Taxamo White Paper: Standardizing Digital Tax Compliance PDF

Standardizing International
Digital Tax Compliance
A Taxamo White Paper

November 2015
Standardizing International Digital Tax Compliance: a Taxamo white paper (November 2015)
Contents
1. Introduction
2. Executive summary
3. Challenges for digital tax legislators
4. Complexities created by new digital tax laws
4.1 Registration and filing
4.2 Tax calculation
4.3 Data retention
10
4.4 Invoicing
11
4.5 Settlement
11
4.6 Exchange rates
12
4.7 File formats
12
4.8 Conclusion
13
5. Technical recommendations
14
Recommendation 1: Simplify registration
15
Recommendation 2: Standardize & Simplify filing
17
Recommendation 3: Develop and introduce supporting APIs
18
Recommendation 4: Require two pieces of evidence to determine place of consumption
19
Recommendation 5: Do not require sensitive information to be stored
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6. About Taxamo
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1. Introduction
Electronic commerce has the potential to be one of the great economic developments of the
21st Century.
These 17 words combined as the opening line of an Organisation for Economic Co-operation
and Development (OECD) report titled Electronic Commerce: Taxation Framework Conditions
that was presented to a Ministerial Conference in Ottawa, Canada, back in October 1998. Some
17 years later we are in the
midst of a revolution in how
taxation is applied to the
digital economy.
The digital economy is
becoming the economy and
tax jurisdictions worldwide
are slowly implementing
new taxation measures to
recoup revenue. According
to a recent Accenture and
Oxford Economics study the
digital economy is set to add
$1.36 trillion to the global
economic output by 2020.
Problems relating to a digital
service merchants
compliance arise as tax
jurisdictions take a unilateral
approach without thought to the international context of digital taxation, and the practical impact
businesses have in implementing conflicting logic on a single platform.
For countries to see the maximum return from digital tax rules, tax authorities need to design
regulations with which merchants can technically comply. More than this, if tax authorities go to
the effort to make it easy for businesses to comply with digital regulations, they should see a
corresponding return in increased revenue and a reduction in negative feedback.
2. Executive summary
The Organisation for Economic Co-operation and Development (OECD) has taken the lead on
the issue of international digital tax compliance for merchants and have produced a series of
documents outlining recommended practices.
On October 5, 2015, the OECD confirmed their approach to the taxation of the digital economy
by recommending that digital services be taxed based on the location of the consumer. They did
so in their Base Erosion and Profit Shifting (BEPS) report. This report was subsequently
presented - and accepted - on October 8, 2015, to the G20 finance ministers in Lima, Peru.
Action 1 of the BEPS report focuses on the taxation challenges of the digital economy. The
report recommends that rules and implementation mechanisms be adopted to enable efficient
collection of value-added tax (VAT) in the country of the consumer in cross-border business-toconsumer (B2C) transactions, which will help level the playing field between foreign and
domestic suppliers.
This seminal international taxation report adds that the evolution of the digital economy has
dramatically increased the capability of private consumers to shop online and the capability of
businesses to sell to consumers around the world without the need to be physically present or
otherwise in the consumers country.
This lack of a requirement for physical presence is the heart of this taxation issue, and it
produces numerous obstacles for digital tax legislators.
The challenge is to implement a taxation registration, collection, and remittance system that
simplifies the taxation process for digital service merchants and does not affect the consumers
online transaction flow.
Taxamo provides a practical technical solution for digital merchants who wish to comply with the
new place of supply taxation rules for digital goods and services.
To date Taxamo's single integration solution is built to comply with new digital tax rules for the
EU, Japan, South Africa, Norway, and the USA, with more countries currently being worked on.
Through our work in this area we have been exposed to the practical consequences
implementing a single solution which needs to comply with many of the new wave of digital tax
rules. This white paper seeks to provide feedback to tax authorities considering implementing
similar rules so that lessons can be learned from the practical challenges faced by digital
service merchants to date.
3. Challenges for digital tax legislators

