I’ve heard from many online sellers this month who have expanding into new international markets on their list of new year’s business resolutions. When domestic markets feel crowded and online retailers are no longer seeing the same ROI in growing that audience, it’s often time to explore overseas markets.
Now that we’re well into 2017, those expansion plans may have started to solidify, with SKUs being uploaded onto the biggest third-party marketplaces in those countries to reach as many consumers as possible and logistics being arranged to ensure products reach their final destination swiftly. Once the first sales are made, with happy customers enjoying their purchases and proceeds of those sales reaching the online seller’s bank accounts, there’s still one piece of the puzzle which is often easily overlooked –VAT—the tax due for sales made in that country.
The first rule of international VAT is that there is no one catch-all rule. How you ship your products and from where may determine how they are taxed, with in-country fulfilment often requiring pre-emptive VAT registration in that country. However, if you’re fulfilling orders from outside the country but within the EU (for example), retailers can wait until their sales surpass that country’s limit before registering for VAT.
The second rule of international VAT is that non-compliance is never an option. Pleading ignorance with VAT entities will fall on deaf ears and the prospect of being caught out with a huge overdue tax bill is very real and can be business-threatening. I’ve heard stories from unsuspecting UK-based marketplace sellers where HMRC started recovery proceedings over an unpaid German VAT bill, resulting in their company having to scrap expansion plans for the foreseeable future. The lengths that the biggest online marketplaces such as Amazon are now going to in ensuring that their registered sellers are tax-compliant in relevant jurisdictions is an indication of how seriously the biggest ecommerce players are taking VAT-avoidance.
Let’s be honest, nobody is a fan of paying more tax (or having to pass it on to consumers in the guise of higher prices) but the one thing that we can agree on is that it helps to level the playing field. In the not-so-distant past, VAT-compliant sellers were effectively penalised when competing against uncompliant sellers on international marketplaces. Now, there should be no instances in which less-scrupulous sellers give their customers a 20% price cut out of HMRC’s pocket, leaving the seller who plays by the rules without the sale.
So, I’ve highlighted the lack of any fast and easy rule when it comes to tax on online international sales, warned that burying your head in the sand isn’t a viable strategy and explained that there is an upside to VAT. But you likely knew all of that already. This question is: what can you do to make the process as painless as possible?
Firstly, factor the various rates of VAT into your international pricing to start with. This will likely be more of an art than a science – even if you’re listing products on a German marketplace, you’ll not be able to guarantee the buyer will be based in Germany and it’s ultimately the buyer’s location that often determines the rate of VAT, not to mention the prospect of the sale being fulfilled from a warehouse based in another country. Having said that, making as much of a provision as possible whilst still maintaining competitive pricing will place you in the best position when the taxman comes knocking.
Secondly, don’t wait until the end of the year to start tracking how much tax you owe. This may sound impractical but bear with me; there are some great tools out there such as Cross Border VAT to help you track your VAT obligation on every sale in the EU, even going so far as to update tax due based on shipping method and location included in the Amazon or PayPal data feed. Whilst we always suggest enlisting a dedicated accountant or tax advisory firm such as Meridian Global Services to manage your international VAT filings, at least you will know roughly what to expect in-between their more comprehensive calculations. Cross Border VAT will also take into account product categories that are VAT-exempt and it’s useful to check historical tax for over payments. After discovering they have been overpaying overseas VAT, some sellers have ended up with considerable refunds.
Finally, when it comes to actually paying the overseas VAT bill, don’t get caught out by needlessly converting GBP into the foreign currency required – it could add more cost to an already expensive process, especially if you’re using a bank to do it. It’s normally better to keep the funds due in the currency of the original sale, which can then be remitted to the relevant VAT entity without any additional currency conversions. Companies like World First can help you send monthly or quarterly VAT payments to the Finanzamt, SIE or HMRC directly from your sales proceeds. No more converting EUR funds into GBP then back into EUR, for example. Simply tell your account manager how much tax is due, your unique tax reference and we’ll take care of the rest. Or, set it up yourself whenever you wish using our 24/7 platform, World First Online.
Hopefully some of the points I’ve detailed above have been useful and we always recommend seeking independent and qualified tax advice regarding everything VAT-related. If there’s anything else you’re unsure of when it comes to making international payments or repatriating your overseas earnings, please get in touch on +44 2078011068 or firstname.lastname@example.org and we’ll be glad to help.