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The New VAT: From Regulatory Burden to Strategic Opportunity (Part 2)

By Jim Fredlund / February 4, 2015

In our last post, we explained how the European Union’s new way of calculating the value-added tax (VAT) will change the landscape of digital commerce. Today, we’d like to suggest three specific ways electronic retailers can turn the perceived burden of the new law into an opportunity for success.

1. Do tax calculations faster

The most daunting challenge of complying with the new VAT scheme is the most obvious: determining where your customers are and calculating tax accordingly. In some cases, the new law requires businesses to supply two pieces of non-contradictory location evidence for every consumer. In the process, merchants must counter the significant potential for consumer fraud. Some retailers will respond to increased VAT liability by passing the cost along to consumers in high-VAT countries, and sensible Europeans will quickly figure out that they can save money by falsifying their purchase location. Every retailer will need to find a way to determine and document the actual location of every customer, every time—and then calculate the correct VAT.

It’s a significant technical challenge to establish a user’s location, record the proper evidence, and calculate the appropriate tax—while maintaining a pleasant user experience. Internet users are very sensitive to latency when they shop, which means that every fraction of a second counts. Our experience suggests that conversion suffers if tax calculation takes more than two tenths of a second. You might have a beautiful website—but can your back-end systems handle the complexity of the new VAT calculations without causing a lag that will lead to abandoned carts and lost sales? At Digital River, we offer a speedy and accurate tax calculator, so our customers can rest assured that latency won’t lead to lost revenue and profits.

2. Adjust pricing more intelligently

Passing on the cost of the new VAT to consumers is only one way for businesses to respond to the new taxation scheme, and retailers will want to consider their pricing strategy carefully. Merchants of electronic services have three basic options:

  1. Absorb the cost and leave VAT-inclusive prices as they were in 2014, without passing new costs on to consumers. This strategy stabilizes prices and might increase sales by shielding consumers in high-VAT countries from increased prices. But it might also reduce revenue and profits.
  2. Increase prices for all customers to adjust for average increases in VAT liability. With this approach, customers all pay the same price for the same product or service, regardless of their location—which benefits consumers in direct proportion to the VAT rate where they live. For retailers, this strategy requires careful calibration to remain strategically coherent.
  3. Implement net pricing to adjust prices according to each customer’s location. This way, consumers absorb the real amount of VAT for their own purchases.

Net pricing is the clearest, most transparent way to reckon with the new VAT law. But floating prices might alarm consumers and put tension on consumer-protection obligations that require VAT-inclusive pricing. Digital River’s deep expertise in European digital commerce lets us help our customers respond to the new VAT as a strategic opportunity, adjusting prices more adeptly than their competitors.

3. Reduce the burden of compliance

Once you’ve put systems in place to verify and record the location of each of your customers and settled on a pricing strategy that makes sense for your business, all that’s left is paying the VAT you owe to all the EU countries where you have customers. Fortunately, EU lawmakers have come up with a helpful alternative to paying VAT in 28 member states separately: the mini One-Stop Shop, or MOSS, allows companies based in the EU to register to file their VAT returns in a single country.

While the MOSS scheme makes the new VAT easier for businesses to handle, its usefulness is limited. While filing with a single MOSS is much easier than filing 28 separate VAT returns, the hard work of compliance comes long before the return is filed. First, companies must compute VAT correctly, determine and report the tax attributes of buyer and seller correctly, and defend against local audits. The actual filing of the return is a small matter by comparison.

No matter how complex the new law may be, tax compliance and the financial costs of tax risk need not be worrisome. For many of our customers, Digital River takes responsibility as the Seller of Record. We assume responsibility for paying the correct tax on all online transactions, reliving our customers of the regulatory overhead and audit risk. That frees our customers to pursue their strategic goals—more cost-effectively than their competitors.

Want to learn more? We’ve provided a free webinar for businesses that might be affected by this year’s VAT changes.

Please be advised that the information presented above is a representation of Digital River’s interpretation of EU VAT changes.  This information is to be used for informational purposes only and not for the purpose of providing legal or tax advice.  You should consult with your legal counsel or tax advisor with respect to any particular issue or problem.

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