Category: VAT
How taxing could be less stressing?
How to Overcome Sales Tax Compliance Pressures
Regardless of the industry in which your clients operate, sales and use tax compliance is a complicated, complex and time-consuming process. Small- to medium-sized businesses (SMBs) especially feel the increasing sales tax pressures, as they often must balance those responsibilities along with other primary job functions.
But how can organizations overcome sales and use tax pressure? What must be done to find the right balance, ensuring that sales tax requirements are met but also that core business objectives are not overlooked? Here are key ways that you can ensure your clients can effectively face sales tax compliance challenges.
Create manageable processes with automated sales tax solutions
Sovos surveyed 250 individuals who have responsibility for sales tax compliance/management/administration at their organization, with 80% of respondents working at companies earning less than $10 million or between $10 million and $25 million in annual revenue.
Eighty-three percent of those surveyed said automating their organization’s tax management process would make them happier in their current role, and they would be more likely to stay with the company. However, just under two-thirds (62%) of respondents said their business adopted new technology or systems in the past two to three years to meet evolving sales and use tax requirements.
Manual processes might have been “how it’s been done,” but that doesn’t mean that it’s going to be enough for the continued complexity of sales tax. Economic nexus changes, expansion of e-commerce options and overall business growth can lead to long hours spent filing manually at the end of each month. Additionally, there can be limitations of tax calculation (e.g., jurisdictional granularity, customer/product taxability) through your ERP, accounting platform or e-commerce channel (e.g., NetSuite, QuickBooks Online, Shopify).
An automated sales tax solution can meet current business needs and be capable of scaling as necessary to handle future growth.
Understand and prepare for audit liability and risk
The Sovos survey also found that eight out of 10 respondents said that either triggering an audit or facing a financial penalty was their biggest fear if a mistake was made when remitting sales tax. Eighteen percent also said they worried about a manager losing confidence in them or even getting fired should they make a mistake.
Audit liability can stem from numerous areas. This can include improper tax calculation, such as misclassifying a candy bar as candy when it should be classified as food for a particular jurisdiction. Incorrect filing remittance (e.g., under or over-reporting), data transfer and reconciliation issues, and historical inaccuracies can also create a liability risk for businesses. For example, do you have a record dating back to all transactions, and what the tax was when you filed previously? Historically, a single source of record can help when an audit wants to look back three years. Additionally, jurisdictions can audit back up to six or seven years if an organization failed to submit sales tax returns.
This is why sales tax compliance is key. Your clients must understand sales tax calculation and filing requirements. For sales tax calculation, there are constant regulatory changes across jurisdictional levels and there can be a lack of granularity into local jurisdictions. There are also exempt sales to consider, along with sales tax holidays.
Sales tax filing requirements will involve constantly changing state and local tax forms, as well as complexities like negative returns and credits on hold. Businesses should also ensure accuracy in reporting, their historical accuracy and that overall visibility into the filing process is understood.
Find scalable options that continuously meet growing complexities
Sovos found that 35% of respondents said the growing complexity of sales tax distracts from core business priorities. Over half reported that their organization saw a strain on IT and other resources, with 13% noting a stressful workplace and even employee churn.
Your clients need to consider tax as early as possible to better understand how their business growth correlates with sales tax complexities. This includes expanding into new states and jurisdictions with unique tax rates and exemptions on certain products or for particular industries. If they don’t have the in-house resources to keep up with that rapid change, it can be a daunting undertaking and lead to greater audit liability.
The filing process itself can also be more complex as businesses grow or add more products. New states and jurisdictions will have different forms, with their own filing deadlines. Do your clients have a system to keep track of those form updates? Even the reporting and submission process (e.g., online v. paper mailed in) could be different.
The expansion or creation of an online marketplace can also have an impact. This is especially true with retailers that are working to keep pace with digital-only sellers. You might be based in one state, but if you’re selling online into another, there are going to be economic nexus considerations.
Sales tax pressures are not likely to disappear anytime soon, but there are necessary steps to ease the burden. Ensure your clients are properly leveraging their ERP or accounting platform for basic tax rates and rules for simple tax calculation. Additionally, implementing a third-party tax provider can provide greater protection and help automate their tax processes. Check out with our experts to learn more about increasing efficiency in your approach to sales tax.
How automation can support cross-border growth
In a $1 trillion dollar market, shipping cross-border requires three crucial elements for successful growth:
- Effectively managing transactions
- Compliance
- Customer delight
While the growth rate of cross-border trade is expected to outpace ecommerce twice over, making sure all three are aligned is one of the biggest pain points facing ambitious businesses today.
