Welcome to the final post in our four part blog series, where we highlight what was covered in a recent webinar on essential business practices for international expansion, which you can access on-demand.
Together, our three platforms can help you succeed in product feed management, cross-border duties and taxes, and shipping when expanding internationally.
So far in the series, we have covered:
- Deciding factors and choosing the right channels for international expansion
- Key things to consider in local markets
- Shipping, delivery and returns
Now it’s time to consider cross-border logistics, customs, taxes and legislation.
Complexities and challenges when selling cross-border, and changes to regulations
According to Tamebay’s study on delivery and shipping, expensive international shipping costs seem to be the prevailing barrier to entry into new markets for 52% of merchants. Additionally, 42% of merchant respondents were apprehensive about dealing with foreign taxes.
Logistics, customs, taxes, and legislation can get complex across borders. For example, there are over 14,000 distinct sales tax jurisdictions in the United States, which makes compliance a challenge when you sell into different areas.
You need to find out what rate to charge (which can change frequently), and they each have different product categorisation rules, deadlines and ways they are paid.
While there is opportunity for revenue in the US, this is obviously an absolute minefield for those growing and selling internationally. So you want to reduce the impact and risk of international trade by using automation technology here.
Changes to regulations in the industry are happening continuously, and it can be challenging to keep up with these and understand your obligations.
Things have become even more complex with Brexit recently, and with new EU VAT reforms. But don’t panic and don’t be scared of tax regulations – take some time to learn about customs and VAT and understand where your responsibilities are.
We’ve broken down the basics and key information below to help you make sense of VAT and customs rules, key changes, and your obligations stemming from Brexit and IOSS/OSS scheme in the EU.
💬 “There isn’t much room for trial and error on the tax side when you are looking at new marketplaces. Think through tax obligations such as import VAT, UK EORI numbers and EU EORI numbers when trading internationally. Change your business practices to cope, and make sure you avoid double tariffs when selling on multiple marketplaces.”
— Mike Carpenter, Senior Manager, Strategic Alliances – EMEA at Avalara
Brexit and tax obligations
As we look forward, Brexit has changed the game for retailers who are selling into the UK and Europe. There have been some key changes to tax obligations which we have discussed in the next section.
Retailers now need to work harder to hang on to their customers – one bad experience at the border can have a big impact on customer loyalty. So it’s important to focus on improving customer experience.
Brexit has forced some merchants to hit the reset button as ultimately some decisions in business are based on effort vs reward. Brexit has definitely increased the effort. Many merchants see that the reward is still attractive, but some do not and have moved away from shipping internationally.
This has therefore resulted in more opportunity and less competition, which some merchants are benefiting from. Many that have conquered the challenges around Brexit are now expanding into more countries as the process is pretty much the same to sell into markets such as the US or Australia for example.
Some merchants have come out stronger as a result of dealing with the challenges head on and have modified their business process to satisfy the requirements. So while Brexit is still confusing, if businesses get it right, the market is more open than you might think.
So what are the key changes for tax obligations that are happening since Brexit? What do businesses need to get ready for with these new reforms?
HS classifications and commodity codes
Since Brexit happened, businesses will now need to learn about commodity codes. This is to manage duties and tariffs.
Businesses need to accurately identify and match goods to the right HS Code for customs declaration, to avoid paying the wrong duties, and failed shippings.
The UK is using the standard global six-digit format, and the EU will be requiring its 8 digits minimum.
Most tax authorities publish their commodity codes online for you to assign to your products. The UK has a Trade Tariff tool online. You can use the UK’s HMRC’s Tariff Classification Service to get non-legally binding classification advice. EU member states have various similar tools.
But assigning these codes to all product types can be time consuming and expensive. Additionally, the information required to determine the correct tariff code is often missing or not easily available, and therefore true import costs are not often well understood. So it’s best to use a fully automated system for this.
DDP vs DUP
Before you make your first international sale, you’ll need to understand “Incoterms”, which stands for International Commercial Terms. These include Delivery Duty Unpaid (DDU), Duties at Place (DAP) and Delivery Duty Paid (DDP).
We have discussed what these mean for sellers, and the differences between them in our previous post on shipping, delivery and returns.
Many EU companies haven’t had to think about DDP and DUP prior to Brexit. As we’ve discussed earlier in our previous blog, DDP Increases customer satisfaction. So many businesses are moving to a DDP model, where everything visible upfront customers know what to expect.
Shoppers want transparency and they are aware of more about ‘hidden costs’ now with customs fees and import VAT.
This element will also have a major impact on a retailer’s conversion rates into Europe. Being transparent and calculating the duties at checkout will help with failed deliveries and negative reviews post purchase.
EU VAT reforms – the IOSS/OSS scheme
The new European VAT regulations came into force on 1st July 2021. These are the One Stop Shop / Import One Stop Shop schemes.
This is a voluntary scheme, but will suit a lot of businesses because it increases transparency. It will make it possible to declare and pay any VAT owed with a single declaration and EU VAT number.
As of 1st July 2021, three new systems will replace the MOSS (Mini One Stop Shop):
- The non-EU OSS system used to declare B2C services within the EU provided by companies located outside it.
