Tech start-up of the week: Taxamo

16 Feb 2015

Our tech start-up of the week is Taxamo, a Kerry-based company that uses a software-as-a-service (SaaS) model to provide an EU VAT compliance solution to digital service merchants.

The rules for compliance changed on January 1, 2015. Companies that supply digital services (e.g. image, video, or game downloads; web hosting; data warehousing, etc) must now collect two pieces of evidence proving where their EU customer is located.

“These companies must do this in order to apply the correct VAT rate and to collect the appropriate VAT amount from online customers,” explained Taxamo CEO John McCarthy.

“There are additional compliance obligations around reporting, VAT invoices, storing information on VAT transactions for ten years and ensuring compliance with the various VAT regimes across the EU, all of which Taxamo satisfies.

“Taxamo provides a unique end-to-end solution that enables digital service merchants satisfy regulatory and customer requirements as it relates to VAT calculation, evidence collection, returns, and VAT audit.”

The market

The new VAT rules apply to the B2C digital services market in the EU. In 2013 the total B2C e-commerce market in the EU was €317.9 billion, the number of online e-commerce merchants in the EU has been estimated at 645,000. The new EU VAT rules will affect 250,000 of these merchants, who sell digital goods & services.

“The OECD has also said that the new rules now in force within the EU are viewed as the global template for taxing the digital economy,” McCarthy said.

“Already, Canada, Japan, India, South Africa, and Australia have revealed plans to explore the introduction of similar taxation systems for the taxation of e-services.”

A Boston Consulting Group study estimated that by 2016 the digital economy in the G-20 economies will be worth US$4.2 trillion (up from US$2.3 trillion in 2010) and that the Internet contributes to as much as 8 per cent and over 12 per cent of GDP in South Korea and the UK, respectively.

The study also noted that the digital economy will grow at an annual rate of 8pc, far outpacing growth in more “traditional” sectors.

Closer to home, the Irish digital economy alone is predicted to be worth €21 billion, and employ 150,000 by 2020.

The founders

Greg Birdthistle, head of business development, and CEO John McCarthy at the Taxamo offices in Killorglin, Kerry

“My background is primarily in the payments industry through my work with FEXCO,” McCarthy said.

“I have had a good cross section of experience from my time there, dealing with everything from technical project work, business development to innovation. During my time at FEXCO I spent two years in Hong Kong helping set-up and grow its business in Asia.

Greg Birdthistle is the head of business development and is a serial entrepreneur in his own right having founded a number of retail and technology companies over the past 10 years.

“Beyond the core management team of Greg and I, we have the support and input of our fellow board members and investors, Brian McCarthy (chairman – chairman and founder of FEXCO) and Denis McCarthy (head of systems – CEO of Annadale Technologies and Aviso).

“Combined, the Taxamo team has over 30 years experience in the payments and technology industry and leads the way in technical solutions for e-merchants.”

The technology

Taxamo’s development team has created a real-time solution that can collect up to six pieces of information in a single transaction.

This is crucial as the new EU rules require that a merchant collects two matching (non-conflicting) pieces of evidence. This is demanded so that the merchant applies the correct VAT rate and collects the correct VAT amount from online customers.

“From the moment a customer lands on a merchant’s website, Taxamo gathers location evidence. We validate B2B transactions and charge appropriate VAT rates for both physical and non-physical goods. Everything happens in real-time. Our solution continues right through to creating a quarterly EU VAT return and storing location evidence for 10 years.”

Taxamo has an ambitious goal of being the trusted partner of choice when it comes to providing global tax solutions to the digital economy.

“We have a robust pipeline of features and new products that will launch in 2015 / 2016 and we believe that we can lead taxation services in this new digital age,” McCarthy said.

Customer acquisition

“We’re pleased with our performance to date and have consistently grown our customer acquisition month on month.

“While it is difficult to measure the market at such an early stage, we estimate that we have acquired a significant share of the European and non-European market who need a solution for 2015 EU VAT.

“In terms of investment, we are well capitalised and do not need investment at this time. We are however interested in speaking with partners who offer strategic and operational resources that would accelerate our growth into International markets. “

McCarthy said the greatest challenge that Taxamo has faced so far is a lack of awareness about the new EU VAT rules.

“It has been publicly noted that many merchants do not feel they were not made aware of the rule changes or had adequate time to prepare.

“Now that the rules are in effect, we are seeing this shift and are pleased to be in a position to meet demand as it comes online.”

Location, location, location

McCarthy points out that Killorglin thanks to the legacy of companies like FEXCO is in effect the digital payments capital of Ireland.

“We are based in Kerry and as a location for a payments related start-up there are few better locations in Ireland, or anywhere else for that matter.

“There are a growing number of payments related companies in the Killorglin area and we can make use of the expertise and talent that companies such as FEXCO have brought to the area. While we are based in Killorglin, we have embraced a remote development framework so our wider development team are based throughout Europe. “

McCarthy says he is new to the start-up scene but has already gained insights that may be of use to other Irish tech self-starters.

“Firstly, figure out what your main expertise or area of interest is. The next challenge is to discover a, previously unrelated, industry that the new digital economy is bringing into contact with your area of expertise. In my case my industry was payments and it became apparent after I read an article on the new VAT rules back in 2008 that it was only payments that offered the level of customer data required for e-service merchants to practically comply with the new VAT regulation.

“Putting two and two together we came up with the Taxamo solution. To design a solution I needed to develop my own expertise in e-services VAT – which is what I did.

“Once you have a kernel of an idea figure out who your customer is and try to understand what problem you are trying to solve from their perspective; design a product and go to market.

“Then, be prepared to change and change often based on market feedback. You will either have something that brings value to the market or something that is not right for the market now. If you have a winner – good for you; if not – try again.

“I have found that the key challenge isn’t in coming up with the initial idea (although that is important), it is designing a process and building a quality team that can take feedback and act appropriately and efficiently. We have been lucky in Taxamo that we have a winning idea and a fantastic team assembled to give ourselves the best chance of making a success of this fantastic opportunity.

“1 January 2015 was a natural watershed for Taxamo. Our solution is now in use throughout the globe, enabling compliance with new EU VAT regulations. We are processing thousands of transactions every day, helping merchants to comply with the new rules.

“Since the turn of the New Year we are more confident than ever of becoming the trusted partner of choice for global tax solutions to the digital economy.”

VAT image via Shutterstock

John Kennedy is a journalist who served as editor of Silicon Republic for 17 years