The shift to online sales has prompted many tax authorities to apply tax based on the location of the customer. More than 80 tax authorities now apply consumption tax at destination, and individual US states can levy sales tax on out-of-state vendors (including non-US vendors).
The consequences are that businesses will have to report to more tax authorities each year. This presents a number of practical challenges, which are analysed and explained in Vertex’s publication ‘Global digital services: a tax compliance guide’.
Peter Boerhof, VAT director at Vertex says “this ever evolving tax landscape has introduced an additional layer of complexities for online sellers to navigate. For businesses, it’s essential to adopt specialist indirect tax technology to remain on the right side of indirect tax obligations, otherwise they run the risk of non-compliance. Not only can this result in penalties and fines but it can also slow down opportunities for business growth.”
Key challenges
One of the main challenges is determining the customer location, and consequent tax treatment. Location can be determined based on data such as billing address, device IP address, bank or credit card details, landline number, loyalty/subscription reference, ZIP code or other information.
Where data conflicts, self-declaration by the customer may be required. However, it is important that the speed and smoothness of the online customer journey is not disrupted: friction-free calculations must be made in milliseconds to deliver a positive customer experience.
Another issue is tax thresholds based on value or number of sales. Some countries, such as Chile and Colombia, have no threshold meaning that businesses must register and file from the first sale made. The EU has an annual €10,000 threshold to relieve micro-businesses established in the EU.
Other countries have thresholds that apply only to domestic businesses (for example Saudi Arabia and India) or are based on global sales (such as Switzerland).
Applying the correct foreign exchange rate is also complicated: it is not possible to apply a single exchange rate source across all countries. Some jurisdictions specify exactly which source must be used to calculate the rate.
Attention must also be paid to rules on invoicing and credit notes as some countries have complex requirements regarding details such as date format, invoice numbering, displaying the tax amount, exchange rate and VAT number.
Even more exotic requirements may be imposed as some countries, such as Serbia, require bilingual invoicing. Others (such as India) require the invoice to be signed by a senior authorised company representative. One of the more unusual requirements applies in Taiwan, where all online sales must contain a legally generated lottery number to enter the state lottery.
Further complications arise for business-to-business sales transactions. Reverse charge systems or exemption certificates may seem like simple solutions, but in practice they require greater checking and record-keeping.
Finally, you have to consider carefully how you store and access data for all transactions. For sales to EU customers, certain information such as country, type of service, date, VAT rate and amount must be stored for 10 years. Time limits for data storage vary significantly from country to country and, in the US, from state to state. This is on top of invoice archiving requirements.
How to manage the risks
Meeting indirect tax obligations is an important but complex task, particularly as your business expands and you want to be as friction-free as possible. It’s also important to be aware of the latest changes in rules and requirements around the world – which can often be imposed at short notice.
To manage the risks, it is important to ensure tax compliance is properly resourced, all systems are kept up to date and global sales reporting is proactively managed.
Read more about why specialist indirect tax technology is necessary to ensure obligations are met in e-commerce in the article ‘Expanding online goods and service sales is making tax technology stronger’.
