A version of this article previously ran in the June 14, 2022, edition of Tax Notes.
Managing taxes on a worldwide scale is a challenging and full-time endeavor. This has been an increasing issue for companies assessing and adapting to the seismic shift in customer and business demands since the beginning of the COVID-19 pandemic.
The desire for e-commerce businesses to operate on a truly global scale is becoming increasingly common, but this changed significantly from the beginning of 2020. While the impact of COVID-19 is likely receding, it’s unlikely that the demand by consumers on e-commerce businesses will drop to pre-pandemic levels.
Businesses will need to consider the effects on logistics, costs, value-added taxes (VAT) and duty liabilities, as well as technology to support global sales going forward.
Consumers all over the world turned to online retailers at an unprecedented rate for goods and services that have traditionally been delivered through a storefront or other physical medium, according to the Department of Commerce.
This demand impacted direct-to-consumer (D2C) operators as well as third parties such as Amazon.
Advances in technology, marketplaces, and distribution channels allowed e-commerce businesses to source and sell goods—and services—online to virtually anyone in the world. This shift happened quickly as businesses reacted to one of the largest changes in consumer purchasing habits seen in modern times.
Three major challenges exist for e-commerce businesses in relation to global sales:
- Competition. Consumers have more choices for sourcing goods and services. Consistent checkout and fulfillment experiences remain vital to retaining customers.
- Pricing and profitability. Taxes, variable logistics, and increased manufacturing and customer acquisition costs impacted businesses’ profitability, often materially. Setting global pricing across multiple sales channels became increasingly complex and remains an important area of focus.
- Logistics. Meeting customer expectations on fast and predictable delivery times created huge pressure on third-party logistics (3PL) and transportation networks.
As new businesses enter the global e-commerce market, they must deal with the large number of variable costs as well as indirect taxes such as VAT, goods and services tax (GST), and customs duty.
Systems and processes built for a primarily domestic market required rapid changes to meet global demand and remain tax compliant and profitable.
Tax Impact on Global Sales
As businesses expanded into new markets, logistics decisions—where to ship from—became the first operational decision that drove tax requirements for sellers of tangible goods.
Many companies moved products to a single distribution point, typically in their home country. Others, driven by logistics costs and customer expectations on delivery times, used drop-ship or a foreign distribution center.
Tax authorities, who were impacted significantly by the pandemic, increased import-export compliance checks and tax collection efforts. Countries began to target the increased cross-border e-commerce activity to generate tax revenue and support domestic retailers.
New Programs Enacted
Prior to the pandemic, Australia, New Zealand, Norway, and Switzerland had VAT and GST programs in place to tax nonresident D2C sellers of goods.
Starting in 2020, the United Kingdom, Canada, the European Union, and Singapore enacted targeted tax collection regulations on cross-border e-commerce retailers in addition to the steps already in place in marketplaces and similar fulfilment operations.
For online sellers of D2C services, the trend established by the EU in 2003 continued. Since April 2020, more than 20 countries or provincial taxing jurisdictions added VAT collection requirements to nonresident D2C sellers—in addition to the approximately 60 countries that already had rules in place.
More countries will likely follow this trend with increased requirements in these same countries for D2C goods.
Direct tax, income or similar, has been impacted less than its indirect tax cousin. Rules relating to taxable presence or permanent establishments remain in relative stability, but businesses must continue to monitor where goods or services are sold and assess whether a direct tax reporting obligation exists.
The primary risk for e-commerce businesses relates to holding inventory and selling goods outside the country of incorporation.
Key VAT Assessment Items for E-Commerce Businesses
The general expectation for wholesale (B2B) sales is that the business customer will be the importer of record into any foreign jurisdiction and therefore be responsible for any taxes, duties and fees that apply to the imported goods or services.
Appropriate international commercial terms are the key factor in helping businesses maintain a sale taking place prior to importation.
There are four key areas that e-commerce businesses must assess prior to D2C global sales expansion. These four items primarily focus on sellers of tangible goods, but item three below is also critical to remote sellers of D2C services.
- Optimal or required sourcing, distribution, and logistics routes
- Total cost including all relevant taxes to deliver products to the customer location
- VAT and customs duty liabilities on end-to-end supply chain
- Technology, system integration, and data requirements
For each of these focus areas, businesses will need to work with vendors including manufacturers, 3PL, and other logistics providers, as well as internal operations and finance teams, to assess, design, and deploy an effective global sales solution.
Assessing each focus area requires businesses to have accurate data points for procurement, distribution, and sales. Small factual changes in key business data or a lack of data can materially impact the ability to accurately sell products and often create an increased cost basis or unrecorded tax liability on sales.
Most accounting firms undertaking due diligence, whether for additional funding, investment, acquisition, or IPO, will carefully focus on how e-commerce companies handle global sales.
Failure to manage taxes on the supply chain can impact revenue or profitability and hence valuation. VAT rates outside the United States are often 20% or greater and combined with customs duty can have a material impact on margins and profitability.
What Should Businesses Do?
Businesses need to take action in four key areas.
Ship-from, ship-to, and intermediate consolidation points are data points critical to any cost and tax assessment.
Without these clearly known, including future options, it’s difficult to begin any assessment on the true cost basis and the VAT and customs duty impact of the proposed supply chain.
A trade-off between logistics and tax requirements is likely and companies should be clear that differing distribution models may be needed on a country or regional basis.
Establish a clear process for gathering all logistics-related data and make customer and seller data available to the 3PL or logistics provider to avoid double or no taxation.
Returned merchandize, warranty, and similar post-sale events should be mapped to assess their impact on the overall tax efficiency of the supply chain.
A change to multicounty logistics movements passing through more than one country can increase VAT and duty costs, import clearance, handling, and similar processing fees.
Businesses need to identify all costs associated with the procurement and distribution of products to establish a known cost basis that can be used to set an appropriate sales price.
US ship-from products manufactured outside the United States can incur US duty costs, which may be significant. Consideration of drop-ship, duty drawback, and similar tax and duty mitigation options need to be assessed for all products.
Determine if tax inclusive or tax exclusive pricing is appropriate for the ship-to jurisdiction based on customer expectation.
VAT & Customs Duty
- Determine if VAT or customs duty will apply to the D2C sale and clearly establish who is responsible for the compliance and reporting of taxes due.
- Consideration should be given to using a landed cost model that allows for accurate determination of VAT and customs duty on D2C sales.
- Establish VAT compliance procedures to identify registration and filing requirements and monitor sales thresholds to manage future compliance needs.
Technology and Systems
- Assess the use of checkout systems to support cross border sales through automatic VAT and Customs Duty calculators.
- Ensure core ERP systems can maintain VAT balances to reconcile against sales data.
- Utilize third party compliance systems that can be automated with core ERP/checkout systems to minimize errors.
We’re Here to Help
For more information about global e-commerce and VAT contact your Moss Adams professional.
You can also learn more at our International Tax Services page.