International Payments and VAT: Facts In case you are doing cross-border business and accepting international payments, you must be aware of these rules
By Mukesh Sahu
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International payments or cross-border payments are financial transactions that involve more than just banks. They connect companies, individuals, banks and settlement institutions operating in more than one country with different currencies that need to be paid. For example, if A in London sends money to Y sitting in India, this is referred to as international payment.
International payments processes
Ordering customer: The ordering customer is either an individual or an entity, or a financial institution, who tries to make an international payment to an overseas beneficiary. For instance, an ordering customer can be you, or a company you own that wants to buy a service from a marketing company in another country.
Intermediary institution: Most banks do not offer or buy foreign currencies. Instead, banks pass on detailed information about who the recipient is, what his/her bank account number is, and how much money he/she is receiving to financial intermediaries. After that, your bank settles the payments on the back end.
Beneficiary customer: The beneficiary customer is the person or company to whom you are making an international payment and also the final entity involved in the international payment. Beneficiary customers receive their money through financial institutions or banks with which they have an account.
Types of International payment methods
Trading in commercial goods involves a certain amount of risk. Whether you are a buyer or seller, you are bound to be exposed to some risks while carrying out international transactions. Largely, the amount of risk involved depends especially on the payment method one uses.
There are many international payment methods for importers and exporters worldwide. And as the world continues to globalize, there is an increase in international payment modes, as well.
Key international payment methods used globally
Cash in advance: Also known as pre-payments, this is when a buyer completes the payment and pays the seller in full before the merchandise is delivered and shipped off to the buyer. There are several cash-in-advance payment modes available, but credit card payment and wire transfers (electronic payment via banks) are the two most commonly used methods.
Letters of credit: This is one of the most secure international payment modes for importers and exporters since it involves reputable financial institutions, such as banks as the intermediary and an assured level of commitment from both parties.
Documentary collections: In this process, both the buyer's and seller's banks act as facilitators of the trade.
Open account: It proves to be an extremely attractive option for buyers, especially in terms of cash flow because it is all about merchandise being shipped and delivered before payment
Consignment: This process is similar to that of an open account where payment is completed only after the receipt of merchandise by a buyer
What is VAT?
Value-added tax (VAT) is an indirect tax that is levied on goods and services with added value at each production point or distribution cycle—from raw materials to the final retail purchase.
The VAT includes the charges for the shared service and infrastructure provided by a certain state/country. For instance, if your business is based in India and you wish to sell your product/service in the US since you have a consumer base in the US, too. For this, you have to be thorough about the workings of banks, financial laws for businesses, taxes, and so on, because the VAT that you pay might be recoverable via refunds. However, the VAT that you charge from consumers for your offerings must be remitted to the government to comply with the foreign taxation rules.
Therefore, in case you are doing cross-border business and accepting international payments, you must be aware of the following: in-depth information about the intricacies of the VAT landscape in the respective countries; registration and compliance for VAT; the feasible and justifiable VAT on your offering; the remittance to the government is based on the law; and keep tax records (especially if you are not a native of the country) and always pay the dues.