Levelling the playing field is a common theme from the OECD. It has recommended that nonresident suppliers register, collect, and remit VAT/GST according to the rules of the jurisdiction
in which the consumer is resident. Their reasoning is that this approach will result in the VAT/
GST being paid in the jurisdiction of the consumer and thereby reduce the tax advantage
businesses can have from establishing offshore, or in low-tax jurisdictions.
The absence of an effective international taxation framework, however, complicates this
proposal.
In a recent Ernst & Young
(EY) survey of senior tax
executives, titled Exploring
The Possibilities, Jeff
Michalak, EY Americas lead
for International Tax
Services, stated that
companies now more than
ever should take action to
identify the impact of these
[OECD] recommendations
on their business and tax
planning. These BEPS
recommendations will likely
be followed by inconsistent
and uncoordinated country
implementations, leading to
uncertainty for taxpayers,
the possibility of double
taxation and potential
controversy.
In addition the EY survey revealed that:
83% of senior tax executives believe that the evolving taxation of the digital economy is
important to the future of overall worldwide taxation, affecting primarily nexus, permanent
establishment and treaty evolution.
Also, 27% are contemplating new operating models for digital transactions.
It is the inconsistent and uncoordinated country implementations that create issues for
international digital service merchants who must try to conform with a myriad of differing, and
sometimes contradictory, rules.
4. Complexities created by new digital tax laws

As international tax jurisdictions implement new digital tax laws the knock-on effect is that
merchants must deal with new systems, creating obstacles to simplified compliance.
Merchants face navigating unknown taxation regulations in relation to registration, tax
calculation and collection, data retention, invoicing, and tax remittance (schedule and file
formats). This is in addition to language barriers and foreign exchange issues.
Besides backend complexities, online businesses are tasked with coding real-time logic into
their front-end stores to handle varying tax requirements on the fly. This includes
ensuring that sufficient data is stored to comply with the digital TAX requirements of the
determined country of the sale,
ensuring that the correct VAT rate is calculated in real-time depending on this logic
ensuring that the correct invoice type has been issued to the customer depending on the
type of customer it is and the location of the end customer.
ensuring that the correct customer information is gathered to comply with in country B2C
audit requirements
As more tax jurisdictions, and regions - e.g. the European Union (EU) - introduce new laws
aimed at taxing the digital economy it becomes increasingly difficult for digital service merchants
with worldwide sales to understand and comply with their tax obligations locally. These
difficulties, in turn, lead to uncertainty in relation to a businesss tax compliance.
In this section we take a look at some of the most recent international digital tax system
implementations and the differences in implementation between each. Specifically, we will take
a look at varying requirements between:
The EUs VAT Mini One-Stop Shop (MOSS) system, in operation since January 1, 2015
Japans new consumption tax introduced on October 1, 2015
Norways VAT on eServices (VOES) open since July 1, 2011, and
South Africas VAT on electronic services introduced in June 2014.
We will focus primarily on the EU and the Japanese implementations as they represent two very
different approaches and the other implementations have features of one, or other, of these
approaches.
4.1 Registration and filing

Table 1 illustrates how digital tax systems in Europe, Japan, Norway and South Africa differ in
registration and filing requirements.
Table 1: Comparison of international digital tax registration requirements for merchants (Nov
2015)
Tax
authority
Online Tax agent

