Six tax considerations for global subscription companies
With subscription-based businesses thriving in today’s global economy, cross-border trade is easier and more popular than ever before. This means that businesses are managing higher volumes of transactions, which comes with a greater indirect tax compliance burden on sellers.
Many tax authorities worldwide now apply tax at the destination, charging the tax rate of the customer’s jurisdiction and then working with that local tax authority to achieve compliance. For each location a seller sells into, they must adhere to local, unique tax rates and rules and deal with their tax authorities. In the U.S., this event varies by county.
As a business selling subscriptions, there are a few key indirect tax factors of which you need to be aware.
Customer location determination at point of sale
Establishing in real-time where your customer is located at the point of sale is key. This is the starting point for understanding what rules and rates should apply to the subscription and establishing the correct supporting evidence that must be gathered for that sale.
However, supporting evidence isn’t always a straightforward process, as some countries require only one piece of location evidence, while others need two pieces of non-conflicting evidence.
If this evidence conflicts (for example, if a customer’s billing address does not align with their IP address or BIN), then the customer’s location cannot be determined, and you may need to ask the customer to self-declare their location, which delays the customer journey.
Tax thresholds determine when a business is liable for tax in a given tax jurisdiction. These thresholds can be set per country or region (e.g., EU) and can vary substantially. Thresholds are constantly evolving, and sales analysis must happen per region continuously to ensure a business remains tax-compliant.
Applying foreign exchange (FX) rates
Applying the correct FX rules for invoicing and filing can be complex. There is no single source of exchange rates across all countries, as each jurisdiction dictates which exchange rate source must be applied.
For businesses, this implies a robust system is needed, which ensures the correct foreign exchange rate from the approved source is used for each jurisdiction (at the transaction, at invoice, or at the end of the reporting period).
Each tax jurisdiction applies its own invoice rules with varying degrees of complexity. This includes mandated e-invoicing in some jurisdictions for specific transactions.
Some common rules applied to invoices include using specific date formats, sequential invoice numbering per country, display of tax amounts, indicative foreign exchange rate on the tax amount, and so on.
More exotic rules include Saudi Arabia’s requirement for bilingual invoicing, uniform invoice lottery on digital sales in Taiwan, and the need for a signature of the senior authorised representative of a company in India.
B2B transactions/Tax exemption certificates
As a seller, you must be able to distinguish B2B transactions from B2C transactions. When selling to a business customer, it is important to understand if the reverse charge rule applies in the country of destination.
This reverse charge mechanism shifts the tax liability to the buyer, meaning the seller will not charge VAT on an invoice as the recipient should self-account for the VAT on this purchase.
Although this sounds like it simplifies tax obligations as there is no need to charge and collect VAT on sales to business customers, the onus is on the seller to prove that their customer is a registered business when invoicing. Typically, this is done by including the customer’s valid VAT number to apply the reverse charge rule. In the U.S., a business transaction may be exempt from sales tax by using exemption certificates. These exemption certificates apply depending on the status of the buyer or the reason for the purchase.
The seller has to ensure a solid process is in place for managing these exemption certificates and avoiding relying on expired certificates. For each of these factors, it’s important to have the right procedures in place to maintain a seamless customer journey, where transactions can be processed quickly without any delays at checkout.
The regulatory landscape
The growing number of e-invoicing mandates adds to the complexity as there is little to no harmonisation of the rules and requirements. And once implemented, the scope of a mandate often changes.
Many mandates cover B2G (business to government) transactions, and many countries are expanding this to B2B transactions. Some countries are also looking to include B2C transactions. In addition, some jurisdictions implement mandates where the customer can demand an e-invoice.
The scope of mandates can also differ; however, most jurisdictions currently only include domestic transactions and locally established or VAT-registered persons. This implies that cross-border transactions that are taxable abroad and foreign taxable persons are likely off the hook.
To maintain compliance with these volatile mandates, businesses can enlist the help of tax technology to optimise their real-time VAT reporting and e-invoicing processes for multiple countries.
And the businesses that are doing so (by embarking on their “tax transformation” journey) have already noticed the results. Vertex’s recent Compliance’s Complexity research found that three-quarters (74%) of the 580 tax decision-makers surveyed felt that having the correct tax technology was the most important factor in achieving indirect tax compliance.
How automating tax calculations can super-charge subscription growth
To make the most of your subscription-based model and unlock the opportunities that come with it, a trusted, scalable technology to support you in your growth is vital.
Automating tax calculations and reporting means subscription businesses can vastly reduce the time and effort of their tax departments, reducing manual effort and removing the risk of ‘human error’ within their reporting.