57 countries all over the world implement the VAT destination principle for companies selling digital content (everything from gaming and e-books to stock imagery). Such companies must pay VAT \GST in all countries that their customers are in. It is not only 57 different tax regimes, but also other kinds of services and means of payment, so the complexity is high and therefore e-merchants make many mistakes. We would like to describe:
1. Customer location determined incorrectly
As we move around the word freely, to determine our location becomes more and more difficult. According to tax rules, merchants can rely on several pieces of evidence determining customer location such as :
- IP address
- Telephone number
- Bank address
- Billing address
- Delivery address
As tax rules across countries vary, sometimes it is not easy to jangle this info. Just imagine: a man is originally from Latvia (billing address) moves to Germany for work (IP address) and has a bank account in Lithuania. All pieces differ, so we need at least one more to calculate the right VAT. The answer is to collect as many pieces as possible (don`t forget GDPR issue).
Some companies calculate VAT before check out, just after the goods are in the cart. As soon as they receive payment from the customer, they can receive a contradictory piece of information. The only thing for them to do is to send a notice to the customer to change the info in the order, as payment evidence varies from billing information.
2. Not enough pieces of evidence have been collected
Some companies use only IP address as the only evidence, but tax authorities don`t consider such information as sufficient. But as our practise shows this particular element is the most volatile- people move around more and more. The better way is to collect at least 3 pieces in order to prove customer location to tax authorities.
3. Different Currency exchange rate have been taken
Some companies keep accounts in domestic currency. But at the website, they collect money in various currencies. So when it`s time to fill in VAT returns, the currency may have been exchanged two or more times.
The right way – is to keep a record in the currency of payment and exchange it only once - on the last day of the quarter
4. Using standard VAT rate instead of lower
There are several VAT rates in all VAT countries, for unassociated services, and different rates apply. The most common mistake – to use the standard (the highest) rate for all the services that the company provides. For example, e-books in many countries are subject to a lower rate.
5. Wrong calculation
As this tax is indirect and companies use a flat price to sell to contrasting people, usually to calculate the right amount of tax we need to divide by 100+VAT and multiply by VAT
20% VAT rate
100 € / 120 * 20 VAT = 16.67 €
But in some countries rate is applied straight
15.57% VAT rate
100 € * 15.57 / 100 VAT = 15,57€