portal required
Registration
API used
Filing
schedule
Threshold
included
Tax
rate(s)
E.U.
Yes
No
No
Per quarter
No
Various 4
Japan
No
Yes
No
Yearly
JPY 10 million 1
8%
Norway
Yes
No
No
Per quarter
NOK 50,000 2
25%
South Africa
Yes
No
No
Per month
ZAR 50,000 3
14%
Table 1 notes:
1.
2.
3.
4.
The Japanese threshold requirement for foreign suppliers of digital services to Japanese consumers is JPY 10 million, this
equates to circa 80,000 or $83,700 (subject to exchange rate fluctuations).
The Norwegian threshold requirement for foreign suppliers of digital services to Norwegian consumers is NOK 50,000, this
The South African threshold requirement for foreign suppliers of digital services to South African consumers is ZAR 50,000, this
There are upwards of 70+ VAT rates in the EU among the 28 Member States, not all of these VAT rates apply to digital
services.
Online portals
The EU, Norway, and South Africa enable digital service merchants to register via an online
portal. In the EUs case one MOSS registration enables a non-EU digital service merchant to
register and account for all of their EU B2C supplies. On January 1, 2015, the EU created the
VAT Mini One-Stop Shop (MOSS).
This new registration, filing, and settlement system enables a digital service merchant with B2C
supplies in the EU to register and file a quarterly VAT return with one Member State. The MOSS
system requires this Member State of Identification (MSI) to send - on behalf of the merchant the tax due in other Member States, e.g. if a merchant registers with HMRC in the UK for MOSS
then the UK would remit the tax due on the merchants sales to other countries in Europe.
The use of MOSS is not compulsory. The alternative to MOSS for digital service merchants is to
register directly with each EU country where the merchant makes sales.
Tax agents
Of the quartet of tax authorities focused on in table 1, only Japan requires digital service
merchants to appoint a Japanese-resident tax agent (known as a zeimu dairinin) to complete
the procedures related to Japanese tax payments (such as filing a tax return) on behalf of the
foreign digital service merchant. There are other tax authorities, such as Switzerland, who
require tax agents. The requirement to use tax agents adds to the the cost of compliance for
merchants.
Registration APIs
None of these tax authorities or regions - as of yet - offer an application programming interface
(API) for digital service merchants to register with an online portal and file their tax liabilities via
a third-party service (e.g. their accounting platform). APIs are now commonplace among the
digital economy enabling online merchants to link core systems together. Recent developments
in this regard include the United Kingdoms tax authority launching an API plan promoting a
third-party first software approach. This is discussed later in this white paper.
Filing schedules
Among the four tax authorities and regions there are three filing options. The EU and Norway
require merchants to file returns on a per-quarter basis; Japan has provided guidance that a
yearly return will suffice, while the South African Revenue Service (SARS) wants digital service
merchants to file monthly returns.
Threshold levels
This is where all four tax authorities differ in their approach to the taxation of the digital
economy. There is no common thread. The EU has removed the threshold requirement from its
application of the MOSS system. This has come under much criticism from small-to-medium
enterprises struggling to adapt to the new environment. Japans new rate of consumption tax
only applies to merchants with a taxable turnover of over JPY 10 million (circa $83,700).
Norways VOES includes a low threshold of NOK 50,000 (circa $6,100) while South Africas
system has placed a threshold of ZAR 50,000 (circa $3,800) on foreign digital service
merchants.
Tax rates
The EU introduced the MOSS system to simplify the process of complying with these new rules.
There are upwards of 70+ VAT rates in operation for a variety of goods and services across the
EU. Foreign digital service suppliers with sales in Norway must charge a VAT rate of 25%. In
Japan the new consumption tax rate introduced on October 1, 2015, is 8%, while South African
VAT is set at 14% for supplies of digital services (referred to as e-services by SARS).
4.2 Tax calculation

To compliantly charge and collect the correct amount of tax a digital service merchant needs to
apply the correct digital tax rate to their services.
Typically, this has to be done in real-time. This is a three-step process.
Step 1: Determine the governing law of the transaction

This is done by determining where the customer is usually resident. Confusingly, different
countries have different rules determining this.
Some countries only require one piece of evidence, often relying on billing address as a means
of identifying the location of the customer.
This is open to abuse because in most countries the billing address for card transactions are not
validated as part of the payment process so the customer may put in whatever country they
wish.
The EU system provides most certainty of any system in place today and it requires that the
merchant determine place of consumption of their electronic service based on two pieces of
non-conflicting evidence.
Such evidence includes:
Customers billing address

IP address
Bank details (location of bank)
Country code of mobile phone SIM card
Location of fixed land line
Any other commercially relevant information (e.g. payment mechanisms or gift cards
unique to specific Member States, information from third party payment service providers,
consumer trading history details, etc.).
Step 2: Ensure sufficient evidence is collected to comply with governing law(s)

In Norway, for example, in order to comply with VAT audit requirements; the first name,
surname, and street address of the customer is required.
The merchant must code a solution so that this logic is built into its platform so that a customer
is further engaged should the governing law require information from the customer that has not
already been shared.
Additionally, the customer location proxies may indicate that more than one countrys regulation
may apply so further location evidence from the customer may be required.

Step 3: Apply the correct tax rate
Once the governing law has been established and it has been confirmed that all evidence that
allows the merchant to conduct a compliant transaction has been collected, the merchant must
then apply the correct VAT rate.
This means digital service merchants need to be aware of digital tax rate changes and rulings
affecting the types of services covered by the governing laws.
Not only that but these merchants also need to be able to apply the correct tax rate to the
services they offer via their website(s) in real time.
4.3 Data retention

