For many companies, which sell their products abroad, dealing with tax can be confusing and tough. Each country and state has its own rules on what gets taxed, making it hard to figure out when and how much tax to collect. Setting up systems and software to gather sales tax in the right place also takes a lot of time and money.
One major headache is that businesses must collect sales tax from customers, and if they don’t, the company has to pay it for them. Because of this, many companies delay collecting sales tax, which can lead to problems as the business grows.
Here are 5 reasons why sales tax/VAT matters on your invoices when you bill your customers:
- Legal compliance: Including sales tax/VAT on cross-border invoices is essential for legal compliance. Different countries have varying tax rules, and accurately reflecting the applicable sales tax on invoices ensures adherence to local laws and avoids legal issues.
- Transparent pricing for customers: Including sales tax/VAT on cross-border invoices provides transparency to customers regarding the total cost of goods or services. This transparency builds trust and avoids misunderstandings or dissatisfaction on the part of customers, fostering a positive relationship with them.
- Avoidance of fines and penalties: Failure to record the relevant sales tax/VAT in cross-border transactions can result in penalties and fines from the tax authorities. Accurately reflecting sales tax on invoices allows companies to avoid legal ramifications and financial penalties.
- Risk mitigation: Correctly recording sales tax in cross-border transactions reduces the risk of audits and investigations. It demonstrates a commitment to compliance by reducing the likelihood of litigation that can arise from incomplete or inaccurate invoicing.
- Improved financial accuracy: The inclusion of sales tax on cross-border invoices contributes to overall financial accuracy. This ensures that financial records match actual tax liabilities, facilitating accurate financial reporting, budgeting and forecasting for the business.
Let’s take a closer look at tax issues and understand the important details when dealing with taxes in your subscription plans and invoices.
Tax rules. Sales tax rates can vary at the country, state, county, and local levels. Businesses need to be aware of the specific rates applicable to their transactions depending on the customer’s location. You should consider the nature of your customer – whether a business or an individual – as this factor affects the tax amount.
Refunds and credit notes. Tax authorities often require businesses to reconcile sales and purchases for tax reporting purposes. Putting tax amounts into credit notes and refunds helps in this reconciliation process. This makes it easier to report the correct information and to properly comply with tax rules.
Digital products and services. With the rise of e-commerce and digital transactions, some countries have established special legal provisions for digital products and services and have updated their sales tax rules to include them, imposing tax on goods such as software downloads or streaming services.
Point-of-sale vs. destination principles. Some jurisdictions use the place of sale principle, where sales tax is collected at the seller’s location, while others use the destination principle, where tax is collected at the customer’s location.
We can help
The Rainex team has configured all of the above features. Now you don’t have to worry about tax rates or tax names when creating subscription plans and invoices: our tax engine built into our platform will do it for you. Currently, our tax advisors have developed over 80 tax rules, and we keep adding new cases to this list on a regular basis.
Previously, you had to integrate with both billing and tax compliance systems. Now Rainex ensures that your billing system is set up to solve your tax related problems.
How does it work?
So, a tax rule is created by a combination of four parameters: the product country, the customer country, the product type, and the existence of a customer tax number. The name and amount of tax on your invoice for the customer are determined by different variations of these parameters.
When setting up taxes, you can either create your own tax rules, use the default tax rules, or even a combination of both. The more detailed a tax rule is, the stronger its impact compared to other tax rules in the sequence.
Let’s look at an example. You own a company based in Germany that offers a monthly subscription to a streaming media channel. Your customers are individuals from all over the world. In this case, according to global tax laws, tax rules are determined by the customer’s country, but you don’t need to spend your time and money researching all the tax rates for different countries. Rainex takes care of this for you by automatically calculating the tax amount in your invoices based on the tax rate of your customer’s country. However, if you want to implement a specific tax rule into your tax model, you have the flexibility to do it on your own.
What are the upcoming steps we plan to introduce in Rainex?
Looking ahead in Rainex, we have some additional tax things coming up. Let’s talk about what new stuff we’re planning to make things even better.
- Threshold and nexus
In many countries, businesses surpassing a specific revenue threshold are required to register for Value Added Tax (VAT) or Goods and Services Tax (GST). This involves collecting taxes from customers on behalf of the government and remitting them accordingly. Most US states require businesses to collect and remit sales tax if they have a “nexus” or a substantial presence in that particular location. Therefore it’s essential for businesses to be aware of the revenue thresholds applicable to their specific tax jurisdiction and to stay informed about any changes in these thresholds.
- Tax Exemption
Certain customers might qualify for exemptions from sales tax. For instance, specific entities like non-profit organizations or government agencies could be exempted from the obligation to pay sales tax. The same idea applies to products too. It’s crucial to be able to mark certain customers and products as tax-exempt.
- Tax Forecasting
Businesses can make smarter decisions when they fully grasp their anticipated responsibilities, including the taxes they need to settle by the end of the fiscal period. That’s why revenue and tax amount forecasting is one of essential features.
When businesses can predict how much money they’ll make and the taxes they’ll owe, it helps them plan ahead. They can decide how to use their money wisely, make smart choices with their resources, and make sure they’re ready for their financial responsibilities.
In summary, the automatic tax calculation in invoices is a time-saving tool that reduces errors and ensures businesses adhere to tax regulations. This feature enables businesses to allocate their time and resources more efficiently.
Sign up for a Rainex account and try these and other essential features to grow your business in a free trial. Stay tax compliant with Rainex!
