VAT in a Cross-Border World

How can you reach more consumers to stay competitive? Cross-border is the way to go. The 2015 U.S. Small Business Global Growth Report, commissioned by eBay, showed that while export-oriented small and medium-sized businesses in their marketplace grew their businesses by 91% from 2010-2014, those who focused on the U.S.-only grew by just 58%. It’s becoming apparent that solely focusing domestically just won’t cut it anymore.

As the cross-border opportunity expands, so does the complexity. With an estimated $1.86 trillion dollars in ecommerce sales globally in 2016, doubling the total from 2011 (according to Forrester Research), there should be nothing stopping any size retailer—whether large, medium, or even the one-person shop—in creating a transparent experience for the global consumer.

If only it was that simple. One of the biggest challenges is keeping abreast of the various rules and regulations for each country. Many governments employ a value-added tax (VAT) to implement a consumption tax.

It is in place in over 100 countries with rates ranging from 10-25%.  In B2C cross-border transactions, VAT is paid for by the end customer. There is already a wide body of legislation and regulations, but governments are becoming more stringent as they realize the extent of what has become known as the ‘VAT Gap,’ meaning the money they do not realize when an international transaction results in the failure to collect or correctly remit taxes properly. Also, when not presented properly, taxes (as well as duties) can also create surprises for your cross-border consumer who may see the accurate fully landed costs sometimes, but may see them incorrectly calculated—or not at all—at other times.

The VAT Challenge is not a one and done issue. Rules are changing constantly as more and more governments want to ensure that they are getting their share of the increasing cross-border sales.

In April 2016, China announced new rules on duties and taxes applicable to personal imports – impacting many retailers. The duty and tax application will depend on the type of import.

  • Goods purchased in China’s cross-border ecommerce network from registered merchants with a customs value up to CNY 2,000, and where the accumulated transaction value also does not surpass the personal annual limit of CNY 20,000, will be exempt from import duty and subject to 70% of the applicable VAT and Consumption Tax rate. Imports that exceed these limits will be subject to all duties and taxes for general trade. Only approved products can be imported under this regime. The implementation date of these rules is yet to be determined.
  • Goods purchased from overseas e-tailers that are not licensed to sell in China’s cross-border ecommerce zones, with a customs value up to CNY 1,000, are subject to Parcel Tax, a flat rate that combines duty, VAT and Consumption tax. The new parcel tax rates are 15%, 30% or 60%  depending on the product, with the majority of products being levied at 30%.  Imports that exceed this limit are subject to all duties and taxes for general trade.
    • It is likely that later in the year, we will see new proposals in the EU that will be reflective of a global trend toward taxing all transactions and sourcing sales (determining the jurisdiction that receives the sales tax) to the location of the customer (its destination). The European Commission (EC) has under consideration proposals to remove the current exemption from VAT for low-value (under 22 Euro) items, including from countries outside of the EU, such as the U.S. The EC may also propose rules to simplify VAT for businesses selling across between EU countries.

While the VAT challenge impacts all retailers, brands and marketplaces looking to grow in the cross-border economy, there are two groups that need to take specific note:

  • U.S. sellers on online marketplaces attempting to reach the global consumer. Not all marketplace solutions are created equal. Recently, on the message boards of a popular U.S. marketplace, sellers were expressing concern about being caught with a sub-optimized experience creating possible lost orders. Online marketplaces are being challenged by governments about accurate calculations.A poor experience for both the seller and the buyer turns off an important opportunity. Sellers should ask specific questions – what is your cross-border program? Can I choose the countries that I sell to? Do you provide product classification? Will the check-out provide a fully landed cost experience for the global consumer, including duties and taxes?
  • The ‘DIYers’ in cross-border trade. With API resources, there is no longer a need to try to keep up with ever-changing laws and regulations in-house. Duty calculator solutions that use commerce cloud technology can keep brands and merchants up-to-date for their sites. With plug-ins for platforms like Magento, eBay, and Woocommerce, etc., the correct rates for duties and taxes are easy to access and easy to maintain accurately.

The takeaway: Taxes are never optional. To pre-pay import taxes at the moment of purchase is more convenient for the customer. Accuracy and precision are critical at both the moments of purchase and at customs clearance, and ensuring correct declarations will ensure compliance and avoid over-payments. For a transparent cross-border experience, it comes down to cost-effective product classification, accurate import duty and tax calculations and proper import documentation.

Gregg Zegras us Senior Vice-President of Global Ecommerce for Pitney Bowes

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