Digital service merchants with cross-border B2C supplies in the EU must - by law - store
transaction data for 10 years. The transaction data required includes information such as the
time and date of the transaction; the VAT/GST rate applied, and the amount of VAT/GST
collected.
When filing in Japan, digital service merchants are required to retain information regarding sales
in Japan. If they have any deductible tax, they will need both books and bills, etc. In principal,
books and documents related to the transactions should be retained for seven years after two
months of the tax period in which the merchant filed (i.e. seven years and 2 months and the
time between transaction and filing).
In Norway the VOES system requires transaction data must be stored for 5 years and, at the
Norwegian tax authorities' request, it must be made available electronically within three weeks.
In South Africa, the SARS requirement is for digital service merchants to store transaction data
for 15 years.
Table 2: Comparison of international digital tax data retention requirements
Tax authority
Data retention period
E.U.
Ten years
Japan
Seven years, two months
Norway
Five years
South Africa
15 years
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4.4 Invoicing
A consequence of new digital tax rules is the digital merchants must comply with all the legal
obligations around making a B2C sale in the country in question. This also relates to invoicing
requirements and it is another area which is inconsistent from region to region.
European Union
In accordance with EU VAT rules, invoicing varies from Member State to Member State. Indeed
a dozen EU Member States place no obligation on merchants to issue invoices.
Others do require invoicing: France, for example, requires merchants to issue an invoice for any
service supplied for more than 25.
Japan
For registered foreign businesses, when providing a Japanese business with B2C electronic
services, an invoice should state:
i.
ii.
iii.
iv.
v.
vi.
The name of the document issuer and its registration number

The date of provision of the services
The content of the services
The payment amount
Indication that the registered foreign business is liable for consumption tax
The name of the business (customer) receiving the invoice.
N.B.: Issuing an invoice electronically is acceptable. A registered foreign business has a duty to
issue such invoices upon the service recipients request.
4.5 Settlement
Every country also has its own rules on how settlement should be made, each involving varying
degrees of complexity.
In the EU, merchants need to file returns within 20 days of each business quarter, i.e. April 20
for Q1; July 20 for Q2 and so on. In Japan digital service merchants need to file returns once a
year and in South Africa, monthly filings must be made.
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4.6 Exchange rates

European Union
In the EU returns need to be made in a single reporting currency. Transactions that occurred in
another transaction need to be converted to the reporting currency. The exchange rate to be
used is the European Central Bank (ECB) rate on the last day of the quarter.
This exchange rate is the mid-market interbank rate which is not achievable by any bank, let
alone any retail customer. Depending on the size of the merchant this means that the merchant
has to pay an FX fees and charges of up to 5% on top of their VAT obligation (depending on the
rates and fees charged by their bank).
This cost comes straight off the bottom line of the merchant. In Taxamo we have come across
small non-EU businesses who have paid double the amount of tax owed in fees and bank
charges as was owed in tax in their efforts to remain compliant.
Japan
In Japan digital consumption tax returns need to be in Yen. Digital service merchants need to
convert foreign currencies using the Telegraphic Transfer Middle-rate (T.T.M.) from the day of
the transaction. The T.T.M. is a mid-market rate issued by the banks in Japan.
This means that the merchant carries an FX risk, in some cases for up to a year, if the merchant
does not regularly convert their tax obligations from the transaction currency back to Yen. This
FX exposure has the potential of significant costs for even large merchants.
4.7 File formats

The file format of the settlement return is another area that, even within the EU, has already
proven to cause problems for digital service merchants.
In the EU digital service merchants with B2C supplies face the prospect of producing settlement
files in half a dozen differing formats. These formats range from XML to Excel & .csv.
Merchants may have to code their systems to produce vastly different settlement report outputs
because individual Member State require them to do so.
In addition there is the added layer of complexity of a lack of automation within these file upload
systems. In many cases merchants must manually input data and then upload the correct file to
the relevant EU Member State system.
This illustrates how the aim of tax compliance simplification is still a one-sided affair. It may be a
simplified system for the tax authorities, but it is cumbersome for merchants making every effort
to comply. On a once a quarter basis this may be feasible for merchants, however as the
number of countries in which a merchant must comply increases the level of effort involves
quickly becomes unmanageable as the process is not automate-able.
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4.8 Conclusion
Today, we are in the infancy of digital tax, yet already we can see through just comparing the EU
and Japanese systems that differing approaches by countries to designing regulations causes
practical difficulties for digital merchants who wish to comply.
In the next section we will make some recommendations on approaches that countries could
take which would make it easier for digital merchants to comply with their regulations.
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5. Technical recommendations
The globalisation of the digital economy has led to tax jurisdictions worldwide seeking to
improve revenues by applying tax on the consumption of digital services.
However, no international digital taxation framework exists. A major obstacle to this
standardisation is that national digital tax laws are drafted in isolation and digital service
merchants then have to
code solutions that take
international laws into
account for their
platform(s). As
documented this
fragmented approach
results in conflicts and
mismatches.
Decisions to draft and
implement legislation,
while following OECD
guidelines, have been
taken unilaterally with
what seems like little or
no thought given to the
potential practical impacts
on foreign digital service
merchants complying with
various tax laws, each designed in isolation.
What is clear is that the vast majority of digital merchants want to be compliant. It is the job of
tax authorities to assist these businesses in this desire by coding their laws with the
practicalities of compliance in mind. To this end, what is required are international standards for
digital tax compliance that encompasses registration, collection and settlement remittance
process for merchants. This will make it easier for merchants to code compliance solutions and
make it easier for tax authorities to design regulations.
Taxamo has been at the coalface of this changing landscape and from market feedback we
have gained valuable insight into the problems that merchants face across the world. What
follows are recommendation for international tax authorities to bear in mind when designing
compliance portals and in drafting regulations in this area.
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Recommendation 1: Simplify registration

