This blog answers the question “Dynamic Currency Conversion income collection?” Income from DCC transactions is liable to income tax and capital gains tax. The blog notes that the Dynamic Currency Conversion payment method is a highly popular and secure way of completing monetary transactions.
How Can I benefit from Dynamic Currency Conversion Income Collection?
Merchants who offer Dynamic Currency Conversion transactions earn income from the forex spread, resulting from the currency conversion process. When the exchange rate markup is applied to the transaction by the bank approving the payments this entity splits the markup with the DCC merchant.
Dynamic Currency Conversion provides foreign payment card holders with the option of being able to pay for the transaction by using their local currency (at the checkout point). This implies that their initial sale or shopping effort could deal with prices in other currencies.
The DCC terminal automatically recognizes the home currency of the card holder and offers them the option of completing their payment in it.The purchase receipt for the transaction also shows the checkout in the buyer’s home currency.
What is the principle used for DCC conversions?
The following principles are followed by DCC to ensure transparency of currency conversions and other standards applicable to MasterCard partner businesses.
DCC is a service provided by acquirers and their merchants or ATM owners that enables:
The cardholder can choose to carry out their cross-border transaction in local or local currency
their billing currency ( the currency in which the Mastercard was issued).
If the cardholder chooses to complete their transaction in the billing currency of the merchant or ATM, the amount of the transaction is converted using the exchange rate provided by the card issuer.
In case the card holder decides to go ahead with the transaction payment in the billing currency of their MasterCard, their account will be debited at the exchange rate given by the seller.
DCC is not a Mastercard product or service. However, Mastercard has built a number of
Standards and requirements for any member, DCC service provider, merchant or ATM owner
providing Dynamic Currency Conversion options. These standards ensure the transparency of the DCC currency conversion process
Relevant information is made known to the cardholder for helping to guide them to an informed decision.
In addition, this transparency offers the following advantages:
- Helps avoid customer dissatisfaction during the purchase process or when they view their bank statement (relating to exact charges for currency conversions)
- Instils member confidence and loyalty in the Mastercard service and brand. As a result, there is also an associated benefits program that proactively monitors compliance with these standards.
How is the income from DCC transactions taxed?
Income from DCC transactions is taxed through multiple taxation systems applicable to the overall income earned through these transactions. Three different types of taxation charges are levied on DCC transactions authorized by merchants, which are:
- Income Tax:
- Corporate Income Tax (Paid by the company on its profits)
- Capital Gains Tax:
DCC taxation rules are similar to the general taxation rules for currency conversion in the UK. The tax on forex trading in the UK depends on the instrument you are trading currency pairs wit. If the currency trading activity is conducted through a diversified gaming account, the income is exempt from tax under UK tax law.
When should DCC merchants pay capital gains tax on their income?
You must pay capital gains tax as a DCC merchant when you sell an asset if your total taxable income exceeds the annual capital gains deduction.
You can calculate your capital gains tax on DCC income as follows.Calculate the profit for each asset. The same method applies to taking out the capital gains for any stocks or shares invested during the year.
Add up the profits of each asset and subtract any eligible losses from it.
You must report and pay the capital gains tax only if the taxable income exceeds the deductible and not otherwise.
If your total profit is less than the deductible tax amount you are not required to pay any taxes
Also you are exempt from tax in the case that your total taxable income is covered by (accounted by) the capital gains tax.
The fiscal year runs from 6 April this year to 5 April of the following year.
You must still declare your profit on your income tax returns if both of the following conditions apply:
- the total amount for which you sold the goods is greater than 4 times your personal allowance
- you have registered for the Self-Assessment tax return
What are prohibited practices on influencing a cardholder?
Prohibited practices on influencing a cardholder are given below, The terminal should not aim to force the following issues:
- The cardholder should never be prompted to select “yes” or “no”, “accept” or “reject”, “continue”.or “Cancel” or select any such pairs of positive and negative options.
- The offer should not emphasise DCC as the only option or be phrased as yes or no
Question presented to the cardholder
- Currency selection should not use “traffic light” colour patterns such as red and green
keys (on the terminal)
- The terminal should not highlight or pre-select the Dynamic Currency Conversion option.
- The terminal screen must not use language that provides the user false information or that could lead to erroneous conclusions
- Mislead the user about the issuer’s conversion process
- Add any unexpected or other conversion fees or charges to the regular charges
- DCC should not be presented as a cheaper option than competitive payment methods
- The currency conversion options provided by the merchant must not be misrepresented as intended by MasterCard.