Speaking at eTail Germany, one of Europe’s largest conferences dedicated to businesses seeking global expansion, Patrick Frith, Director of Cross-border Global Trade, Avalara said: “For any business thinking about selling anywhere in the world, the single biggest headache they face is how they can move their products from one place to another in a way that keeps them compliant with the financial obligations of each market. It’s no surprise that despite the desire to grow, the complexities of international expansion can cause a lot of uncertainty.”.
A surge of changes across the global compliance sector has seen a seismic shift in new compliance codes and reporting requirements. One notably is the update to the Harmonised System (HS) tariff codes which came into play at the start of 2022 resulting in the removal of 870 codes and an addition of 940. Country specific, HS Codes are a system to classify globally traded products. Used to calculate customs duty, each country has a unique code for the same product – so getting it wrong will impact your business and your bottom line.
Frith continues: “Given the growth rate of the market, if you’re not already shipping internationally, now is the time to consider cross-border trade. The opportunity for expansion is enormous. If the notion of navigating some of these known challenges feels overwhelming, please be assured that there are solutions to help. Technology has developed enormously over the last decade – utilised by thousands of businesses across the globe, it’s a proven means to help navigate around potential pitfalls – meaning you can keep focused on growing your business.”.
Partners can provide you with real-time calculations, support, and advice on everything you need to keep your goods moving across the globe.
If you’re ready to find out more, contact us to speak to one of our experts for a no-obligation discussion on how we can help.
Moving towards a common e-invoicing standard in Europe?
https://horizonsolutions.biz/contacts/
More and more countries globally are implementing mandatory e-invoicing or digital reporting requirements. The requirements differ significantly between countries, with different standards and formats, diverse data fields required, as well as different processes relating to how the invoice and its data are shared with tax authorities and received by customers. In the European Union (EU), the first country that mandated e-invoicing for B2B transactions was Italy in 2019. However, the majority of EU countries are now moving forward with implementing mandatory e-invoicing, either for B2G or for B2B supplies, with some launching pilot programs and others bringing in new legislation to bring in e-invoicing in the next 12 – 24 months.
Diverse reporting requirements but clear direction of travel
In addition to e-invoicing, there are several distinct types of digital near-real time reporting including SAF-T (Standard Audit File for Tax) which is an digital tax audit file that needs to be submitted covered all transactional data (this can be monthly, quarterly or annual), real time data submission (submitting invoice level detail to the tax authority either on the same day or within a few days), through to fiscalisation of retail sales (where mandated government software must be used with point of sales solutions including cash registers to record sales and transmit data direct to the tax authority). Despite the different formats and types of VAT digital compliance filings, the direction of travel for indirect tax is clear – it is digital and real time reporting of transactions and governments are increasingly mandating e-invoicing as the method of obtaining this transactional-level data. The number of countries with e-invoicing mandates across the globe continues to grow every month, and we have now reached a major turning point and critical mass in Europe, as both France and Spain have announced mandatory e-invoicing from 2024 (and it is expected that Germany will follow soon).
VAT in the Digital Age
The European Commission’s “VAT in the Digital Age” initiative (and subject of a current public consultation) is looking at increasing the use of e-invoicing across the EU as well as looking to move towards a more harmonised set of requirements for e-invoicing and cross-border digital reporting. The policy options being considered include:
- A more widespread adoption of digital reporting and e-invoicing requirements across EU
- Fostering the adoption of digital reporting requirements that optimise the use of digital technologies
- Reducing the fragmentation of digital reporting requirements
- Issuing a non-binding recommendation providing a common design for reporting obligations across the EU
- EU member states no longer having to request an explicit derogation for introducing mandatory e-invoicing for B2B transactions
- The introduction of partial (limited to cross-border transactions) digital reporting and e-invoicing requirements
- The introduction of fully harmonised (covering domestic and cross-border transactions) digital reporting and e-invoicing requirements
- Requiring taxpayers to record data about their VAT transactions in a standard pre-determined digital format, which tax authorities can access upon request.
While it may be difficult to reach consensus on a single standard for e-invoicing, the real impetus for change and conformity may instead come from collaboration between the countries themselves rather than through legislation or guidance from Brussels. A great example of this is the new version of the French-German e-invoicing standard that has just been released – the Factur-X / ZUGFeRD. This standard has been developed through cooperation between France’s National Forum for Electronic Invoices and Electronic Public Contracts (FNFE-MPE) and Germany’s Forum elektronische Rechnung Deutschland (FeRD).
Could this be the blueprint for a harmonised European e-invoice standard?