Here are a list of recommendations that would serve to make the task of compliance easier and
less costly for a merchant.
Registration should not require an agent.
Tax agents cannot be automated and the level of effort and cost required for a
merchant to assign a tax agent is often prohibitive. There will also typically be an
ongoing cost for filing. This does not lend itself to compliance.
Registration should be simple and provided in English, along with local language.
Registration should not look for information that is not absolutely required.
The more effort it will take for a merchant to gather information the less likely it will
be that they will register and comply.
Registration should include the URLs for which the business is responsible.
Businesses change and it is useful for the taxing authority to know what URLs a
business is registered for in order to manage audit etc.
Facility should be made for businesses who wish to register and regularise their
compliance position after the initial registration period.
Typically with the introduction of new regulations there will be an initial registration
period, in which all merchants are expected to register. From experience in the EU
it is clear that the majority of businesses worldwide probably will not be compliant
within this period. As part of the design of the registration process it should be
made clear how a business can regularise their position and become compliant
after the initial registration period. This could take the form of allowing a business
to register transactions for a previous period in the current taxing period. The
taxing authority may wish to enable this feature on a case by case basis so that
businesses can make good on fines or interest if they wish to avail of the service.
The business should be able to assign filing and settlement rights to third parties
in a way that is familiar to the business.
This is a key recommendation and it is expanded upon later. The key problem
here is that in and of itself, even when designed well, filing and settling with one
country is somewhat of an inconvenience; as more countries bring in this OECD
recommended, place of supply rule around the world, the level of effort increases
exponentially for all digital merchants. If the tax authority makes it easy for the
merchant to outsource this compliance work to a third party platform then they are
more likely to comply. To facilitate this, tax authorities need to consider how
practically a third party can easily be assigned this work.
Registration should be available via an API so that a business can provide details
from a third-party platform. Confirmation of details and final registration and
confirmation of passwords, etc. may be done on the taxing authoritys site by way
of confirmation of registration details.
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What is the idea of exposing registration via an API & enabling the merchant to easily
assign filing rights to a third party?
Digital merchants' platforms are typically a grouping of a series of off-the-shelf cloud-based
services and software combined in unique ways, harnessed to allow the digital merchant sell
their service. For example, the modern digital merchant may use a cloud-based shopping cart
platform which is hosted for them. Plugged into this may be various third party platforms
including inventory management platforms; payment service providers; accounting platforms;
analytics providers; advertising service providers, etc. Typically digital merchants outsource all
but their core business to the myriad of providers that service this market. This is simply the
most efficient way to run their businesses. Tax registration, filing, and settlement should be
viewed in the same context.
With this in mind, it is apparent that should countries make it easier for third parties to service
digital tax on behalf of digital merchants; the market will fill the gap that the absence of an
international MOSS system represents and facilitate digital merchants to comply in all the
countries that can be supported. If tax authorities approach the support of digital tax with this in
mind the levels of compliance should, as a consequence, increase.
In order to allow businesses assign filing (and possibly settlement) rights, tax authorities should
consider methods of assigning rights that are common among online third party platforms today.
One approach would be where businesses issue public and private key pairs (suggested size:
4096 bits), and register the public keys with a tax authority, verifying the key's authenticity and
receiving a unique business ID (e.g. tax number) as part of registration. A merchant also has a
right to revoke the public key from the tax authority, in case the key becomes compromised.
When communicating with tax authorities, messages are signed using private keys and the tax
authority can verify their integrity with a public key and the provided unique merchant ID. XML
messages can be used to standarize this integration even further.
External accounting software, ecommerce platforms, PSPs (Payment Service Providers), etc.
can have individual key pairs issued to the merchant that they use to register with the tax
authority. This means that in the case of a merchant ceasing to use the software, they can
safely revoke the key's permissions. The idea is that a merchant can easily assign (and revoke)
registration, filing and settlement rights to third party platforms. This has the added benefit that
the number of third parties that the tax authority will have to deal with will be lower and so the
cost of support should also be lower.
Making it easy for digital businesses to comply using their existing service providers will make it
much easier for digital businesses to comply with any given set of regulations.
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Recommendation 2: Standardize & Simplify filing

