Avoiding the Tax Compliance Risks when Remitting with Prepaid Debit Cards and Ewallets
Compliance can be a tricky proposition for those who make supplier and partner payments using ewallets and prepaid debit cards. These payees are often global in nature. Some may not even realize they need to supply tax information. A smaller, more subversive group may actually be using prepaid debit cards to commit tax fraud or create harbors for themselves to exploit tax loopholes.
Governments are starting to take notice. Already having a bit of a tenuous relationship with sharing and gig economy marketplaces, governments aren’t exactly excited about the lack of regulation and potentially loss of revenue. They are looking for reasons to add oversight and given prepaid debit cards’ controversial reputation, paying out with this method can draw more attention to your marketplace.
So, what can marketplaces and digital companies do?
The first is to decide if drawing the ire of regional governments is worth the remittances paid out using these prepaid debit cards. If they are a small percentage of your payments, maybe they’re not really a necessary payment method. There are almost always other viable payment methods. Each method has its own set of pro’s and con’s but bringing payment method diversity into the mix can alleviate coverage issues.
Regardless of whether you keep ewallets as part of your mix, it may help to establish a strategy for helping payees move away from prepaid debit cards. Based on our research, prepaid debit cards are significantly less popular once payments exceed $1,000. If you’re payees are in that range, it may be worthwhile to move them to Global ACH / echeck, wire transfers, or US ACH. Not only do these methods land directly in the payee’s bank account (therefore reducing the fraud risk), they can be more convenient because payees don’t have to maneuver the prepaid cards’ rules and fees around usage.
The second strategy is to proactively gather tax information on payees during onboarding. This includes collecting their tax identities and any supporting documentation. In the US, that means W-9 and W-8 series tax forms to adhere to FATCA requirements. In other countries, that may be collecting and validating VAT IDs. Tax details have a double-sided benefit. As the payer, you can reduce your risk and regulatory exposure. It also simplifies the year-end rush to request this information.
Next, is to reduce the number of duplicate payees. Collecting tax IDs is a simple step, that’s often enough to reduce duplicate card users who are trying to spread their income around. To take fraud mitigation to the next level, Tipalti Detect can also be used to verify information provided by the payee during the onboarding process. And at the very minimum, payees should be screened against government blacklists such as the OFAC SDN prior to each and every payment.
Lastly, stay in-the-know. These issues often get ahead of businesses. Bigger marketplaces become bellwethers for how a government might feel about the entire space. If a larger marketplace is being told by a government to cease using prepaid debit cards because of potential tax fraud, it may be best practice for smaller marketplaces in that country to follow suit. It may also mean that other countries will adopt such regulations shortly, too.
There’s very little advantage to acting “on the fringe,” and taking the risk of getting shut down entirely when there are many other payment vehicles available.