Factur-X / ZUGFeRD – the French-German standard
The new versions of Factur-X 1.0.06 and ZUGFeRD 2.2 are technically identical e-invoice formats that can be used in both Germany and France, meeting local requirements in each country (for example the German Core Invoice User Specification (CIUS) “XRechnung” in Germany). In addition, the technical specifications for Factur-X / ZUGFeRD are based on international standards that guarantee interoperability and regulatory compliance (i.e. meeting global and scalable policies, standards and guidelines that enable the exchange of e-invoices across multiple systems, borders and national platforms) including:
- The UN/ CEFACT SCRDM Cross Industry Invoice (CII)
- The ISO PDF/A-3 standard
- The European semantic standard EN 16931 (which specifies technical standards and rules for e-invoicing in Europe).
With one eye on the upcoming French e-invoicing mandate, the Factur-X / ZUGFeRD format is also compatible with the French national e-invoicing platform, ChorusPro, which will be scaled for mandatory B2B e-invoicing and e-reporting for the mandate starting in 2024. The other interesting feature of the Factur-X / ZUGFeRD is that it is a hybrid document that combines both a human readable PDF with machine readable XML language. One of the challenges to businesses is that mandated digital reporting is often a parallel process to issuing invoices to customers and the VAT return that is completed and submitted to a tax authority.
This not only involves duplication of time, effort and data, but also leads to additional complexities in relation to data reconciliation between returns and reporting. Under Factur-X / ZUGFeRD, the hybrid document that is delivered to a customer can be the same that is sent to the tax authority. This is a real game changer for e-invoicing and a step further than Hungary’s recent 3.0 XML schema which aimed to combine the e-invoice document that is sent to the customer and the data that is required to be sent to the tax authority. In addition, the new version of Factur-X / ZUGFeRD includes a standard library of additional invoice data that might be needed for specific business needs or use cases, including incorporating “Order-X” which involves additional business data to allow electronic exchange of purchase orders and payment details to fully digitalise and automate the Procure-to-pay (P2P) process.
Use of transactional data by tax authorities
As well as this shift towards a single scalable invoicing and reporting process by national Governments, tax authorities and national e-invoicing forums, we are also seeing this trend driven from businesses themselves. Historically, many businesses wanted a quick local tactical solution to comply with new digital reporting requirements in Europe, for example, licensing a solution from a local software vendor or even simply outsourcing the digital reporting of data to a third-party compliance provider. However, given the number of e-invoicing and digital reporting mandates in place or confirmed on the roadmap, tax and finance leaders are now looking at this strategically and holistically, looking to select and implement a global and scalable e-invoicing solution, as well as digitally transform how they interact with their customers and suppliers.
Whatever the future holds in terms of common standards and how Governments and tax authorities receive and ingest the tax and transactional data, it is clear that they are certainly getting savvier with data and technology and following their own finance transformation projects and digitalization journeys, are starting to run more detailed exemption reporting, analytics, and even AI on the larger data sets that they are receiving. This is used to spot tax errors (in real time under a pre-clearance model, or during an audit), as well as to highlight and profile higher risk taxpayers in relation to errors, omissions and fraud. Tax authorities are also starting to use the data they are receiving through e-invoicing and digital reporting to pre-populate VAT returns (e.g. the Annual VAT return in Spain produced by the tax authority based on the transactional data submitted under the SII). It is anticipated that the preparation of the VAT return as we know it will disappear, and taxpayers will review, edit and augment VAT returns pre-prepared by the tax authority.
Get in touch now and speak to one of our indirect tax experts to see how we can assist with e-invoicing and digital reporting.
Top 10 special territories for VAT purposes
VAT is generally levied around the globe at a federal/country level. However, there are many sovereign states, provinces, territories, regions and discreet areas that have special rules for VAT purposes. Here we have set out our top 10 special territories to look out for and pay careful attention to.
1. Northern Ireland
Northern Ireland is located in the northeast of the island of Ireland and shares a border to the south and west with the Republic of Ireland. It is part of the United Kingdom and within the scope of the UK’s VAT system. However, following Brexit and under the terms of the Northern Ireland Protocol, Northern Ireland is treated as part of the European Union (EU) for VAT and customs purposes solely in relation to goods. While the customs situation is quite complex and fluid, some of the key VAT implications are:
- Sales of goods between Great Britain and Northern Ireland are subject to UK VAT (technically this is an export and “import VAT” is invoiced, but in practice UK VAT is charged and collected like any normal domestic sale)
- Supplies of B2B goods between Northern Ireland and the 27 EU member states (and vice-versa) are treated as intra-community dispatches (subject to acquisition VAT by the customer in its VAT return)
- Supplies of B2C goods from Northern Ireland to consumers in the EU can be reported on the “One-Stop-Shop”
- Supplies of low value goods shipped from outside of the EU (including Great Britain) sold to Northern Ireland consumers can be reported under the Import One Stop Shop (IOSS).
