Pricing strategy – consider the factor of VAT

By / In DIGITAL SERVICES TAX / March 8, 2020

The difference in VAT rates between nations is one of the most significant things you should consider when you expand your business overseas. When you provide your goods or services to the domestic market, the VAT rate is fixed.

On the other hand, when you provide your goods or services to buyers from other countries, the VAT rate varies from country to country. And it also depends on where your customers are located.

What is an Inclusive Price?

The price of your product is the same, no matter where your buyers are, and the VAT is included with the fixed price. There are many advantages of applying an inclusive approach, you don’t have to modify the cart flow with VAT features, and it is easier and clearer to do the monthly calculation. And you can apply thresholds together when you have multiple incomes. But it’s difficult to predict your net income, which differs from the VAT you will have to pay to the authorities.

What is an Exclusive Price?

The VAT is not included in the price if you take the exclusive strategy, it will only be calculated and added after the price of your goods. It is easier for the company to do the calculation, since you will collect the exact amount of tax money that you are owe to the tax authorities. You will have to ​install a real-time VAT calculating tool. The company has to absorb the cost of inaccurate calculation or determination of VAT.

Get it right: pricing strategy that works

Sometimes it is not easy to determine where your customers are located and which VAT rate has to be added before the payment has been made. The solid evidence in this situation is the buyer’s bank account. If the bank’s location is not matched to the VAT rate that was applied, the company may need to recalculate the VAT.

To conclude, Exclusive Pricing is a less money-consuming and less time-consuming approach. Some might say the VAT calculation prior to the transaction is tax-risky for e-commerce.

To solve this problem, you can install a VAT rate API to calculate VAT and update the latest VAT-related information.


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