Which cardholder disclosure requirements need to be fulfilled prior to making a DCC transaction?
Prior to submitting an electronic authorization or pre-authorization request for the transaction and also before the cardholder is asked to choose the type of currency, the cardholder must be informed of the following implications and rights of this (currency conversion) service:
- Their right to choose the currency in which the transaction will be completed (at checkout) from the local currency and the billing currency
- The exact amount of the transaction payment in the local currency;
- The exact amount of the transaction payment in the billing currency
- The exchange rate to be applied upon completion of the billing transaction
- Any other charges that might be billed once the Master cardholder selects the DCC option
In which environments is the DCC payment method automatically authorized?
The DCC payment method is automatically authorized in the following environments:
- Retailer. DCC was automatically applied to the transaction either due to wrong versions or the type of software being used by the vendor. It could also be because the vendor has auto-enabled DCC in the name of the card holder.
- E-Commerce. Dynamic Currency Conversion was applied to an Internet transaction as the choice to cancel the transaction or opt out of the DCC choice was not clearly mentioned.
- ATM. An ATM offered DCC payment choice to a Mastercardholder, but only gave the option to “accept” or “cancel” or the ATM did not process the transaction as specified by the cardholder. This selection could have been made due to incorrect software specifications.
- Car rental company. A car rental company automatically applies DCC without notifying the cardholder. DCC information has not been clearly identified or was hidden in the papers.
- Hotel. A hotel has offered DCC to a Mastercardholder using a warning note mentioning that the cardholder was asked to enter a check on the currency selection (window). However, the merchant failed to respect the cardholder’s choice and instead made a DCC “back office” transaction.
What are the eligibility requirements for offering Dynamic Currency Conversion as a merchant?
The following eligibility requirements apply to outlets offering the Dynamic Currency Conversion process.
Before offering DCC to cardholders at any of their merchants or ATMs, the
the buyer must first register himself and any DCC service provider.
When offering DCC the following requirements apply:
- No specific currency conversion method should be implemented as the default option for transaction
- The Mastercard cardholder should not be forced or encouraged (ie “directed”) in any way using the Dynamic Currency Conversion option
- The offer must be presented to the client in a clear and neutral way
- The choice of Mastercard holder must be honoured by all parties offering DCC
- The offer must meet all disclosure requirements applicable to cardholders.
In addition, the offer must comply with all applicable local laws and regulations. In case the cardholder does not explicitly choose the option of the billing currency the transaction payment should (automatically) be made in their local currency. DCC must not be selected in the absence of the Mastercardholder.
In the event of a refund, the refund must be made in the same currency as that used in
Where can a Dynamic Currency Conversion payment method not be used?
A Dynamic Currency Conversion payment method cannot be used on the following transactions (of Mastercard):
- On contactless transactions at the limit or under the limit for the applicable cardholder verification ceiling (CVM) as DCC is not compatible with the swift nature of contactless payments.
- Prepaid Mastercard or Maestro travel cards and Mastercard or Maestro debit cards in multiple currencies. These payment cards are issued in one or more foreign currencies chosen by the cardholder, allowing the card’s use for paying amounts in the
local currency while travelling or shopping abroad. Running DCC on these cards involves the
transaction amount to be converted a multiple number times, nullifying the card benefit.
- Mastercard Enterprise Solution Wholesale Travel Program (MWP) accounts
as they are virtual accounts meant for one time use (for currency transfers) and used exclusively for making business-to-business (B2B) payments. These accounts used for the MWP program are generated in the target currency.
How does my merchant accept a DCC transaction?
Your merchant accepts a DCC translation in the following steps:
- A cardholder presents a Visa or Mastercard for payment of the transaction
- The payment amount (in the currency where the Visa or MasterCard is being used) is entered at the point of sale terminal
- The Visa or Master Card is swiped or inserted in the card reading machine
- If a DCC compatible foreign card is recognised, the holder’s national currency
Is automatically identified
- The POS terminal prompts the merchant to submit (if no PINpad is.available) to the cardholder.It then displays the sale amount in two option boxes, one of the card holder’s local currency and the other one for the currency in which the original transaction is supposed to be in.
When the cardholder wants to pay in their own local currency, you have to press the green button. If the cardholder does not want to use the DCC service and wants to pay for it in the currency being offered to them the merchant has to press the red button.
