According to PayPal president, David Marcus, “Over 90 million shoppers from all over the world shop from merchants that are not in their country.” Marcus recommends retailers around the world to seize the business opportunity of global ecommerce, which is estimated to exceed over $100 billion dollars.
If you are a U.S.-based small business retailer looking into the growth of cross-border trading and the potential for international online sales, it’s critical you learn about and understand the Value Added Tax (VAT) laws of selling into the European Union (E.U.). Getting your VAT right throughout each international transaction will help to avoid assessments penalties and other export issues that could impact your company’s operations and profits.
First, VAT is designed to be neutral to the seller, and it’s the consumer that is ultimately taxed. In years past, VAT was charged to the recipient of the product upon delivery, but this proved to be a negative experience for the consumer who was surprised with an additional charge they didn’t expect.
Today U.S. retailers make one of the Member States as the first port of entry for VAT registration, which keeps the ownership of those products to the exporting company and makes them the ‘importer of record’. The import tax is determined based on the cost of goods upon entry and can be reclaimed on the VAT return. Then retailers calculate and include VAT during the checkout process. Since E.U.-based consumers are accustomed to paying VAT, there are no surprises.
Keep in mind that VAT rates vary depending on each Member States’ rates, much like sales tax varies from state to state in the U.S. To ensure you get your VAT right state by state, you’ll need to familiarize yourself with those VAT rate variances by state and work them into your sales process system.
One of the recent changes that took place in January of this year impacted the sale of digital products, such as ebooks, music downloads, web design themes, fonts, online training modules, and the like. The new E.U. VAT legislation removed the tax thresholds for this type of product sale, requiring companies selling into the E.U. to charge VAT in the country of the buyer versus the country of the seller. This means even a sale in the amount of $1 dollar requires compliance and VAT registration.
When it comes to accounting for VAT, your finance department and/or your accounting firm need to be a part of your plans for expansion through international sales. Your tax processes need to include VAT compliance paperwork and submissions, some or all of which may not be handled properly if you’re relying solely on your accounting software. You may also consider seeking out a U.S.-based accountant or accounting firm that specializes in VAT.
Another way to test the waters in cross-border trading without going it completely alone is to take advantage of the international trade systems available from Amazon and eBay.
eBay’s Global Shipping Program (GSP) promises to make international shipping “as easy as a domestic sale.” You’re able to take advantage of their system that handles custom forms and import charges by shipping to their U.S. shipping center in Kentucky. Plus, your international buyer is kept informed through end-to-end tracking and their shipment is protected. As a merchant, you’re also protected against any damage that occurs after it’s shipped from the Kentucky center to the customer.
Fulfillment by Amazon (FBA) service is now used by over 2 million sellers listing their products via Amazon’s global marketplace. Under this service, “(FBA) transfers your goods from a fulfillment center into another country where your products were stored, the transfer may also be treated as atransaction subject to VAT.”
Amazon’s Build International Listings tool enables you to automatically create offers and manage prices in multiple marketplaces. The Amazon Currency Converter for Sellers (ACCS) service covers eight currencies, including the Euro, British Pound, US Dollar, Australian Dollar, and Canadian Dollar. Amazon Prime customers around the world can receive free shipping and easy returns, and foreign transactions are processed through Amazon payments within the buyer’s account.
The Nielsen report, commissioned by eBay, revealed the anticipated cross-border shopping population will reach 130 million and $307 billion in sales by 2018. The potential for increased revenue and scale of your retail business can indeed be found through international sales channels. As with any venture to expand your company’s reach, tactical steps and strategic measures need to be taken to ensure success and compliance with government laws.
To learn more, download the free white paper, “A Retailer’s Guide to International Trade VAT Implications.”