2. Vatican City
Vatican City is an independent city-state and enclave located within Rome, Italy. Also known simply as the Vatican, it is the smallest sovereign state in the world, became independent from Italy in 1929 and is a distinct territory under the ownership, authority and jurisdiction of the “Holy See”. The Vatican City is outside the scope of Italy and the EU for VAT and customs purposes. As such, Italian VAT is not applicable in Vatican City.
3. Monaco
The Principality of Monaco is a sovereign city-state on the French Riviera. Monaco uses the Euro as its sole currency but is not a member of the EU. Monaco is treated as being part of the territory of France for VAT and customs and excise purposes. As such, VAT is levied in Monaco on the same basis and at the same rate as in France.
4. San-Marino
The Republic of San Marino is a small county in Southern Europe enclaved by Italy. It is treated as within the territory of Italy for customs and excise purposes but outside the scope of Italy and the EU for VAT purposes. San Marino has its own “import tax or single-stage tax” on goods and related services imported to San Marino by businesses – this is chargeable at 17%. Starting from July 1, 2022, it will be mandatory for Italian taxpayers to issue electronic invoices to customers in San Marino via the SDI platform.
5. The Canary Islands
The Canary Islands or “the Canaries”, as they are known informally, are a Spanish archipelago in the Atlantic Ocean. The eight main islands are Tenerife, Fuerteventura, Gran Canaria, Lanzarote, La Palma, La Gomera, El Hierro and La Graciosa. They are autonomous communities of Spain. However, while the Canary Islands are part of the EU for customs purposes, they are outside of Spain and the EU for VAT purposes. Instead of applying Spanish VAT, there is a local Sales Tax called “Impuesto General Indirecto Canario” (IGIC) in the Canaries with a standard rate of 7%, a higher rate of 13.5%, and a reduced tax rate of 3% (with a zero rate for certain basic need products and services). The Canary Islands also recently introduced IGIC real-time invoice reporting requirements under the Suministro Inmediato de Informacion (‘SII’).
6. Lake Lugano
Lake Lugano is a glacial lake situated on the border between southern Switzerland and northern Italy. The lake is named after the city of Lugano and is between Lake Como and Lago Maggiore. With effect, January 1, 2020, the Italian municipality of Campione d’Italia and the Italian waters of Lake Lugano are now included in the EU customs territory. However, Campione d’Italia remains outside the scope of Italian VAT and the EU VAT area. As such, Italy and Switzerland have agreed to introduce a local consumption tax in Campione d’Italia that is aligned with the Swiss VAT rates to ensure a level playing field.
7. The Channel Islands
The Channel Islands are an archipelago in the English Channel, off the French coast of Normandy. The Channel Islands include two Crown Dependencies, Jersey and Guernsey. They are not part of the UK but the UK is responsible for the islands’ defense and international relations. The Channel Islands are outside the scope of UK VAT but Jersey has a GST which is chargeable at 5%. Guernsey currently has no VAT system but has recently proposed the introduction of a GST in the future.
8. Faroe Islands
The Faroe Islands just the “Faroes” are a North Atlantic archipelago located north-northwest of Scotland and halfway between Norway and Iceland. Like Greenland, it is an autonomous territory of Denmark but outside the scope of Danish VAT. The Faroe Island does however have its own local VAT, which in Faroese is called “Meirvirðirgjald” (MVG).
9. Isle of Man
The Isle of Man is an island in the Irish Sea, off the coast of Great Britain. It is an internally self-governing dependency of the British Crown and its people are British citizens. However, the Isle of Man is not, and never has been, part of the UK nor is it part of the EU. There is a common tax area between the two countries resulting from an agreement between the UK and the IOM governments. The spirit of the agreement between the UK and the IOM is that IOM legislation will continue to generally mirror UK legislation and procedures, so maintaining a customs union and common indirect tax area. Isle of Man Customs & Excise administer VAT locally, although they are required to follow and implement UK policy and practices.
10. Lichtenstein
The Principality of Liechtenstein is a German-speaking microstate located in the Alps between Austria and Switzerland. It has a customs and monetary union with Switzerland and is part of Switzerland for VAT purposes. As such, Swiss VAT is levied on goods and services in Lichtenstein, but the tax is administered locally.
Businesses that have customers in the above territories should ensure that they are correctly accounting for the right rate of VAT on sales. This may involve setting up custom tax calculation policies in their ERP, ecommerce platform or tax engine based on more granular address data.
Speak to one of our experts to discuss how Horizon Solutions can assist with correct tax rate determination
- 1
- 2