- You must inform the cardholder that DCC is an optional service and that they can pay in their national currency or in the currency of the country where the transaction is being made
- The PIN code is entered if required (for authorization)
- The Transaction is complete
In case the card holder chooses to make the payment in the local currency, the receipt will show this choice. The payment receipt shows the following details
- Sale checkout amount in the currency where the payment is made
- Sale checkout amount in the cardholder’s local currency
- The Exchange Rate (of the currency conversion option)
- Confirmation of the cardholder being offered the option of completing the payment in EUR currency and that their currency choice is considered final
This blog addressed the question“How Can I benefit from Dynamic Currency Conversion Income Collection?“A DCC merchant benefits from the “forex spread” or exchange rate markup applicable to each transaction. DCC Income needs to be mentioned on self assessment tax returns to HMRC through the CG1 Capital Gains Return and Self Assessment form. If the DCC transaction system is being used by a corporation, it will also be declaring the income on its Corporate Income Tax returns by using the CT600 form.
Please feel free to comment on the content or ask any questions in the comments section below :
Frequently Asked Questions (FAQs) :How Can I Benefit From Dynamic Currency Conversion Income Collection?
What are the customer benefits for paying with DCC instead of by using regular payment options?
The customer avails the following benefits when paying with DCC instead of other payment options:
- A competitive currency exchange rate on their transactions( Provided and regularly updated by the Reuters agency)
- Total Transparency at the point of sale
- A guaranteed exchange rate on the currency conversion
- Simplified expense accounts claims available to business travellers.
- The exchange rate (used for the transaction) is also clearly stated on the payment receipt
The Merchant also gets the following benefits when customers use DCC currency conversion:
- Dynamic Currency Conversion uses a variety of currencies
- A Dynamic Currency Conversion commission offered to the merchant on every transaction
- Better Customer Satisfaction (compared to competitors levels of customer loyalty)
Can DCC transaction payments be refunded?
Yes, DCC transaction payments can be refunded back to the card holder.
Refund payments for Dynamic Currency Conversion transactions need to be entered as
- A reversal payment
- As a credit (amount) in the DCC currency and DCC amount accounts, corresponding to the currency in which the purchase transaction was chosen to be made
- As a credit (amount) with the Dynamic Currency Conversion applied at the exact exchange rate used for the initial purchase transaction, so that the final currency and the final amount corresponds to the currency and amount of the initial transaction.
If the cardholder suffers a loss due to currency conversion, he is entitled to a recovery of
the forfeited amount. This loss beared by the Master Card holder from the Dynamic Currency Conversion process must be supported with evidence of checkout (point of sale) receipts
As an expert in financial transactions and currency conversions, I can provide detailed insights into the concepts discussed in the article about Dynamic Currency Conversion (DCC) income collection. My expertise is grounded in a thorough understanding of the principles and regulations governing DCC transactions.
Firstly, the article emphasizes that income from DCC transactions is subject to income tax and capital gains tax. Merchants offering DCC transactions earn income from the forex spread, resulting from the currency conversion process. The exchange rate markup applied by the bank is shared with the DCC merchant. The taxation of DCC transactions involves income tax and corporate income tax, with exemptions under specific conditions, such as using a diversified gaming account for currency trading in the UK.
The article explains the principles of DCC conversions, emphasizing that DCC is not a Mastercard product but follows Mastercard standards. These standards ensure transparency in the currency conversion process, providing information to cardholders and preventing misleading practices.
The blog further details the taxation of DCC transactions, specifying when DCC merchants are required to pay capital gains tax on their income. The calculation of capital gains tax involves assessing profits, losses, and taxable income.
Prohibited practices on influencing cardholders are outlined to maintain transparency and prevent misleading information. The article stresses the importance of fulfilling cardholder disclosure requirements before DCC transactions, ensuring that cardholders are informed about currency choices, transaction amounts, exchange rates, and additional charges.
The environments where DCC payment method is automatically authorized, such as in retail, e-commerce, ATM, car rental, and hotels, are explained. Eligibility requirements for merchants offering DCC, including compliance with local laws and regulations, are highlighted.
The limitations of using DCC, such as on contactless transactions, prepaid travel cards, and Mastercard Enterprise Solution Wholesale Travel Program accounts, are discussed. The process of accepting a DCC transaction by a merchant is detailed step by step, including informing the cardholder about the optional nature of DCC.
The article concludes by addressing the benefits of DCC income collection for merchants, emphasizing the forex spread, and mentions the customer benefits, including competitive currency exchange rates and total transparency. The FAQs cover customer and merchant benefits, refunding DCC transactions, and the entitlement to recovery for cardholders experiencing losses in the currency conversion process.
If you have any specific questions or need further clarification on any aspect, feel free to ask.