11 Important Tax Terms Techies Should Know

IT professionals know stuff other people don’t.

(If you’re a tax pro who doesn’t work in IT, you can stop reading. May we recommend these TaxTech tips instead?)

Certain words and phrases – like “API” or “cloud strategy” – don’t mean much to those folks on the finance team, but are integral to getting your job done. Conversely, if you’ve ever heard tax pros speak, it probably sounds like another language. What are CTCs and how are they different from DRRs? Is a “tax on digital services” the same as a “digital services tax”? What about VIES?

If you’re tasked with building or managing tax solutions, it’s imperative that you understand the basics of what they’re talking about. That’s why we’ve created this (abbreviated, but handy!) guide to terms you’ll be hearing quite a bit if you need to work with your company’s tax team.

Glossary

B2B / B2C

On the surface, this seems simple: B2B refers to a business selling to another business, while B2C refers to a business selling to a consumer. But tax law globally requires you to throw out your general assumptions and look at the letter of the law. The law often spells out when businesses are able to treat someone as a business, or when they’re able to treat someone as a consumer.

Let’s look at an example. Some tax authorities globally say that, “If you’re a person and do not possess a VAT number, you may not treat your transaction as a B2B transaction.” Whereas others (particularly in Europe) say, “You can treat a transaction as B2B if you have other alternative evidence that the person you’re dealing with is a business.” (We’re simplifying things a bit here, as otherwise we’d have to spend time talking about the definition of a “taxable person.”) In short, it might mean providing their registration number, or it may require your customer to prove that they’re conducting an economic activity. Ultimately, it’s up to the specific tax authority in that jurisdiction to determine whether the transaction is between two businesses or a business and a consumer.

Whether a transaction is B2C is more nuanced than you might believe, as well. For example, a marketplace (like an online auction site) must know whether the transactions on their platform are B2B or B2C because it determines when the platform is responsible for tax obligations or when the underlying individual is. As stated before, businesses must understand the legislation in the jurisdictions they’re operating in, as that will determine the tax treatment of a given transaction.

Continuous Transaction Controls (CTC)

Originating from Latin American countries, including Chile, Brazil, Mexico, and Argentina, CTCs are mandatory real-time reporting and clearance obligations designed to reduce fraud and promote transparency of B2B transactions. This is also gaining popularity in the EU, as Italy introduced CTC in 2019, and is now looking to expand its regulations to include cross-border transactions. Over time, the scope of CTCs has also been extended to other transaction types, including B2C and B2G (business to government).

Digital Reporting Requirements (DRR)

These requirements are becoming more common globally as tax authorities are moving towards transaction-based real-time controls. A recent prominent example are the new DRRs outlined in the VAT in the Digital Age proposal from the European Commission, which likely will become a template of sorts for other countries to enact similar rules. As DRRs will be rolled out over time, it will take quite a bit of planning and IT resources for digital businesses to keep up with the changing landscape of reporting requirements.

Directive on Administrative Cooperation 7 (DAC7)

DAC7 is the seventh iteration of the EU Council Directive on Administrative Cooperation in the field of taxation. It introduces regulations that apply to business activities on Digital Platforms and has two main purposes: support tax transparency and prevent tax evasion and avoidance.

It also acts as a way to standardize data reporting requirements for all Platform Operators across the EU, lightening the administrative burden for those businesses that are active in EU Member States. Building an information exchange between tax authorities further simplifies things for Digital Platform operators, as it means they’ll also be able to meet their reporting obligations in a single member state for the entirety of the EU.

For more details on DAC7, consult our essential guide.

Fiscalization

This is shorthand for a process that allows validation of a single transaction by a local Tax Authority. It allows them to record the amount of taxes a business owes the government, and aims to reduce fraud.

Input tax / Output tax

Output tax is the VAT/GST or sales tax that you calculate and charge on your own sales of goods and services. Output tax is paid to the government..

Input tax is the tax others charge you. It’s typically included in the price of taxable goods or services you buy for your business.

Marketplace (facilitator) rules

These rules say that Marketplaces and Digital Platforms connecting buyers and sellers are responsible for collecting taxes on transactions and remitting them to the tax authorities. Essentially, the Marketplace acts as if it is the seller of the goods or services when it comes to taxes.

In the US, such rules are commonly referred to as Marketplace facilitator rules. While in other countries some people may refer to these rules as “deemed reseller” rules. Be aware that this is not the same.

One-Stop Shop (OSS)

In the not-so-distant past, it was daunting for growing companies selling goods and supplying services to final consumers (B2C) throughout the European Union (EU) because they would need to register in each individual Member State.

The OSS simplified VAT obligations for such businesses allowing them to register for VAT in just one EU Member State rather than in all the 27 (or wherever the sales are made).

OSS also allows businesses to declare and pay the VAT due on all these sales of goods and services in a single quarterly electronic VAT return – and make a single payment of the declared VAT for all the transacted EU countries.