File Format
File formats should be in an easy to generate format. XML is typically one of the easier formats
that can be coded so that should be considered for support.
As described, in the absence of an international MOSS system - countries should look to thirdparty platforms as the way that businesses can handle their report filing.
Foreign exchange rate
For small merchants the cost of foreign exchange fees to settle an obligation may constitute a
significant additional fee to the actual amount being settled to the taxing authority. This foreign
exchange fee has to be borne by the merchant and represents a cost to their bottom line for
doing business in the country in question.
This cost to business can be mitigated by the taxing authority by using a reasonable rate to
convert the VAT amount from the transaction currency to the tax reporting currency. The rate
that ought to be used depends on the typical spread for the currency in question against major
currencies for retail customers in the major economies. This might, typically, be in the order of
between 2% to 5% above the interbank mid-market rate. It may be that the use of such a rate
may mean significant revenue increases for large merchants.
It may be that tax authorities could use mid-market rates, or interbank buy rates, for large
enterprise merchants while facilitating smaller merchants by offering the retail rate. This would
reflect the comparative costs to both in complying with these rules.
Date
The exchange rate that is used ought to be set as close to the settlement date as possible.
Converting transactions at the rate of the day of the transaction should be avoided because it
opens merchants up to significant currency exposure, unless the merchant converts the
transaction currency to the tax currency on a daily basis. In most cases this option is not
practical, and would add significant costs to the business.
Frequency
The recommended tax report filing periods for digital tax returns should be on a quarterly basis.
This frequency will align with international best practice as reflected in table 1, where Norway
and the European Union both require digital tax reports to be submitted on a quarterly basis.
International businesses operate to this quarterly calendar. It is in the fiscal interests of digital
service merchants to align their digital tax reporting to these existing business best practices.
The introduction of such a timeline will mean less upheaval to existing internal processes for
these merchants.
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Recommendation 3: Develop and introduce supporting APIs

An Application Programming Interface (API) is essential for a standardised international
framework for digital taxation.
APIs will make compliance less costly as they will provide a link (a digital handshake) between
the merchants and the tax authorities. There is no limit to the range of APIs that could be
developed for the purposes of international digital tax compliance, and Taxamo would
recommend the following:
A tax rate API
Tax authorities should have an API host which responds with tax rates when queried with
different product category codes (as described below).
This would mean that every tax authority would have a tax rate for every defined product
category code (most being at the standard rate) or a default tax rate for all eServices in cases
where any specific eServices do not attract a reduced rate.
An additional feature of this service should include the ability to query the next rate change for a
country, and a request for all current valid VAT rates (and upcoming dates for rate changes) via
the API.
International product category code definition for digital goods and services
Where a country has a reduced rate for some digital goods and services, these services should
be identified using an International Organisation for Standardization (ISO) category code.
This is so that a merchant who sells ebooks for example in one country can classify their service
as an ebook and query any given supported country with the same service identification code
and receive back the correct tax rate for that product or service.
The potential issue here is that countries would then need to define tax treatment for goods and
services against these category codes, which may in some circumstances differ from their
physical equivalent.
The alternative to this is a digital service merchant seeking local advice in every country they
supply to in order to understand what tax bracket their product, or service, qualifies for. This
again would drive up compliance costs for these merchants.
Foreign exchange rate availability
The exchange rate that ought to be used by the business for filing their transactions should be
made available to merchants via an API where the business requests a rate for a date and the
service responds with the rate appropriate for that date.
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A business validation service API where a reduced rate is to be charged in B2B

