It’s a little too easy to shop these days. Anyone with internet connectivity and a credit or debit card can pop online and purchase almost anything in minutes, whether the seller sits in a basement down the street or half a globe away. However, the transaction is not that simple for the ecommerce seller on the other end of the line, especially if that seller is located in another country.
Selling internationally is easier than it ever has been. The internet makes it relatively simple for sellers to market to and connect with buyers in almost any country. Translation software is facilitating communication, and methods of payment for international transactions are becoming increasingly sophisticated. In addition, improved international shipping options are whizzing packages around the globe in record time. Together, these improvements are drawing more and more small and mid-size companies into the international marketplace.
Yet selling internationally involves more than making the sale and mailing a package. In addition to figuring out applicable transaction taxes (e.g., sales tax, GST, or VAT), shipping, and insurance costs, global sellers are required to assign international tariff codes to every product for each country of import. They need to know the de minimis thresholds (the minimum declared value a shipment must have for it to be subject to customs duty) of all ship-to countries. And they must attribute the proper rate of import tax to each exported item in each import country.
Tax and tariff regulations are on the rise
International tax compliance has never been more important because the overall increase of cross-border ecommerce activity has inspired more countries to adopt stricter policies at the border. Whereas once they may have let them pass unmolested, customs officials are now on the lookout for small commercial shipments or packages from reoccurring sellers. In addition, due to the geopolitical climate, it’s becoming increasingly common for shipments to be screened to ensure they aren’t “bad things” being shipped to “bad people.” This means exporters and importers are encountering even more customs enforcement.
In fact, customs officials and tax authorities are increasingly stopping shipments at the border to ensure the proper import taxes, duties, and fees have been paid. If these weren’t correctly accounted for at checkout, customs will reach out to customers and inform them that they can have their package once they’ve paid the tax that’s owed. Not the kind of call a customer wants to receive unexpectedly.
Officials also check invoices and verify tariff codes when goods enter their country, and they don’t let discrepancies slide. This means even sellers who strive to account for taxes may come under scrutiny. International tariff codes are extraordinarily precise, and a misclassification can lead to a significant difference in the amount of tax owed. Whenever issues arise, customs officials contact not the seller or the shipper but the consumer, upon whom the burden of global tax compliance falls. If a seller or shipper misclassifies a product and the incorrect amount of tax is paid, the consumer will be billed for any remaining tax owed, plus applicable penalties and interest. Errors that have gone undetected for months or years can create a sizable bill.
Size doesn’t matter anymore
While large shipments by enterprise sellers may once have been the primary focus of tax authorities, that’s no longer true. As the number of packages crossing the border has increased, so has the scrutiny of customs officials and tax authorities. This may not cause problems for sellers who are well-informed and in compliance with customs duty and import tax regulations. However, the non-compliant are likely to encounter delays and even penalties.
Large enterprises can devote entire teams to customs duty and taxes, and even still, it isn’t unusual for them to get global tax compliance wrong. According to a recent study, nearly one-third of surveyed U.S. shippers have suffered delays and fines from regulatory agencies (e.g., customs authorities) because of tax compliance-related oversights such as incorrect tariff code classifications or a lack of screening. In fact, nearly one-quarter of the 281 executives surveyed for the study said they were concerned regulatory penalties would lead to fines and shipment delays.
International tax compliance is even more challenging for small and mid-size sellers, many of whom struggle to understand what’s required of them. They may not have the time or expertise needed to assign correct tariff codes for each product and each country of import. They may ask their shipping company partner to take care of global tax compliance yet fail to provide the detail necessary for them to get the tax right. Or they may not be aware of all the documentation, fees, and taxes required to ship products from one country to another and unwittingly place the burden of tax compliance on their customers’ shoulders.
Any of the above scenarios can impact the ultimate customer experience. At minimum, problems at customs cause unexpected delays. More likely, customers will be forced to pay unexpected costs to obtain their shipments. Some will pay what is owed to receive their package. Others, perhaps outraged by the expense or the surprise, will refuse the extra cost and the shipment, creating additional expenses for the seller.
Be smart about international customs duties and taxes
The most successful global sellers of any size get in front of customs duty and import tax. Understanding all that entails is the first step toward improving international tax compliance.
Customs Duty & Import Tax For Dummies provides a detailed introduction to the benefits and challenges of cross-border selling. It explains how to calculate the international landed cost of a transaction — the total cost of shipping goods internationally from door to door — and the advantages of using a landed cost calculation app rather than a manual solution. Get it now.