Value-added tax (VAT)

A value-added tax (VAT) is a transaction tax charged on the increase in price or value of a product during each level of production or distribution. As a result, the supply chain often passes on the VAT, and therefore the supply chain ultimately charges the VAT to the final purchaser. Some VAT may be reclaimed on materials and supplies used to create or make additional products or services.

The VAT differs from sales tax in that it is a tax on the final consumption of goods and services, not a tax on the total value of the goods or services. VAT is charged as a percentage of the price of a product or service.

How Digital River calculates VAT

This topic outlines how Digital River calculates, charges, and invoices VAT for stores. Digital River has implemented a third-party tax solution to calculate and charge VAT on orders with taxable supplies.

In most cases, Digital River is the Seller of Title (SOT) for orders where VAT is charged. This is because most clients use Digital River’s taxing profile, which contains Digital River’s VAT registrations.

The system runs tax calculations using Digital River as the SOT unless you specifically set up the site/store to use a different taxing profile. The system automatically calculates and charges the appropriate tax for purchases based on several factors:

• Product Tax Code
• Merchant Nexus (Location)
• Shopper Ship-To Location
• Ship-From Location
• Other Merchant Registrations

On many Digital River stores, the stores initially display VAT rates to shoppers using the locale chosen by the shopper on the store. For these sites or stores, the VAT displayed on the store and the VAT charged when the order is completed may differ, depending on the situation.

When a shopper enters their billing and shipping information on checkout for this store, the system recalculates the VAT to show the rate appropriate for their actual location. For physical products, the system may use the shopper’s shipping address to determine the VAT rate. For downloaded products, the system may use the shopper’s IP address and/or billing address to determine the location and the appropriate VAT rate.

Estimated VAT vs. VAT Inclusive Pricing

For products that require VAT, you can choose one of the following pricing models to follow:

• Estimated VAT Pricing—Set prices with VAT excluded. The shopper sees the product price and a separate estimation of VAT based on their locale. The store shows a disclaimer stating that the VAT is estimated at this point. When the shopper enters the billing and shipping addresses for the order, the system calculates the VAT and shows it on the order summary page before the shopper authorizes the purchase. As a client with this pricing model, you always receive the same revenue share (margin) per product sold.

• VAT Inclusive Pricing—Set prices with VAT included. The shopper sees the product price with VAT included. When the shopper completes the purchase, the system lists the VAT on the invoice for the order. With VAT inclusive pricing, the shopper experience remains unchanged as they see the exact product price (with VAT) at the time they add the product to the cart and during checkout. However, as a client, you may not always receive the same revenue share (margin) for each product sold as the price list controls the VAT for the store and may differ slightly.

The pricing model you choose depends on where the tax must be charged and collected. Some jurisdictions (for example, the EU) require you to set pricing with VAT included so you should contact the appropriate tax authority before deciding on a final pricing method. The main difference between VAT inclusive and estimated VAT pricing is the shopper experience.

If you are unsure whether you should set pricing with or without VAT included, ask yourself which of the following is most important to you:

• Do you want the shopper to see the exact price for a product when VAT is required? If yes, you should use VAT Inclusive Pricing.
• Do you want to always receive the same revenue share per product sold and spend less time managing your product pricing? If yes, then you should use the Estimated VAT Pricing.

How countries charge and collect VAT

Several countries worldwide charge and collect VAT. The rules about when to register, what to charge, how to collect, what to file with the government, and so on, vary from country to country.

This topic provides a summary reference only. For current information on VAT in the EU, visit the HM Revenue and Customs website at www.hmrc.gov.uk.

VAT registration

Generally, anyone that sells goods and services over the registration threshold Value added tax term. The limit (value) of taxable turnover at which entities must register, collect, and remit VAT. For example, at the time of this printing, the registration threshold in the UK was £85,000. for a country must register for VAT in that country. Registration in one country does not preclude registration in another country.

Businesses and sellers can apply for a registration exemption if the value (taxable turnover Value added tax term. The total value of taxable supplies, less exempt supplies., or sales) of the taxable supplies Value added tax term. Goods and services that should be charged VAT at any rate (standard rate, reduced rate, and zero-rate). does not exceed the specified limit for the country, or if most or all of the taxable supplies are zero-rated.

Digital River is registered for VAT in several countries inside and outside the EU and will act as the Seller of Title (SOT) Value added tax term. The entity who has registered for VAT and will collect the tax on purchases. In most cases and for most clients, the SOT is Digital River. for clients. If a client wants to act as the SOT, they must register for VAT themselves. However, most clients elect to use Digital River as the SOT to simplify the process. Digital River will then register, collect, and remit VAT tax paid on orders placed with that client.

Reduced rate and zero-rated supplies

Depending on the country and taxable supplies sold, a reduced rate Value added tax term. The reduced rate collected for VAT in a particular country. For example, at the time of this printing, the reduced rate in the UK was 5%. or zero-rate (0%) Value added tax term. The VAT rate of 0% used for some taxable supplies. VAT may be used.

Reduced rate supplies are taxable goods and services that have a lower percentage VAT rate than the standard VAT rate. The percentage varies by country, and in some cases, by the taxed item. In the UK, the reduced rate is 5% (at the time of this printing) for goods and services such as domestic fuel or power, renovations or alterations of dwellings, women’s sanitary products, and children’s car seats.

Zero-rated supplies are taxable goods and services that currently have a 0% VAT rate. In the EU, some examples include most foods, newspapers and books, children’s clothing and shoes, public transportation services, and exports.

Exemptions

Some goods and services do not require that you charge a VAT. These goods and services are exempt supplies Value added tax term. Goods or services (taxable supplies) that are exempt from VAT. Exempt supplies are not part of your taxable turnover.. Exempt supplies are different from zero-rated taxable supplies even though you are not required to charge a VAT for zero-rated taxable supplies either. The difference lies in the purchasers’ ability to reclaim VAT paid on materials used to make any exempt supplies they sell, or on services that are exempt.

When a shopper goes through checkout in your store, and the order contains taxable supplies Value added tax term. Goods and services that should be charged VAT at any rate (standard rate, reduced rate, and zero-rate)., text fields will appear where the shopper can enter their company information and VAT registration Value added tax term. The process by which a business or individual becomes registered to collect and remit VAT in a country that imposes VAT. number. When the system verifies the registration, the system removes the VAT from the order.