Price inclusive VS exclusive strategy – VAT perspective
When you sell locally VAT isn`t a problem you can determine constant VAT rates for each service or goods you sell. But when you sell to customers in different countries you can not use this approach because VAT on the same service or product differs in every country your customers are.
Let`s start with the definitions:
Inclusive pricing means that you set up the same price for your product regardless of where customers are, and calculate and withdraw VAT after sum was paid to you.
Exclusive pricing means that you set up the price without VAT and need to add a proper VAT according to the customer location.
Let`s assume that you decided to apply the exclusive approach.
“ + ” you collecting the exact same sum of VAT you are obliged to pay to tax authorities
“ – ” you need to install real-time VAT calculating tool
“ – ” if you were wrongly determined VAT you need to correct your mistake and all additional costs are on your business
Sometimes it is tricky to determine the place of supply before payment has been made — for digital services merchant receive THE LAST AND THE MOST IMPORTANT PIECE OF EVIDENCE about the bank account only when transaction has been processed — and if it contradicts the place of supply we already calculated — it`s on the merchant side to recalculate VAT.
“ – ” you cannot predict your revenue it will depend on how much VAT you need to pay at the end of the quarter (month)
“ + ” you don`t need to change your cart flow with VAT features
“ + ” when calculated once a month it is no mistakes because all pieces of evidence are collected
“ + ” if you have several sources of income you can apply thresholds because you can sum all transactions together
We consider that for digital services VAT calculation before the transaction is more tax-risky. But from the economical prospective exclusive strategy is time and money consuming to implement. But revenue is more predictable. The easy way to calculate VAT before the transaction is to install a special API which is updated once a month because taxes are changing area. At the moment there are 57 countries over the word which implement VAT on distant sales but it will be more than 100 by 2020.