Jul 17, 2017
In the final part of a three-part series concentrating on the Software-as-a-Service (SaaS) model we analyse how international tax compliance processes can be improved for SaaS businesses.
Previous posts in this series:
- Part one: global challenges for the SaaS model
- Part two: CFO headaches as tax reforms targeting SaaS businesses affect strategy, globalization, and compliance
It is astounding in this digital age that a majority of businesses still rely on manual processes for international VAT/GST calculation and compliance-related reporting.
Here at Taxamo we know it doesn’t have to be this way. These processes can be, and should be, automated. Ironically, many Software-as-a-Service (SaaS) business, disrupting every other facet of business, still rely on these manual, as well as revenue and time-intensive, processes.
Tax is a serious business. Tax compliance involves risk and it places reputations on the line if not afforded the correct attention.
International tax compliance brings additional complexity. As the market leaders in international digital tax compliance Taxamo is well placed to understand this landscape. A SaaS business with international sales must today deal with a marketplace that has become increasingly fragmented, due to a myriad of local tax law changes. This situation will become even more complicated as tax authorities worldwide continue to extend their VAT/GST systems to cover supplies from SaaS businesses, among others.
Taxamo eases this complexity by using the Intermediary model to help digital businesses sell internationally without the associated headaches of international tax compliance. Taxamo becomes part of the supply chain for VAT/GST purposes and takes on all the related VAT/GST liabilities. Let’s explore this further.
Difference between Intermediary and Merchant of Record
The Intermediary takes on the VAT/GST liability for a merchant’s international digital sales. The Merchant of Record (MOR), on the other hand, is the organization that is held financially liable by the acquiring bank.
The Intermediary becomes part of the supply chain, becoming the de facto supplier. Taking on the VAT/GST liability means it is the Intermediary that is responsible for registering with the relevant tax authority, collecting the correct VAT/GST, and remitting the tax due to the tax authority.
Let’s compare the use of an Intermediary (such as Taxamo) with a MOR:
- Complete flexibility and control over your checkout page. The merchant integrates the Intermediary (e.g. Taxamo) into their checkout page ecosystem. However, the merchant maintains control of when and what changes are necessary to ease the customer journey to improve your conversion rates. Using a MOR means losing control of the customer experience. As the MOR controls the merchant’s online checkout page the customer journey is their responsibility.
- When a merchant uses Taxamo they retain the ability to choose any payment service provider that best suits their international market needs. As a result the merchant can accept an array of localized payment methods. Having the option to choose a PSP provides the opportunity to reduce costs, as the merchant can negotiate fee structures directly with PSPs.
- An Intermediary, such as Taxamo, does not take responsibility of the end customer. This is maintained by the merchant. The merchant therefore maintains full control over the whole customer journey including customer service queries, with real-time data being fed back through the merchant’s own checkout page.
- In addition, an Intermediary such as Taxamo does not deliver or take title of the service so there is no licence/intellectual property (IP) issues to deal with.
In using an Intermediary, such as Taxamo, the international marketplace is opened up for the merchant but without the associated burdens of regulatory compliance and FX exposure. The Intermediary handles these burdens and allows the merchant to sell internationally unhindered.
Potential outsourcing of tax compliance
The SaaS proposition – software hosted in the cloud and accessed via a web browser – has encouraged outsourcing of the majority of business functions over the past decade: from sales to HR, finance to customer service.
Today, these SaaS businesses are beginning to look at their own internal functions as tax authorities worldwide continue to focus on their business model. Tax reform is accelerating and burdens are increasing.
Potential outsourcing of international tax compliance requirements needs to be considered seriously from a strategic perspective as it will affect a company’s international expansion coming as it does with a host of regulatory burdens.
Analysis of internal processes
When reviewing internal processes SaaS businesses will weigh up the option of using an automated service. The desire for an automated and simple-to-use process is very appealing. More often than not automation means outsourcing.
An automated service will also allow SaaS businesses to:
- Manage data efficiently
- Manage their tax risk
- Improve internal controls
Take the situation where indirect tax teams at SaaS businesses still manually update tax tables. This is time-consuming and open to human error. In an automated service this manual process is removed and leads to a more efficient workplace as indirect tax teams are freed up to focus on other business-critical tasks. These teams can do so safe in the knowledge that the preparation of indirect tax returns and the updating of tax rates are taken care of.
Tax analysts also win time to concentrate on functions such as researching international indirect tax issues and interpreting their impact on their SaaS business.
Use Taxamo’s technical expertise
Expertise is a key requirement for such a move to automation. Tax rates need to be accurate: accuracy and reliability is key. At Taxamo, we have this expertise.
Acting as an Intermediary, we are part of the supply chain, meaning SaaS businesses pass their international VAT/GST liability to us. As an Intermediary we, legally, shoulder the burden of international tax compliance. This allows international digital service businesses to refocus on their core strategic and revenue-maximising functions.
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Taxamo content is created for guidance only, please consult your local tax advisor.