Firms give high-risk countries priority for VAT registrations

Companies that provide digital services are becoming more picky about which nations they register for VAT in, basing their decisions on potential earnings and fines.

According to tax authorities, more companies are choosing where to register for VAT on digital services based on their sales and the potential for penalty.

According to Alex Baulf, managing director for global indirect tax at tax technology company Avalara in the UK, corporations are prioritizing high-risk jurisdictions due to the quick changes in indirect tax legislation.

According to him, as more nations implement VAT regimes for digital services, firms will probably pay increasingly closer attention to the possible financial consequences of non-compliance.

"They will prioritise registering in countries where they have the most revenue and where they think there’s the most risk of penalties or interest [charges]," according to Baulf.

He continues, "Another potential driver is limited resources for compliance."

According to Sabine Studer, head of group tax at the Swiss metal processing company Bystronic, businesses often register for VAT in areas with the biggest risk.

"But from a tax planning perspective this might not be the right way to approach things," argues Studer.

She argues that because they are jointly and severally liable for VAT with the merchants on their e-commerce platforms, it may frequently be problematic for businesses to pick and choose which locations they register for VAT.

Businesses must also weigh the danger of late VAT registration against the possibility of authorities making retrospective tax assessments.

The queries frequently posed by tax officials include, "Why do you all of a sudden register now, have you already done business in the country before this?" according to Studer.

Some tax specialists contend that due diligence procedures provide even greater hazards to businesses than enquiries from tax authorities do.

According to tax leaders, doing due diligence during an initial public offering (IPO), capital raising, or business sale poses the most dangers to business services.

The largest danger to a company's VAT compliance, in Baulf's opinion, is "actually the risk of a big event such as raising finance, an IPO or the sale of a business, and the impact this has on failing a due diligence process."

According to him, businesses run the danger of having millions of dollars wiped off their values due to inadequate VAT compliance.

A "big four" adviser or lawyer will frequently arrive during a due diligence process and start asking challenging questions regarding the company's digital services and VAT compliance.

These can ask, for instance, if a company serves other companies as clients. During transactions, the advisor may additionally ask for VAT numbers, evidence of validity, and VAT registration in some countries.

According to Baulf, "I’ve seen tens of millions of dollars being wiped off the value of sales."

Businesses that provide digital services face a serious challenge as a result of the considerable revenue blow caused by higher provisioning and tax obligations. It might be argued that this poses an even greater risk to businesses than a visit from tax authorities.

Businesses should identify these hazards early, often during the due diligence phase, according to Baulf.

In particular during M&A agreements, according to Marta Pankiv, senior director and head of group tax at software company Tricentis in Vienna, it is critical for businesses to stay current on indirect tax laws and VAT registration requirements.

"I have been through a few M&A deals, and I can tell you that every time we found that indirect tax and sales tax were the top exposure," according to Pankiv.

According to Studer, multinationals can reduce the tax risks connected to due diligence procedures by doing a risk landscape study.

Companies who have not yet undergone tax audits may also choose to do this in order to guarantee a clear tax picture.

"If you do a tax risk assessment and find that there are vulnerabilities in certain countries then you can go to those jurisdictions and ask to register for tax retrospectively," advises Studer.

As a result, businesses could guarantee higher compliance throughout their international operations.

The place of sale is important for reporting indirect taxes, especially for digital services. For corporations, though, this poses a host of issues. The OECD suggests taxing digital services at the point of consumption.

A tax leader at a marketplace in Europe claims, "Digital services are consumed where the one using the service is located, so it is a destination-based consumption tax."

According to Pankiv, this makes it difficult to track sales locations, apply the proper tax rate, and register in that country.

With the establishment of the One-Stop Shop (OSS), which offers a centralized processing method for submitting returns, reporting, and making VAT payments, the EU has attempted to simplify VAT registration.

Despite the still-present complications, "the European introduction of the OSS makes life easier," claims Pankiv.

She claims that her team is focused on keeping track of where sales have occurred and where the business is offering services in order to stay on top of any indirect tax responsibilities.

While registration is much simpler than in the past, this is not necessarily true of the VAT reporting requirements.

Europe's VAT return processes vary, with the most developed nations simplifying the process to a maximum of 10 items to be checked. Those who are behind continue to demand that businesses meet more than 150 standards merely to be compliant.

"This makes the VAT return process quite complex and lengthy, often requiring a lot of manual processes, while the most advanced countries have technology to prepare returns," according to Baulf.

The EU's attempts to harmonize VAT reporting contrast sharply with those of other countries throughout the world, where businesses must contend with numerous compliance barriers.

Complex registration procedures, local application language requirements, the use of local attorneys, local bank accounts, local representatives, and the usage of local currency for payments are a few examples.

Some countries and regions would benefit from modeling their tax authority structures after those of the EU in order to create efficient procedures for filing VAT returns.

These might include African nations via the African Tax Administration Forum and Latin American countries via the Inter-American Centre of Tax Administrations.

Businesses must make sure they can categorize transactions as either business-to-business (B2B) or business-to-customer (B2C). From the standpoint of VAT registration and regulation, the two types of transactions provide quite distinct difficulties for organizations.

According to Pankiv, "B2B and B2C transactions are not that clear-cut sometimes and we need to talk to businesses to try to understand who they are selling to really."

According to Baulf, EU-based companies must have a paper trail to demonstrate that their clients are legitimate businesses. This audit trail should include verification of the clients' VAT registration and their ability to self-account for the levy in accordance with intra-Community acquisition rules.

In order to avoid incurring a tax assessment from authorities, businesses may ask consumers for information as part of a data validation exercise during transactions.

VAT numbers are significant in all transactions, whether they are B2B or B2C. According to the same tax head at a marketplace in Europe, this also means that firms need to make sure that their supplier master data is valid.

The tax leader believes platforms should not wait for a due diligence process when they are being bought before correcting their data.

As a result, certain platforms may decide not to work with smaller vendors or marketplaces who have a history of non-compliance.

The tax chief argues, "Whether we like it or not, we then have a reputational risk."

Enterprises confront significant obstacles on a number of fronts, including those of contagion from collaborating with non-compliant businesses, as legislation around VAT on digital services become more stringent.

Businesses must make sure that information on the people they do business with and their compliance status is maintained up to date. A thorough VAT reporting process should be strengthened by a due diligence process, not undermine it.

By fLEXI tEAM