Your e-commerce business is booming. As global consumer buying becomes increasingly easier, more and more buyers from new countries are ordering products from you. Sales are up, the cash is rolling into your accounts, and you’re ready to spend more toward building your inventory.
But just when you’ve started getting used to the fresh income from new business overseas, a slew of unexpected, profit-slashing VAT (Value-Added Tax) bills begin to pour in. To add to the headaches, there’s a different VAT bill for each country where you’re selling your product.
It’s an unexpected pitfall that expanding e-commerce businesses fall into when selling to new markets overseas. And it’s no surprise – there are more than 140 countries outside the US that use a VAT/Goods and Services Tax (GST) type system on goods.
So what are e-commerce businesses to do? While VAT charges are almost inevitable if you’re selling overseas, there are steps you can take to reduce the surprises and even cut out certain extra charges.Tip #1: Know where your customers are
Becoming VAT-smart starts with creating a simple blueprint of your situation. Start by creating a list of countries where you sell to and record the annual sales amount you generate in each of those nations. This step may be the easiest, but it’s also the most vital as it will help you see if you’ll need to register for VAT and steer you toward how much you’ll owe.
Tip #2: Know each country’s VAT threshold
For each country where you sell product, you’ll need to find that country’s “VAT threshold,” or annual turnover (revenue) trigger, and compare it to your country and sales list to see if you’re within the threshold. This is important: if your annual sales in a given country exceeds that nation’s threshold, you’ll need to register a VAT account in that country as you’re on the hook to pay VAT charges.
As an example, if you’re considered a “distance seller” (i.e. an international e-commerce business) with products going into the UK, you are required to register for VAT if your annual sales exceed £83,000 within the nation’s borders. By the way, if you discover that you owe VAT charges for past years, be sure and pay them promptly as Tax Authorities can seek unpaid VAT bills based on sales you made as far back as 10 years, depending on the country.
While it’s best to work with a VAT-compliant tax accountancy to help you on a personalized basis, you can get a general idea of each country’s VAT threshold on our partner Meridian’s Distance Selling Threshold table.
Tip #3: Know each country’s VAT rate
If you find your sales in an overseas country exceeding that nation’s threshold, you’ll likely want to know that country’s VAT rate to get a general idea of the tax liability you can expect. Much as US sales taxes vary by the state, VAT rates differ by the country, and typically range from 10% to more than 25%. You can view a full list of the 2016 VAT rates for every EU nation and the UK on Meridian’s Standard VAT Rate table.
Once you know the VAT rate in one of your markets, you can match it to your annual sales there to estimate the amount of taxes you’ll owe. For example, if you’re a US seller that generated £100,000 in non-VAT-exempt sales in the UK where there’s a 20% VAT rate, you may owe roughly £20,000 in taxes.
Tip #4: Know the two most common types of VAT charges
Fulfillment by Amazon (FBA) sellers and others looking to ship inventories in bulk either by themselves or through a fulfillment partner need to be aware of two common VAT triggers.
The first VAT trigger comes when your products initially enter the country you’re exporting to, though you may be able to recover this one if you handle it right. If you’re using third parties to warehouse and fulfill your inventory stock, it’s crucial to know where they are storing your inventory and what jurisdictions you need to do your VAT research on. Even though these third parties handle the logistics, you’re still liable for the VAT charges tied to where they’re sending your products.
The second VAT trigger happens at checkout, where it is passed on to the consumer abroad when they buy your product online. To help you better account for the consumer-facing VAT charges you’ll have to collect, and so your shoppers avoid sticker shock when it’s time to place an order, it’s easiest to price your products with the VAT charge already included. For example, if you’re a US merchant selling an item on the Amazon UK marketplace for £100, and the product’s VAT will be £20, price the item for £120. On your checkout pages, be sure and list the item’s original price and VAT charge separately to show your buyers you’re being fully transparent.
Pro Tip: Avoid paying for double conversion charges and boost your bottom line
You should know this tip if you’re selling overseas through Amazon or another e-commerce marketplace. Sellers often have their overseas profits automatically repatriated by the marketplace provider (at a time and currency exchange rate of the provider’s choosing) and converted back into their home currency for a fee. Later, when the VAT bills come in, sellers will need to convert their money again (and pay fees to convert for a second time) to settle the VAT in each foreign country.
Here’s how to avoid paying twice for the conversion and keep more of your overseas profits. Let’s say you’re a US e-commerce business selling overseas to customers in the UK and you earn £100,000 in sales. If you open an account with World First USA, they can set you up with a receiving account in the UK from which you can directly pay your VAT bills, no conversion required. From here, you can choose when to bring your money home, lock in a great exchange rate, and skip having to pay for a second conversion charge when you pay your VAT bills.
If you want to maximize your bottom line while minimizing unexpected tax audits and VAT charges, it’s crucial to know where you’re selling, where your products are being stored, and what types of VAT charges to expect.
We hope this guide helps you plan for the potential challenges of VAT around the world. VAT charges are complex and vary from country to country, but mastering the complexities could help you grow your global sales. To learn more about successfully expanding to new countries, get in touch with us.
This article comes from our magazine “E-Commerce Solutions – Insights for Online Sellers.” Download now to read lots more best practices on selling online!