Introductory Guide to International eCommerce, Part 2: Taxes and Remittance
We know that eCommerce is a growing business model, and international eCommerce is making up a big chunk of that growth.
Statista notes that global retail eCommerce sales will reach more than $4 trillion by 2020, and FinancialBuzz gives an example of how fast this growth has been, too. They point out that Alibaba grew its Singles Day sale on November 11 from a handful of brands in 2007 to nearly 100,000 brands in 2017. Those brands collectively grossed nearly $18 billion within a single 24-hour period in 2017.
With great growth, however, comes great administrative responsibilities. Brands are facing ever-increasing complexities as they take their digital storefronts international. When you’re seamlessly doing business across many national markets, it’s not always clear what money you owe to whom.
This is the second part in our series on international eCommerce. The series dives into the most crucial considerations for brands with an international presence, with the understanding that the shifting landscape of international eCommerce presents both a challenge and opportunity to these brands. Check out Part 1: Customer Data and Privacy to get the nitty gritty on how your company can address customer privacy concerns.
In Part 2, we deal with a stickier part of international eCommerce: taxation and remittances.
How to Stay on Top of Important International Laws & Trends
Taking the time to truly understand taxes and remittance is crucial to any international brand’s success.
Unless your company has a robust team of in-house legal counsel, you will be relying on local partners to help you navigate issues such as:
- Value-added tax (VAT)
- Other jurisdictional tax obligations
Still, it’s important to have someone on your team who is responsible for understanding tax and remittance obligations, and how those affect your business strategy.
Instead of diving into the minutia of the cross-border tax implications for every country and state you serve, this person (or team) should have a big-picture view of how your company’s tax and remittance obligations affect your ability to serve your customers.
Take Brexit, for example. If and when the UK renegotiates its trade relationship with the European Union, millions of people will be affected. That’s given businesses plenty to learn about and prepare for:
- Global VAT Compliance has an ongoing guide to what changes consumers and business can expect once a Brexit deal is reached.
- Ulrika Lomas at Tax-News.com gives a breakdown of the implications on VAT, duties and customs.
- Writing for Econsultancy, Dan Barker highlights both the potential benefits and drawbacks of the change.
Patrick Wall at The Economist brings us back down to earth on this topic, reminding us of two things: first, that eCommerce platforms should already be well-versed in traversing international tax environments and, second, that the UK will in all likelihood foster beneficial tax conditions with both the EU and the US. But “until a clearer picture forms,” he warns, “the eCommerce sector must be braced for lengthy negotiations and challenges ahead.”
The long and short of it is missing out on these conversations can be costly for your business. Ernst & Young puts it unequivocally: “This relentless quest for distant markets and the supply chain connections required in an omni-channel environment often cause businesses to miss indirect tax consequences and compliance obligations. The penalties are costly and diverting.”
Avoid that fate by ensuring compliance in the markets you serve. Read on to learn how.
How to Ensure Compliance
Even once your team is aware of the trends and changes that directly impact your business, ensuring compliance is not always easy.
For example, Robyn Staros and Stephanie Gilfeather at Deloitte highlight that sales and use taxes are not covered by international treaties — unlike, say, income tax. Therefore, it’s essentially up to each business to ensure they are on top of international tax compliance. Nick Hart at Radius points out that new rules are nearly constantly being introduced, leaving international operators to figure out the landscape.
So, where do you start with compliance?
Fortunately, some things are likely to remain the same in international tax law. The Value Added Tax, for instance, nearly always comes as a shock to US-based eCommerce brands.
“VAT at every step in the eCommerce chain: from manufacturers and retailers to the end customer,” writes Jeanette Sherman of Avalara. “Once you understand VAT, you’re one step closer to filling in the international tax compliance picture.”
Cracking the VAT, along with trade tariffs, is a complicated key to tax best practice. Donato Raponi, head of the VAT Unit of the tax arm of the European Commission, even describes VAT as one of the top three barriers to international eCommerce.
For example: Depending on where your company has an established, operating entity, your business might be on the hook for collecting VAT, might be able to claim VAT reimbursement, and/or might be paying taxes anyway through the import of goods into the EU. This is why it’s so crucial to have trusted business partners when selling across borders.
It’s worth noting here that EU customers are already used to seeing VAT as part of an item’s sales price. In those markets, don’t be shy about pricing your products accordingly.
On the flip side, US-based companies selling to US customers in other states might be subject to new taxes. In June 2018, the U.S. Supreme Court decided that “states can now force businesses without a physical local presence to collect sales tax on purchases made by customers in the state,” Annie Pilon at Small Biz Trends reports.
Stuart Lauchlan at Diginomica warns this will most heavily impact small businesses without existing infrastructure in place.
But not it’s not all bad news. Even the U.S. Supreme Court decision may have more complicated implications for some sellers. “The Supreme Court’s ruling didn’t speak directly to the responsibility of online retailers to collect sales tax for marketplace sales, which means that many online purchases will likely still go untaxed,” writes Patricio Robles for Econsultancy.
The takeaway here should be clear: Brands selling across state and national borders should have a reliable partner to help them navigate complicated and evolving tax questions.
With compliance taken care of, brands can then focus on delighting their customers.
Keep It All Customer-Focused
Understanding the ins and outs of taxes as they apply to international eCommerce also impacts your customers’ wallets. “Over collect and you’re charging your customer too much,” writes Avalara’s Ryan O’Donnell. “Not a good long term plan in a competitive market. Charge too little and you may be on the hook for the outstanding balance.”
In short, you’ll have to know where to strike the balance to keep customers satisfied with the way you are passing on the cost. Making compliance a background process that customers don’t have to think about is a great goal in this arena.
There is a lot to consider in this post, but if you take the following three steps, you will be on your way to solving big questions about tax and remittance:
- Stay on top of the laws and trends. This post is just the start. Make sure you do your due diligence!
- Ensure you are filing correctly. Unless you are trained in international tax law, you will want to seek professional advice.
- Focus on minimizing the complexity for your customers. The draw of eCommerce is convenience for customers. Whatever you do, make sure this remains true for your customers.
- Be as local as possible. Long-distance international commerce (e.g. shipping from the US to customers in France) is a nightmare, both for your company and for customers who have to wait week to receive purchases. Being local means having legal and fiscal entities on the ground in the markets where you operate. This also means respecting local laws regarding taxation, hiring and fair competition. That’s why we almost alway suggest brands partner with full-service eCommerce companies to establish that local presence.
Taking these few steps can help international eCommerce companies ensure that they not only comply with tax law, but also set their customers up for success around the globe.
Check back in for the third part of this five-part series on international eCommerce. Next up: logistics and reverse logistics.
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