Europe’s New Cross-Border Tax Rules Are Coming and Cloud-Compliance Is Key

It’s often said that “nothing is certain but death and taxes” – but that quip could also include changes in tax laws, as the revisions in local, state and federal jurisdictions seem never-ending.

As commerce crosses time zones and currencies, and as consumers send all manner of goods across Europe, Eric Christensen, chief payments officer at Digital River, says that merchants – especially smaller ones – have to scramble to keep up with new rules, such as how to compute value-added tax (VAT).

Those changes, which went into effect in July, mandate that online marketplaces and platforms will be responsible for computing and collecting VAT. Within the EU, VAT will be determined based on the “ship-to” EU country – the final destination where the end consumer lives, not the “ship-from” EU country.

For the merchants selling into these countries, said Christensen, compliance and registration activities are (and will be) complex. That’s especially true as volume increases – goods that were exempt from VAT under 22 euros are now included in taxation schemes, just like larger transactions (over 22 euros).

The rules are designed to “level the playing field between on-shore merchants and cross-border merchants,” he explained. The rules also mean that the eCommerce ecosystems will need to have some cross-dialogue. Marketplaces will have to work closely with brands to understand where the products are being sourced and shipped – and to ensure that the right VAT is being collected based on where customers are located.

To get that level of granularity, Christensen maintained, cloud-based technologies can make a significant difference. Providers like Digital River, in partnership with Avalara, can ensure that tax calculations are done properly with the correct tax rates, while taking into account any policy changes.

The need for such tech-driven solutions is especially acute given the fact that miscalculations can trigger audits, penalties and payments on back taxes owed. In most cases, it would be too late to collect those funds from the customer, said Christensen, so the merchant or platform would be on the hook, which comes out of the bottom line. The advantage of using the cloud and third-party providers is that there’s a digital paper trail of customer-level tax data that can be used to provide information, or a defense, during an audit.

A Positive Bottom-Line Impact

Knowing that the correct tax collection processes are in place means merchants can offer localized payments without having to worry about the tax implications of different payment methods. Companies ranging from smaller merchants all the way up to giants like Visa and Mastercard, with a localized presence on a country-by-country basis, must have the right entity structures in place.

“That entity structure triggers the requirement to have a tax registration in any given country” as firms act as local sellers, Christensen explained. “Being able to accept local payment methods gives value to your bottom line,” he noted,  adding that automating tax compliance “allows the brand to focus on what they want to do: selling good products.”