Reverse charge

If your company operates in a VAT/GST regime, you may already be familiar with this term. In its most basic form, a reverse charge reverses the obligation to charge VAT from the supplier to the customer. Normally, the obligation to charge VAT rests on the person selling the goods. A reverse charge reverses it on to the buyer to charge VAT to themselves and then remit it to the appropriate tax authority.

Types of reverse charges

There are different types of reverse charges, including a domestic reverse charge and the cross-border reverse charge. The latter is used to simplify doing business for international companies – especially ones in the EU. If one company is selling to a business customer in another country, it doesn’t force the seller to register in that country, charge VAT, and then remit it. Instead, it reverses the obligation to charge taxes to the buyer.

Reverse charges help both companies and tax authorities. For companies, instead of paying VAT on a product/service and then waiting for the government to reimburse them (which can take upwards of three months and beyond), there is no negative cash flow with a reverse charge. Instead, the company can declare the funds to the government and the government can give them the thumbs up to reclaim it. No waiting period.

For tax authorities, the reverse charge helps them fight fraud. As it costs the EU an estimated EUR 50 billion in losses per year, tax authorities globally have good reason to close the loopholes that fraudsters use to “avoid the payment of VAT or by fraudulently claiming repayments of VAT from national authorities,” according to Europol. You can find an in-depth analysis of how and why supply chain fraud happens here.

Tax Authority (TA)

Sometimes stylized as TA, this refers to the Tax Authority or tax governing body of a country. For example, this includes the IRS for the US, the ITD for India, or the SDI for Italy and Germany.

Tax Identification Number (TIN)

While Tax Identification Number is a broad term, it applies to all kinds of tax numbers. For example, a TIN encompasses everything from the Argentinian CUIT to the GSTIN in India. It can cover corporate VAT numbers as well as Social Security Numbers. In a hierarchical sense, it’s an overarching umbrella term for all these types of unique identifiers that are given to a taxpayer (be they an individual or a company) and can be used for identification.

Here are some common types of TINS:

• Social Security Number: This unique number is given to American citizens at birth, and many businesses use it to identify individuals.
• VAT & GST number: A number which identifies the taxpayer from a VAT or GST perspective, and can be provided to both companies and individuals.
• Corporate Income Tax Number: A tax number used to identify companies, it’s like a Social Security Number for legal entities.
• Business Registration Number: This number is also used to identify businesses.

For more information about TIN numbers and how to validate them, consult our essential guide.

VAT Information Exchange System (VIES)

Commonly known as VIES, the VAT Information Exchange System was developed to help companies verify individual VAT numbers across the EU. Importantly, VIES is not a separate database, but rather a portal which connects to local EU databases. Databases with VAT numbers are not maintained in VIES but by national tax administrations.

While it’s an essential tool for digital businesses, we’ve written extensively about the VIES system’s numerous shortcomings here, and offer solutions to help.

VAT, GST, and Sales Tax

Value-Added Tax, commonly known as VAT, is a consumption tax added at each stage of the production of a product, or a service. This is the common term used to describe this form of consumption in countries globally and especially across Europe.

The Goods and Services Tax, or GST, is another name for VAT. It is primarily what a consumption tax is called in Southeast Asia and Canada.

Be aware that Government Sales Tax (sometimes also abbreviated to GST) is not the same as VAT or Goods and Services Tax! Confusing, right? Sales Tax, unlike Value Added Tax, is collected by the retailer when the final sale in the supply chain is reached. The best known country with a Sales Tax regime is the United States.

How Fonoa Can Help

Fonoa is a global tax automation and compliance solution provider that helps companies automate their tax processes in a digital, borderless economy.

We sit at the crossroads of tax and technology – and have specialists on both sides of this fence. Our ability to communicate complex concepts simply and clearly enabled us to build industry-leading products, including:

Lookup: Instantly validate tax ID numbers from 95+ countries. We make batch processing easy, too. Lookup also ensures you’re applying the correct tax rate for every transaction.

Tax: Instantly determine the tax treatment of your transactions globally using Fonoa’s flexible and customizable tax engine. Our easy-to-integrate solution automatically keeps track of changing rates and rules to help your business stay compliant.

Invoicing: Issue tax invoices in locally compliant languages and formats, with support for third-party or self-billing. They’re customizable, as well.

Reporting: Report transactions in real-time and keep up with evolving cross border and local reporting requirements, all with a single API. Our Dashboard also offers unprecedented visibility of reported transactions globally.

Returns: Automatically prepare, review and submit VAT/GST returns everywhere your business has to. Assess the accuracy of your returns, eliminate errors, and get notified of potential issues automatically.

Data Sharing: Meet quickly evolving transparency laws aimed at digital platforms and securely share tax data across multiple countries. Fonoa automates the complexities around compliance across the globe, helping digital businesses affected by data sharing obligations like the EU’s DAC7 or Austria’s reporting obligation for digital platforms.

Speak to a member of our sales team today and learn how Fonoa can help your business automate global tax compliance.