Tax Management

What this covers

This reference document covers Prolifi’s three tax management modes, how tax is applied to invoices, country tax configuration, product tax classification, and reporting. Tax management is a critical compliance function — incorrect tax configuration produces incorrect invoices, creates regulatory risk, and generates costly corrections.

Prerequisites

Before configuring tax:

• Operating entities are configured with jurisdiction details — See: Multi-Country Setup
• Products exist in the product catalog (for tax code assignment) — See: Product Catalog & Pricing
• Tax registration numbers are confirmed for each relevant jurisdiction

1. Tax Treatment Options Overview

Prolifi supports three tax management modes, known as Tax Treatments (Glossary: Tax Treatment). The mode you choose determines how tax amounts are calculated and applied to invoices.

The tax treatment is configured at the operating entity level. Different entities can use different tax modes — for example, your UK entity might use Prolifi Tax for standard VAT, while your US entity uses a third-party integration for multi-state sales tax.

2. Self-Calculated Tax

2.1 How self-calculated tax works

In self-calculated mode, your application or integration layer calculates the tax amounts and passes them to Prolifi via the API. Prolifi applies these amounts as line items on the invoice without performing any independent calculation or validation.

This mode is appropriate when:

• You have an existing tax calculation system and want Prolifi to record and display the amounts
• Your tax logic is bespoke or complex and cannot be represented by Prolifi Tax or a third-party integration
• You are in a jurisdiction or situation where you prefer to control tax calculation entirely

2.2 How to pass tax in self-calculated mode

When creating or updating subscriptions or invoices via the API, include tax amounts in the request:

Conceptual invoice tax structure (self-calculated):

1
{
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  "line_items": [
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    {
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      "product_id": "prod_professional_plan",
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      "amount": 1000.00,
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      "currency": "GBP",
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      "tax_lines": [
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        {
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          "tax_type": "VAT",
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          "rate": 0.20,
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          "amount": 200.00,
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          "jurisdiction": "GB"
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        }
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      ]
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    }
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  ]
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}

Prolifi stores the tax amounts as provided and displays them as separate tax line items on the generated invoice.

2.3 Limitations of self-calculated mode

• Prolifi cannot validate that passed tax amounts are correct for the jurisdiction
• Tax liability reporting in Prolifi will reflect the amounts you provide, not independently calculated amounts
• If your external calculation is wrong, the invoice and the Prolifi tax report will both be wrong

3. Prolifi Tax

3.1 How Prolifi Tax works

Prolifi Tax (Glossary: Prolifi Tax) is Prolifi’s native tax calculation engine. When Prolifi Tax is enabled for an operating entity, tax is calculated automatically on each invoice based on:

• The customer’s billing address country (and state/region where applicable)
• The operating entity’s jurisdiction
• The product’s tax code classification
• The applicable tax rules for the transaction type (B2B vs. B2C, digital vs. physical)

Prolifi applies the calculated tax to the invoice as a separate line item and records the tax amount in the tax liability report.

3.2 Setting up Prolifi Tax

Step 1 — Enable Prolifi Tax for the operating entity: In the entity settings, set the tax treatment to “Prolifi Tax” and confirm the entity’s tax registration details (VAT number, GST number, or equivalent).

Step 2 — Assign tax codes to products: For each product in the catalog, assign a tax code (Glossary: Tax Code) that classifies the product type for tax purposes. Common tax code categories:

The tax code is how Prolifi Tax determines the applicable rate — a digital service may attract a different rate or exemption than a physical good in the same jurisdiction.

Step 3 — Configure B2B identification: For B2B transactions that attract different tax treatment (e.g., reverse charge in EU cross-border B2B), configure how Prolifi Tax identifies B2B customers:

• Customers with a VAT registration number are treated as B2B
• Customers without are treated as B2C (where relevant for tax treatment)

3.3 Supported jurisdictions

Prolifi Tax supports tax calculation for major jurisdictions. Check the current list of supported jurisdictions in your Prolifi account — the supported jurisdiction list is updated as additional countries are added.

3.4 Inclusive vs. exclusive pricing

Configure for each operating entity whether the prices in the product catalog are:

• Tax-exclusive (net pricing): Prices in the catalog do not include tax; tax is calculated on top and added to the invoice total (Glossary: Exclusive Pricing)
• Tax-inclusive (gross pricing): Prices in the catalog already include tax; Prolifi Tax back-calculates the tax component (Glossary: Inclusive Pricing)

Tax-exclusive pricing is standard for B2B markets (where buyers can reclaim tax). Tax-inclusive pricing is common for B2C markets and in regions where customers expect to see the total amount including tax.

4. Third-Party Tax Integration

4.1 How third-party tax integration works

In third-party tax mode, Prolifi connects to an external tax calculation service (such as Avalara AvaTax or TaxJar) to calculate tax on each transaction. Prolifi sends transaction details to the tax service and applies the returned tax calculations to the invoice.

Third-party integration is appropriate when:

• You operate at scale across many jurisdictions with complex tax requirements
• You need a dedicated compliance system with audit-grade tax records
• Your existing organisation already uses a tax compliance platform
• You need US multi-state sales tax calculation (Prolifi Tax may have limited US state coverage)

4.2 Setting up a third-party integration

Step 1 — Configure the integration connector: In Prolifi’s integration settings, select your tax provider (Avalara or TaxJar) and enter the API credentials for your account with that provider.

