Tax Management Strategies

In any payment processing system, handling Taxes correctly is crucial. That's why Payiano built the Taxes system to help you overcoming that hassle. Taxes can be applied in various ways, typically as a flat amount ( FLAT Tax ) or as a percentage of the charge value ( PERCENTAGE Tax ). The choice of tax type and rate often depends on legal requirements, the nature of the product or service, and the geographical location of the charge.

When establishing a tax strategy for a charge you have the option to specify a particular approach, or a default strategy will be automatically employed. This choice influences the presentation of tax to the purchaser. Opting for an exclusive tax strategy results in the tax being appended to the base amount of your charge. This approach is frequently employed in business-to-business ( B2B ) charges. Conversely, choosing an inclusive tax strategy ensures that the total amount payable by the buyer remains constant, irrespective of variations in the tax rate. This method is often adopted for business-to-consumer ( B2C ) sales in numerous markets.

When setting up tax strategies, it's important to be aware of the legal tax requirements in each region where you operate. Tax laws can be complex and vary significantly, so consulting with a tax expert or legal advisor is recommended to ensure compliance. This documentation aims to provide a comprehensive overview of handling Taxes in payment processing systems, catering to both flat and percentage-based tax models.

Flat Taxes

• Definition: A Flat Tax is a fixed amount added to the charge, regardless of the charge's value. This type of tax is simple and straightforward.
• Common Usage: Flat taxes are often used for specific items or services where the tax amount does not need to scale with the price. Examples include environmental fees, fixed regulatory charges, or per-item Taxes on goods like fuel.
• Advantages: The primary advantage is simplicity and predictability. The tax amount remains constant, making it easier to calculate and understand for both the seller and the buyer.

Percentage Taxes

• Definition: Percentage Taxes are calculated as a certain percentage of the charge value. This means the tax amount varies in proportion to the price of the goods or services.
• Common Usage: This tax type is widely used in sales tax ( SALES_TAX ), Value Added Tax ( VAT ), and service tax ( SERVICE_TAX ) scenarios. The rate is often set by government policy and can differ based on the product category or region.
• Advantages: Percentage taxes are equitable as they scale with the charge value. Higher-priced items incur more tax, aligning the tax burden more closely with the ability to pay.

Tax Strategy Implementation

- Implementing a Default Tax Strategy ( Advised )

When integrating tax handling into a payment system, it's essential to provide flexibility to accommodate different tax requirements. This includes allowing for both flat and percentage taxes, sometimes even within the same charge. Here are some key considerations:

• Inclusive: In this model, the tax is already incorporated within the charge. For instance, if a product is priced at 100 USD, the final amount charged to the customer remains 100 USD.
• Exclusive: Here, the tax is added to the base charge. For example, a product priced at 100 USD, with an applied tax rate of 10%, would lead to a final charge of 110 USD. (Note: Tax rates may vary – this is a simplified illustration.)
• Inferred by Currency: The tax strategy is determined based on the currency of the charge.

- Defining Tax Strategy for an Individual Charge ( Optional )

You have the flexibility to set the tax strategy for each charge while creating it via the Dashboard or the API. When formulating a charge, you can assess how your pricing structure affects your revenue.

Example

This table compares the exclusive and inclusive tax strategies, showing the base charge, flat tax, percentage tax, total tax, and the total charge for a $100 charge. This comparison demonstrates the impact of choosing either an exclusive or inclusive tax strategy on the final amount payable by the customer. In the exclusive strategy, Taxes are added to the base charge, resulting in a higher final price. In contrast, the inclusive strategy absorbs the Taxes within the total charge, maintaining a consistent end price for the customer.