transactions
Where a tax authority does not require that tax be charged to a business, the tax authority
should make it straightforward for a business to validate whether their customer is a business or
not. A system such as the EUs VIES should be considered.
However, any such system should have industry standard Service Level Agreements (SLAs) for
service uptime, reflecting the critical role it has in the ability of business to conduct business on
the internet. From Taxamo's experience in the EU, the reliability of such a system is critical to
the success of any merchant compliance solution.
If tax authorities impose a requirement for a business to comply with a rule there is a duty on
that tax authority to enable the merchant to comply with those regulations.
Recommendation 4: Require two pieces of evidence to determine

place of consumption
There are in effect two options to consider here:
Require one piece of evidence to determine customer location.
Require two pieces of non-conflicting evidence to determine location.
Taxamo recommends that two pieces of non-conflicting evidence be used. The reasons are
because such an approach:
Reduces the possibility of fraud
This increases certainty for merchants.
This makes it more likely that the correct tax amount is collected for the tax
authority.
Most evidence is not validated by a third-party so it is easy for customers to game
the system (e.g. in most countries the billing address for credit card transactions is
not validated as part of the transaction so the customer is free to put in whatever
country they wish).
Easier for merchants to implement
Many merchants who wish to comply with tax rules have already put in place a
system to comply with EU regulations, so the task of looking for two pieces of
evidence will already have been addressed by merchants.
Merchants have to code logic on how to determine the governing law for any
given transaction. It is difficult to code logic that requires two pieces of evidence
for the EU and one piece for other countries (see text below). This will be the
position that most merchants will be in.
Exploration of current situation where both two pieces and one piece required to
determine location of consumer
Consider that any online merchant who will look to comply with a digital tax regulation will likely
also be complying with the EU regulation.
This means that they will likely have some way of getting two pieces of non-conflicting evidence.
19
Also consider another scenario, if a country has the requirement for one piece of evidence to
identify the location of a consumer then - in practice - merchants who comply with EU
regulations will still look for two pieces of evidence to confirm the location of the consumer.
Lets take the example of two countries, e.g. Mexico & Honduras, bringing in digital taxation
rules requiring one piece of evidence to be sufficient to identify the location of a consumer. Lets
say that they accept the billing country, IP address, and credit card Bank Identification Number
(BIN) as being pieces of evidence.
Lets also suppose that the business also supports the EU regulations, so they are looking for a
minimum of two pieces of evidence where there is evidence that it may be a European
transaction.
Here are some additional scenarios:
In this example:
Mexico (for example purposes only) has stated that one piece of evidence is required, for
example the billing country, or other appropriate evidence, is to be used to identify the
country of a customer.
Honduras (for example purposes only) has the same standard of proof, where one piece
of evidence is required, for example the billing country or other appropriate evidence is to
be used to identify the country of a customer..
Germany uses the EU regulation requiring two pieces of non-conflicting evidence.
Table 3: Evidence scenarios used to identify consumer location
Data
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Scenario 5
Mexico
Germany
Mexico
Mexico
Germany
Germany
Mexico
Germany
Honduras
Germany
BIN
(only utilised where
there is EU
conflicting evidence)
Mexico
Mexico
Germany
Identified country
Mexico
Mexico
Germany
Germany
Billing country
IP
The logic table that a merchant would have to implement to determine governing tax law would
be something similar to above. The key things to note here are that because the EU regulations
are being complied with, and because they require two pieces of evidence, they might
reasonably trump the requirement for only one piece by the Mexican regulation because the
level of proof is greater.
For example see scenarios 1 & 2. The merchant wants to comply with EU regulations which
require that two pieces of non conflicting evidence be gathered to determine the location of the
20
customer. Here the merchant picks up two pieces of evidence, one suggesting the customer is
in Mexico and one suggesting he is in Germany. In order to comply with the EU regulations the
merchant looks for a third piece of evidence as their customer could be from Germany. This
third piece of evidence suggests they are from Mexico so the merchant identifies the merchant
as being Mexican. In effect here the business is using the two non conflicting pieces of
evidence rule for a country which only requires one piece of evidence.
See scenarios 1 & 3. In scenario 3 the merchant has a call to make as he has sufficient
evidence to suggest that the customer is both from Mexico (based on Mexican rules) and
German (based on EU rules). Here the merchant must make a call and would on balance
probably identify the consumer as being German for scenario 3 even though the threshold of
proof is met by both Mexican and EU regulations. The reason the merchant might reasonably
choose Germany as the country of taxation here is because on a practical level there is more
evidence (two pieces) that suggest that the customer is from Germany for scenario 3.
In both these scenarios, from a Mexican regulations perspective, where only one piece of
evidence is relevant and where the billing country of the customer is described as the key piece
of evidence, the two transactions are identical because they both identify the billing country as
Mexican. However in both cases the merchant identifies the taxing location to be different. In
this scenario Mexican regulations are secondary to EU regulations because the standard of
proof is lower. This can cause problems when it comes to potential audit down the line and puts
the business in a position of uncertainty. The merchant may reasonably decide to not do
business where such uncertainty exists.
See Scenario 4. Here one can see a problem because the merchant has picked up sufficient
evidence to suggest that a customer is from two countries, with similarly low standards of proof.
The merchant is put in a position of uncertainty because he has to make a call. On what basis
does a merchant make this call? Is it based on case history within both the countries in
question? Is it based on what evidence is hardest to conduct fraud on? This leads to uncertainty
and business does not like uncertainty.
See Scenario 5. This is the two pieces of evidence regulation in play. It provides certainty and
the merchant can code this scenario relatively easily.
Recommendation 5: Do not require sensitive information to be stored

