next level, and the prognosis is that those levels of e-commerce are here to stay. For many businesses that means more cross-border transactions to deal with. And that means greater challenges in staying on the right side of indirect tax obligations.
Over 80 countries now apply a tax at destination rule to online sales, increasing the need for businesses to switch to customer location-based tax models. Customers purchasing online can be based anywhere these days, so indirect tax technology must be capable of handling the various indirect tax obligations specific to all the countries of the buyers’ locations.
Other complexities cannot be ignored either: VAT rule and rate application; compliant invoicing and VAT ID validation for cross-border B2B supplies to name some. Specialist indirect tax technology is the short answer to these issues. Leave the days of grappling with manual data entry, checking information for accuracy, and struggling to monitor ever changing indirect tax legislation behind you.
How can you make sure you are keeping up to speed with the indirect tax liabilities that come with growing online sales?
1. Ensure your systems can determine customer location for indirect tax purposes automatically
All the information is there; billing information, device IP address, bank details and telephone area code – all these things can point to where a customer is located. What they do not do is help you work out what specific evidence needs to be collected for indirect tax purposes as it differs per jurisdiction.
There are also different rules of what to do when there are location evidence conflicts. In some countries customers need to self-declare their location; in others a logical hierarchy for collected evidence is followed to determine the country of taxation. Indirect tax technology enables you to apply consistent automated tax logic to locate your customer at the point of transaction.
2. Can you automatically apply correct indirect tax thresholds based on customer location?
With indirect tax thresholds varying from country to country, cross-border e-commerce sellers are burdened with more complexity – determining the point of liability where a company must register and remit indirect taxes can be challenging when selling online to many countries.
Globally, thresholds can apply based on business size, foreign supplier status, global sales, transaction value or number of transactions. Specialist indirect tax technology automating indirect tax at point of sale can make help you see when you are nearing thresholds and may need to register in that country for VAT purposes. This means online businesses can focus their time on sales and not on checking tax threshold liabilities.
3. How easy do you find establishing correct foreign exchange rates for tax filing?
Exchange rates are constantly changing and the rules of what should be applied vary per jurisdiction. Knowing the correct rate and rule is crucial to calculating and reporting indirect tax accurately. With high volumes of online transactions taking place with globally dispersed customers and on a 24/7 basis, this is a particular challenge for online sellers. A robust tax engine ensures the correct source exchange rates and defines what exchange rate to apply.
4. Are you sure all invoices are compliant with global indirect tax rules?
Although some countries have no set requirements for invoices, an increasing number do have strict criteria that sellers must follow. Again, this can be a major challenge, given the massive variance in customer locations and volume of sales by many online businesses.
Common requirements to be aware of include invoice and supply date; description of the supplied goods or services; sequential invoice numbering per country; net value of goods or services; tax value in local currency; the seller’s VAT/GST registration number; and the seller’s official business name. But countries may impose specific requirements beyond these common ones. Specialist tax engines enable easy compliance with multiple invoice rules.
5. Can you ensure specific B2B transaction tax rules are applied?
Reverse charge rules to B2B cross-border sales, where the recipient self-accounts for the VAT, are commonplace but not straightforward. The reverse charge rule may appear to simplify a seller’s tax obligations, but on the contrary the seller is responsible for checking the customer is a registered business. This means suppliers must be able to determine what classifies a business for VAT purposes which can be different to the legal classification. Otherwise, there is a risk of challenge at audit or incorrect VAT charging. Specialist indirect tax technology can easily solve B2B VAT status verification issues.
6. Is all your tax data stored safely but easy to access?
Tax professionals may think storing indirect tax data is the least of their concerns but for online sellers it is again a complex area. Not only must transactional tax data be stored securely, it also must be accessible quickly for audit purposes.
Each authority has its own rules about what data must be kept and the availability timespan, so it is not a one-size-fits-all approach. Specialist indirect tax automation ensures all data is archived and easily accessible irrespective of volume and will store information in line with tax authorities’ requirements.
Business selling online need to be fully focused on sales and fulfilment to maximise the potential of a rapidly growing global market. Automating the indirect tax process reduces the time and effort used for back-end process and ensures the business is free to trade globally wherever its customers reside.
Learn more about how Vertex’s specialist indirect tax solutions can help – download our guide here.
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