Selling online globally: the hidden complexities of filing and paying VAT

As new rules covering the cross-border supply of online sales rolled out globally, many businesses have been caught unawares by the hidden complexity of filing and paying VAT. It sounds like a simple process: filing and paying tax, it is anything but. ?

These businesses invested a lot of time and resources on the registration side in anticipation of filing returns and paying the relevant tax. As much, if not more work, went into amending online checkout systems to meet the varying requirements from tax jurisdictions across the globe. The requirements range from how to determine the location of the end customer; how to validate a business number provided in an online sale; how to generate a compliant invoice, and to how to handle foreign exchange (FX) obligations. ?

Despite overcoming these challenges and operating compliantly, the act of paying the taxes due on online sales continues to trip up many businesses. It is not until they liaise either directly or through a third party with the relevant tax jurisdiction that the ‘hidden’ requirements become apparent. Such requirements are not going to fade away anytime soon and are most definitely not one-offs, they are part and parcel of the filing and paying tax process.??

Payment is not just about sending money from one account to another?

Below we provide an at-a-glance look at tax jurisdictions where paying can be rather complex.?

First off, in the following tax jurisdictions a payment reference number is provided after the submission: Kenya, Thailand, Turkey, Mexico, Switzerland, Georgia, Chile, Indonesia, Québec in Canada, Colombia, and in the United Arab Emirates. ?

Secondly, tax jurisdictions may require the proof of payment for every period to allocate the payment: Malaysia, Mexico, Cambodia, Kazakhstan, Colombia, Oman, Tanzania,?to file the return: Nigeria or both: Egypt?

In addition to the above payment difficulties, one may not know that filing a tax return in Albania, Serbia, India, and Japan requires engaging the services of a local third party first.?

Let’s dive into some specific examples of what we mean when we say that payments can be complex. ?

Cambodia: In Cambodia, where rules affecting the supply of cross-border digital services have been in place since April 1, 2022, the filing of the return takes place in both USD and the local currency the Cambodian Riel; the conversion to the local currency is calculated via Cambodia’s General Department of Taxation portal.?

The payment then takes place in USD, however, we currently understand that when the Cambodia tax authorities receive the funds, they apply the exchange rate on the day, not the portal one at the time of submission, to check if the USD amount covers the Riel amount filed.?

As the exchange rate has a certain amount of fluctuation this may mean that in the eyes of the Cambodia tax authorities an under — or over — payment took place. Interest and penalties for an underpayment will be calculated on the total tax liability, not just the potentially underpaid amount.?

To add to these uncertainties is that companies with obligations in Cambodia typically choose to overpay which then leads to having to do frequent reconciliations. Cambodia is a constant reconciliation issue and then another overpayment. Every merchant with a tax liability in Cambodia will decide how they wish to calculate the overpayment, some have settled on a percentage of tax due plus the bank fees, which are dependent on amount of money to be transferred.? ?

Colombia: The payment requires a reference number, which is generated after the filing submission. The filing allows the generation of a local reference number which then needs to be converted into an international reference number and the payment should be made within less than 24 hours, otherwise a new reference number needs to be generated.?

Serbia: There are issues with bank commission fees on payments of tax in Serbia. Advice from the tax authorities in Serbia is that “the bank commission refers to the fees charged by the bank for transferring money to the tax authority bank account, thus the amount of the bank commission varies with the value of the VAT.”?

For example, the bank commission fee in the calculation as per the range below (note RSD = Serbian Dinar):?

• 650 RSD (ca USD 6) for VAT paid up to 1,250.000 RSD?
• 1,100 RSD (ca USD 10) for VAT paid in the amount of 2,150.000 RSD.?

Indonesia - Hidden bank fees: Another issue is that there are hidden bank fees because the receiving bank may apply them without the payer knowing or having any control over it. This causes issues where the payment reference provided post-submission is only going to be recognised by the system if the amount exactly matches - Indonesia being a case in point. For businesses it can take multiple payment attempts to finally determine the one with predictable charges. ?

Thailand: Payment references have often got a limited lifespan so in Thailand, for example, if the payment is late, the reference will not work, and the money gets returned. The problem here is that the money can take a month to get back and in the meantime the Thailand tax authority applies hefty penalties and interest.?

All these examples lead to uncertainty for businesses and the added layers of complexity add burdens on precious time and resources.?

Bottom lines and reputations are at stake?

Being aware of the highlighted hidden complexities is crucial for digital businesses that may be affected. Business growth should not be hindered by barriers imposed by tax authorities. It's important to understand that when a new jurisdiction introduces such rules, most of the work lies not in tax calculation, but in addressing hidden issues related to filing and payment. Additionally, the impact on treasury functions and the application of foreign exchange rates should never be underestimated. Complexity and cost are not only associated with updating the system, checkout, and registration, but also with making it happen - increasing the number of countries, filing frequency, and meeting tight deadlines. Ultimately, these complexities affect the bottom line and potentially a business's reputation when it comes to paying penalties.?

This article has been written with the support of Jp McCarthy. The information was compiled thanks to the support of Juste Cyszaite and Kerstin Baxter.

Disclaimer: The views, statements or opinions expressed in this article are solely those of the author and do not represent tax advice and are not to be designated to be the views, statements or opinions of any other person, group, association or company.