- The intra-EU OSS system used to declare:
- Cross-border sales between Member States
- Local sales concluded via marketplaces
- B2C services within the EU provided by EU companies
- The IOSS (Import One Stop Shop) system will enable marketplaces, EU and non-EU countries to declare the sale of goods imported from countries outside the EU with a value less than €150.
Thinking about the customer experience
Again, it’s important to think about the impacts of VAT on customers, and giving them a great experience. For example, there is a way to import VAT on behalf of the customer before sending the order so the customer is not subject to extra costs.
The new IOSS simplification procedure requires you to charge the VAT at point of sale. You can collect this from your customer at checkout and instruct your carrier to send your goods to your consumers using the incoterm DDP, therefore your carrier will pay the customs fees due on your behalf.
An IOSS intermediary must be appointed when a business is established outside of the EU. All EU businesses are not mandated to appoint one due to the mutual assistance agreement. Norway is the only non-EU country with an exemption from appointing an intermediary.
Understanding the new VAT reporting
📝 What you need to know: While these changes are designed to simplify the system, the complexity is that it’s not uncommon to be selling through multiple channels. Understanding which transactions need to be reported in which return can be difficult. With each country publishing their own requirements, you will need to register and be ready within the market you trade.
✅ Get ahead: Understand which transactions need to be reported and what type of registration you are required to have, because the nature of your business activity may require you to need multiple registrations.
|⚠️ Watch out for: Double reporting or missing transactions which can result in the over or under reporting of VAT. This could result in extreme penalties being applied. Also, not every country has yet published or produced portals in which they want customers to register. Be aware of which countries these are as there is likely to be a backlog and you may not be able to register in time. Shipping carriers need this information from their retailers. It’s important to investigate how you plan to have this information communicated, accurately and efficiently.|
Set the correct tax calculations
📝 What you need to know: Until now, you have probably been using a handful of different codes such as origin rates. From 1st July 2021, each of the EU 27 Member States will have different classifications for products – meaning there will be over 80 rates you might need to be aware of.
✅ Get ahead: Do your research. Understand the taxability of each of the products you’re selling and in each market. How will you calculate the different rates for each of your products?
|⚠️ Watch out for: Classifications. Keep in mind that not every product will have the same classification in each EU country. Although the EU is one trading block, it can potentially get complex if you are, or will be, selling to all markets. Under or overpaying tax can have serious consequences to the business.|
Ensure pricing accuracy of goods online
📝 What you need to know: Standard VAT rates within the EU currently range from 17% to 27%. With a 10% margin in the different countries, it is quite a challenge for businesses who are trying to charge the correct rate within each of the countries.
✅ Get ahead: Can the website be dynamic so you can set prices per region based on IP or delivery address? Or can you have different websites per region? Failing this, you can come up with a pricing strategy based around the countries you predominately sell to so you can maximise margins and stay competitive within each market.
|⚠️ Watch out for: You may have been selling reduced rated products from your home country, but this does not mean it universally applies across all regions.|
Tools and technology: Reducing headaches, ensuring success and seamless experiences in the new market
Although all of this is daunting, technology has evolved to help.
As we have touched on in previous posts, technology is your best ally when it comes to cross-border selling. The best way to ensure you are tax-compliant and find success in new markets is to leverage the right tools to allow you to go global, lessen the burden, reduce risk, and reduce stress.
ShipStation can help you get prepared for cross-border selling, especially after changes such as Brexit for example.
💬 “Make things easier on yourself by automating tasks so you can launch into new channels and marketplaces quickly and easily.”
— Max Mirra, International Business Developer at Lengow
How Avalara can help with cross-border tax compliance
Some areas of cross-border tax and VAT obligations can only be achieved successfully with the right technology. Avalara specialises in this, with continuous enhancements to help you stay up to date when going global.
Avalara helps businesses navigate the complex and ever-changing world of tax compliance, and provides international tax solutions to simplify duties and cross-border tariffs.
It helps you stay apprised of cross-border compliance and customs obligations, communicate the right documentation efficiently and effectively, and improve business operations.
|Simplify your compliance process through a unified tax platform.|
Automate processes for taxes, duties, and HS codes, so you have clean data for tax authorities and a lower risk of an audit or fines down the road.
Enhance customer experience by increasing transparency through presenting customs duties at the point of purchase, thereby minimising surprises for buyers.
Estimate customs duties and import taxes without providing upfront HS codes using Avalara Cross-Border Estimated.
Access lower rates by taking advantage of treaties.
The platform can help you manage key areas such as:
Getting registered with jurisdictions Calculating cross-border VAT to stay compliantAutomating international tax rates and data checks for VAT reportingCustoms declarationAn OSS intermediaryFiscal representation Import VATFiling VAT reportsPayment needs EORI numbersTariffs, rules of origin, HS codes
Contact Avalara to find out how it can help with your international expansion and tax compliance.
Watch the webinar on-demand
Want to find out more about business practices to consider when expanding internationally? Access the free, on-demand webinar for a more detailed look.