We recommend that tax authorities do not require sensitive information that identifies the
consumer be stored to comply with regulations.
Sensitive information includes the consumers first and last name, and their full home address.
Other location proxies may not be considered sensitive and may be stored.
Remember: by requiring businesses to store sensitive customer data about your citizens you
are making these businesses targets for attack and are putting the identities of your citizens at
risk. Be sure there is a valid reason behind making business store this information because
once it is compromised this question will be raised again.
21
6. About Taxamo
Taxamos global digital tax solution enables digital service merchants to comply with new
international digital tax laws.
Its one simple integration meets the requirements of international digital tax laws on tax
calculation, reporting, and invoicing. It also offers merchants a simple, cost-effective, and
reliable way to stay compliant.
Taxamo launched with an EU VAT solution in January 2015 and has since expanded to support
U.S. sales and use tax, Japanese consumption tax (JCT), and South African digital VAT, with
further regions to be introduced before the end of 2015.
Working with international Tax Authorities
Taxamo has gained a wealth of experience and knowledge relating to the dissemination and
communication of international digital tax rules. Taxamo CEO John McCarthy (LinkedIn: https://
ie.linkedin.com/in/jfmccarthy1) has actively participated in a number of industry and government
events, representing both the merchant community, and as a technical solution provider.
Over the past 24 months, Taxamo has worked with European tax authorities to bridge
communication gaps and communicate directly with digital service merchants.
Taxamo has previously published a White Paper specifically on this topic (https://
www.taxamo.com/white-paper-taxing-digital-services/).
Government officials and/or tax authority representatives who would like to learn more about
Taxamo's role in communicating with digital service merchants should contact Taxamo on
hello@taxamo.com. Emails will be brought to the direct attention of John McCarthy.
22

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Standardizing International

Digital Tax Compliance

A Taxamo White Paper

3. Challenges for digital tax legislators

4. Complexities created by new digital tax laws

4.1 Registration and filing

4.2 Tax calculation

4.3 Data retention

4.6 Exchange rates

4.7 File formats

Recommendation 1: Simplify registration

Recommendation 2: Standardize & Simplify filing

Recommendation 3: Develop and introduce supporting APIs

Recommendation 4: Require two pieces of evidence to determine place of consumption

Recommendation 5: Do not require sensitive information to be stored

3. Challenges for digital tax legislators

4. Complexities created by new digital tax laws

4.1 Registration and filing

Online Tax agent

4.2 Tax calculation

Step 1: Determine the governing law of the transaction

Customers billing address

Step 2: Ensure sufficient evidence is collected to comply with governing law(s)

4.3 Data retention

Data retention period

Seven years, two months

The name of the document issuer and its registration number

4.6 Exchange rates

4.7 File formats

Recommendation 1: Simplify registration

Recommendation 2: Standardize & Simplify filing

Recommendation 3: Develop and introduce supporting APIs

A business validation service API where a reduced rate is to be charged in B2B

Recommendation 4: Require two pieces of evidence to determine

Recommendation 5: Do not require sensitive information to be stored

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