7 Tax Issues Facing Growing Software Companies
Published on 08 Jun 2022
The digital economy was one of the few businesses that grew swiftly during the pandemic, so much so that IBM's US Retail Index indicates digital retail had progressed by almost half a decade in less than a year.
However, ecommerce isn't the only product-based firm that has thrived in such a difficult period for businesses globally. Consumer (both corporate and general public) requirements moved quickly. Suddenly, the great majority of people were required to have digital skills in order to work from home. As new means of communicating became required, digital products were in high demand, resulting in a 300 percent growth in the worldwide user base of internet-accessible software providers like Zoom.
Tax Issues for Digital Goods and Software Companies
1. Market Liability and Difficulties
If your digital product or service is offered on digital markets (such as app stores), you must research your tax responsibility. Where does the legal obligation for taxation fall?
Firms selling digital items or software may believe that their marketplace/app store will manage the necessary VAT, GST, or Sales Tax. However, this is not the case.
2. Location of the customer
Customer interactions and checkout procedures are often brief when purchasing digital items. It may be that a consumer enters their bank information and the final product is provided immediately. The whole transaction might be a one-time event with no continuing connection. As a result, corporations have a very short window during checkout to determine the customer's location.
3. Constantly changing classifications and laws
Government tax agencies may provide regular updates in another language. With no centralized tax authority for digital service providers, it becomes difficult for enterprises all around the globe to remain up to date on all tax information that pertains to their operations. Even a professional accountant's world is full of changing classifications, exclusions, updated rates, and laws, so how can firms (big and small) keep up with worldwide differences?
4. Business-to-business and business-to-consumer problems
Every country has different legislation about how B2B and B2C taxes are administered.
There is a fine line between what is a private customer sale (requiring a conventional tax return) and what is a corporate transaction (requiring a reverse charge method for VAT, for example) and how each should be charged. There is much misunderstanding regarding what defines B2B or B2C, and the categorization of digital commodities themselves is not consistent globally.
5. Tax documentation
With the extra intricacy of the B2B/B2C problem comes the additional challenge of proving sales and adding tax. Companies in many countries are required to produce evidence as to why they added or did not add the tax to a transaction. Businesses, for example, might include the client's VAT number in their invoice or receipt to demonstrate tax for the EU. However, small businesses that sell overseas may lack the capacity to verify all VAT numbers or may be unclear what to do if their clients do not have legitimate VAT numbers (for example, if the customer nation has a different tax code system than the EU VAT).
6. GDPR and data storage
Just as crucial as having proper evidence is maintaining it appropriately for the right period of time (and, in accordance with GDPR requirements, providing customers with access to the data you retain, if asked). With GDPR in effect, managing compliance is tough when you may have hundreds or thousands of pieces of evidence to reconcile your tax return. Businesses may find themselves in violation of GDPR best practices due to the huge quantity of data they collect to handle VAT requirements.
7. Tax compliance requirements
The rules for invoices and receipts vary by nation. Businesses may be required to submit invoices containing extra information they would not need in their home nation, which may be difficult to guarantee you fulfill all of your customer's requirements.
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