By Tim Cook
Tax Automation, Localization, Billing & Revenue Management
As companies expand their offerings into “as-a-service” formats, it removes many of the traditional limitations of location-based commerce. By extending their offerings online, barriers are lifted, naturally creating opportunities for market expansion on a global scale. But are companies, and their billing and accounting systems, prepared for a shift to globalized commerce?
While there are many things to consider when gauging your company’s globalization readiness, not all are of equal importance. I believe the three most pressing considerations are Tax Automation, Localization, and Billing.
Tax Automation – VAT Automation
How VAT Numbers Affect VAT Collection
Countries that collect Value-Added Tax (VAT) assign VAT numbers to each organization and use them to track compliance with paying and collecting VAT. In the European Union (EU), for example, all 28 member states of the EU fall under one coordinated VAT system that includes complex requirements for purchases made in and outside of the business’ home country
EU businesses only pay VAT upon purchase for transactions within their home country. If an EU business makes a purchase from a different EU country, they are exempt from VAT at the time of purchase and delay VAT payment until their own tax filing in their own country. Due to this exemption-at-time-of-purchase rule, merchants must validate the truth and accuracy of VAT numbers to prevent incorrectly issuing any invoice without VAT.
Validation Through VIES
To enable correct VAT invoicing, your business billing platform must allow you to collect a VAT number from any country. Your billing platform then needs to be integrated with the European Commission’s VAT Information Exchange System (VIES) for validation of EU VAT numbers. The VIES is the only means of validating a VAT number, and it is not possible to access the individual country VAT number databases directly.
When VAT Numbers are Validated
VAT numbers should be validated frequently and upon most billing actions. Whenever a VAT number is added or updated to an account, at each billing event, or if an invoice is created more than six months from the last time the VAT number was validated, your system should re-validate the VAT. Here are the key validation points:
- Adding or editing Billing Information
- Adding or editing Account Information
- Creating or renewing Subscriptions
- Creating one-time charges
By properly validating customer VATs through integration with VIES and by validating at multiple account and billing touchpoints, your billing system can help ensure compliance with VAT regulations and prevent underbilling of VAT for in-country customers.
Another major consideration for global commerce is the localization of languages and currencies to enable you to operate effectively in areas where the native language and currency of your business is not prevalent.
To be effective, language localization must be reflected on all documentation templates including quotes and invoices, as well as in contract details. Even if other languages are secondary in your product, they should feel native during the sales process, giving the customer the confidence to buy your product. But that’s not the only time localization is important.
Localizing Your Portal
An additional place you should consider language localization to enhance user experience is in your customer portal. Within the portal, it is relatively easy to manage the labeling of fields, however localizing the data populated in those fields from your primary data source can add significant complexity, making a full language localization of your portal much more challenging. But if done well, localization of your portal can be a true differentiator for attracting and retaining global customers.
Currency localization is typically managed with separate price plans for each currency. These price plans can be fixed or can be pushed through a currency conversion process at the time of the transaction. For simplicity, I recommend you consider only updating price plans once or twice a year. I also recommend setting up automated currency conversion after the transaction to convert to a common currency for accounting purposes.
Billing & Revenue Management
Global organizations often operate across several business entities using separate general ledgers for each entity. Automating revenue recognition within an organizational hierarchy like this should be part of your initial planning as you address a global marketplace.
Some key questions to ask yourself are:
- Can international business subsidiaries generate local invoices?
- Can business, revenue, and tax rules be defined and managed based on geography?
Consider whether your billing platform can handle local payment methods in each target geography. Some key questions here are:
- Can your system handle both incoming and outgoing payments in each geography?
- Can your payment infrastructure handle multiple payment gateways?
You should also determine if revenue is going to be recognized and reported locally, or globally, or both. With this decision in hand, you can determine whether your current billing and revenue recognition systems have the capability to handle ongoing and historical currency conversion rates.
According to MGI Research
According to a recent study by MGI Research, the friction of global payment management often leads companies into a well-hidden financial black hole – Revenue Leakage. MGI defines revenue leakage as the gap between what a company is entitled to under the rules of a contract and what it actually is able to invoice for and collect.
MGI Research estimates that in North America, revenue leakage averages between 3% and 7% of annual revenues.
MGI Research estimates that for the planning period of 2020 to 2025 international revenue leakage will on average be at least 50% higher than domestic revenue leakage.
MGI Research expects that between 2020 and 2025, organizations that modernize their global monetization systems and adapt best practices will see a 30-40% reduction in revenue leakage domestically and 50-60% reduction in revenue leakage internationally.
While the “as-a-Service” delivery model makes global market expansion accessible in ways it never was before, companies should plan their global expansion carefully to avoid numerous potential challenges. By focusing on Tax Automation, Localization, and Billing, you can address three critical concerns to ensure tax compliance, help attract local customers and reduce revenue leakage. In fact, MGI predicts that companies who modernize their monetization systems to prevent revenue leakage in international sales can reap significant rewards by reducing leakage in their domestic businesses too.
Getting it Done
B2B Subscription Billing platforms can help globalizing companies to fill critical gaps in their billing and global payment management systems. They also enable companies to implement effective tax automation by integrating with VIES and simplify localization of online assets like customer portals. These platforms can be configured to work with most implementations of mainstream business software, and platforms like BluLogix have “out of the box” integrations with VAT solutions like Wolters Kluwer, with its vast ecosystem of localized global applications.
Webinar: November 12, 2020 at 12:30 EST – Preparing for a XaaS Global Push – CCH SureTax – Wolters Kluwer / MGI Research / BluLogix
Tim Cook is Founder and Recurring Revenue Evangelist of BluLogix.