The e-commerce industry is both very lucrative and complicated. Many online entrepreneurs aren’t aware of all the regulations they are going to need to comply with. One of the factors they need to focus on is VAT compliance.
VAT stands for “value added tax.” A VAT tax is essentially a consumption tax that must be passed on all goods and services sold to customers in a given region. The European Union and many other jurisdictions use VAT taxes to fund approximately 40% of government expenditures. They are strict about enforcing them, because a shortfall in VAT revenue can significantly hurt their budgets. Earlier this year, the EU said that it was going to start it is going to start auditing far more ecommerce sites, since these businesses account for about $2 trillion in global sales.
All e-commerce companies need to understand the different VAT taxes that they will be subject to and make sure they are paid. The European Union reports that 11.2% of VAT liabilities are never paid. Tax authorities are cracking down more and more on e-commerce companies that failed to pay the appropriate taxes.
Here are some tips to help make sure you don’t get in trouble with the tax authorities.
Start a compliance calendar
The absolute most important first step to being compliant with VAT requirements is creating a compliance calendar. You need to know when the payment due dates are for tax authorities in every major jurisdiction that you operate in.
This is not something you want to get wrong. You might owe taxes in six different jurisdictions. You might pay the authorities on time in five of those countries, but still face steep fines with the one country that you pay late. Fines can vary in different countries, so you don’t want to assume that you don’t have to worry about only being late with one or two authorities.
Your compliance calendar needs to keep track of payment deadlines in every country that your e-commerce business sells to. You should set up automated reminders to begin processing paperwork at least a month in advance if you have a lot of orders. Even if you only have a handful of orders in a given country, you should still give yourself at least a week to handle the process. The paperwork will likely be more complicated than you are expecting.
Always keep accurate financial records
The tax authorities rarely operate on the honor system. They are going to want to see detailed information to support your filings.
Tax experts don’t have a definitive list of the exact records that you need to keep. However, at a minimum you should always maintain documents on imports and exports, statements from your financial provider, annual account information and all outstanding invoices.
You never know if you are going to be audited. You might be required to submit all of this information to verify that it is consistent with your VAT reports.
Use the right invoicing tools
There are very clear requirements for sending invoices. Both suppliers and the customers need to monitor invoices carefully for compliance, because everybody is liable for tax liabilities.
You will need to be familiar with the legislative guidelines that all VAT invoices must meet. You should use an invoicing tool that keeps track of this information.
Know whether a customer is subject to VAT collection
You need to keep track of all customers as much as possible. VAT liabilities are determined by the location of your customers.
Unfortunately, it can be difficult to know where customers are located in the modern digital world. Customers often use VPN tools to hide their true physical location. They often use bitcoin to purchase products anonymously.
Unfortunately, there seems to be a strict liability on the part of the seller. They need to keep detailed records on their customers. If your customer is asking to have an item shipped to a physical address, you should have no excuse about knowing where they live and whether a tax needs to be collected. You might not have much of a defense even if they used a virtual currency to purchase a digital product online, even though it would be difficult for the tax authorities to make that determination themselves.
Be as thorough as possible about verifying the location of your customers. If they have concealed their identity well enough that you can’t know what country they are living in, then you might not need to worry about the tax authorities finding out and coming to your door later.
VAT compliance is a big deal
VAT compliance is One of the biggest headaches that e-commerce companies face. However, it is also very important to get right. You need to keep detailed records and make sure that you meet all deadlines and requirements outlined under the tax code.
Rehan Ijaz is an entrepreneur, business graduate, content strategist and editor overseeing contributed content at BigdataShowcase. He is passionate about writing stuff for startups. His areas of interest include digital business strategy and strategic decision making.
VAT stock photo by Josie Elias/Shutterstock