Step 2 — Configure the operating entity: Set the tax treatment for the relevant operating entity to “Third-Party Tax” and select the configured provider connector.

Step 3 — Map Prolifi tax codes to provider codes: Your tax provider has its own product/service tax code system. Map Prolifi’s tax code categories to the equivalent codes in your provider’s taxonomy. This mapping ensures that Prolifi sends the correct product classification to the provider for accurate rate calculation.

Step 4 — Test the integration: Before going live, test the integration with sample transactions in your tax provider’s sandbox environment. Verify that:

• Tax rates returned are correct for your typical transaction scenarios
• B2B and B2C transactions are handled correctly
• International transactions are correctly classified

4.3 The calculation flow

1. Customer transaction is initiated (invoice generation triggered)
2. Prolifi assembles the transaction details: customer address, seller entity, line items, amounts, product tax codes
3. Prolifi sends the transaction to the tax provider’s API
4. Tax provider returns tax calculations: rate(s), amount(s), jurisdiction breakdown
5. Prolifi applies the returned tax amounts to the invoice as separate tax line items
6. Invoice is finalised with calculated tax applied

4.4 Tax commit and filing

When using Avalara or TaxJar, transactions can be “committed” to the tax provider’s system after collection, enabling the provider to include them in tax filing reports. Configure whether Prolifi automatically commits transactions on invoice payment or whether commits are managed manually in the tax provider’s interface.

5. Country Tax Configuration

5.1 VAT (Value Added Tax)

Glossary: VAT

VAT applies in: UK, EU member states, and many other countries globally

Key configuration points:

• Entity VAT registration number (required for valid VAT invoices)
• Standard VAT rate for the jurisdiction (e.g., UK 20%, Germany 19%, France 20%)
• Reduced rates for applicable product categories (e.g., UK zero-rate for food and books; EU reduced rates for certain digital services)
• B2B reverse charge configuration for cross-border EU transactions (where the buyer accounts for VAT rather than the seller)
• EU OSS (One Stop Shop) registration for digital services sold to EU consumers outside your country

Invoice requirements for VAT compliance:

• Seller’s VAT number
• Buyer’s VAT number (for B2B transactions)
• VAT rate applied
• VAT amount as a separate line item
• Net (pre-tax) and gross (post-tax) amounts clearly stated

5.2 GST (Goods and Services Tax)

Glossary: GST

GST applies in: Australia, New Zealand, Canada, India, Singapore, and others

Key configuration points:

• GST registration number for the relevant jurisdiction
• Applicable GST rate (Australia 10%, New Zealand 15%, Singapore 9%, India variable by category)
• For India: CGST/SGST/IGST split calculation (depends on whether the transaction is intra-state or inter-state)
• For Canada: Federal GST plus provincial sales tax (HST, PST, QST) combinations

5.3 US Sales Tax

US sales tax is uniquely complex — it is administered at the state level, with some counties and municipalities adding additional local taxes. Rates and rules vary dramatically by:

• Product type (digital services are taxed differently in different states; some states exempt certain software)
• Transaction type (B2B vs. B2C; some states exempt B2B transactions)
• Delivery location (the customer’s address determines which state’s rules apply)
• Economic nexus threshold (whether you have sufficient sales activity in a state to be required to collect tax there)

6. Tax on Invoices

6.1 Tax line item display

On generated invoices, tax appears as one or more separate line items beneath the subtotal:

Subtotal (net): £1,000.00
VAT (20%):        £200.00
─────────────────────────
Total due:      £1,200.00

For transactions with multiple tax types or rates (e.g., multiple EU countries, US multi-state), each rate appears as a separate tax line item with the jurisdiction and rate identified.

6.2 Credit note tax handling

When a credit note is issued, the associated tax is also credited. For a partial credit note, the tax credit is proportional to the credit amount (based on the original invoice’s tax rate).

Example:

• Original invoice: £1,000 net + £200 VAT = £1,200 total
• Credit note for £500 net: Credit includes £100 VAT
• Remaining obligation: £500 net + £100 VAT = £600

7. Tax Reporting and Compliance

7.1 Tax liability summary report

Prolifi generates a tax liability summary report per operating entity per period, showing:

• Total net (pre-tax) revenue by jurisdiction
• Tax collected by jurisdiction and rate
• Transaction count per jurisdiction
• Tax-exempt transactions (with reason codes)

This report is the input for preparing tax returns and VAT/GST submissions.

7.2 Audit trail for tax amounts

Every tax line item on every invoice is recorded in the immutable audit trail (Glossary: Audit Trail). The audit trail includes:

• The tax amount applied
• The rate used
• The calculation source (self-calculated / Prolifi Tax / third-party provider)
• The jurisdiction

This record is essential for tax audits — it demonstrates that tax was calculated and collected correctly on each transaction.

7.3 Tax reconciliation

Reconcile Prolifi’s tax liability report against:

• Your tax provider’s own records (for third-party integrations)
• Your accounting system’s tax payable account
• Your bank records (to confirm tax amounts collected match expected)

Discrepancies between Prolifi’s tax records and your accounting system often arise from: timing differences, exchange rate treatment on multi-currency transactions, or credit notes applied in different periods from the original invoice.

Cross-references

• Glossary
• Multi-Country Setup
• Getting Started: Finance
• Reconciliation Workflows