Global tax changes
Growing international sales is a top priority for many businesses. Companies based outside of the United States want to crack the American market, while U.S. businesses crave more customers abroad. Getting international tax compliance right is a critical step to growing cross-border sales.
International shipping woes continue
Remember 2021, when shipping was so costly and spots on container ships were so hard to come by that some large retailers leased or purchased their own containers? Global shipping has improved since then. But it’s still not great.
According to logistics company Freightos, the freight rate in October 2022 was 68% lower than the rate in October 2021, but 170% higher than the pre-pandemic rate in October 2019. In fact, in November 2022, some lane prices were 400% higher than they were before COVID-19.
Crossing oceans is just one step in what remains an arduous supply chain journey. Labor issues at ports may delay docking. There’s also sticker shock at the pump. And shipments could have to navigate trucking logjams in much of Europe, rail backlogs and overcrowded warehouses in the U.S., and postal strikes in the U.K. There will likely be other bumps in the road too.
The takeaway? Though some aspects of international shipping appear to be stabilizing, supply chain challenges aren’t going away any time soon.
Tax compliance is another hurdle businesses selling internationally must jump.
Online marketplaces do the heavy compliance lifting in the EU, UK, and US
SOURCE: Marketplace Pulse
Amazon facilitates sales in 21 countries and counting as of October 2022. Other online marketplaces are also putting more resources into global expansion, with good reason. Third-party marketplace sales are on track to be the largest and fastest-growing retail channel globally, accounting for 38% of all global retail sales growth by 2027.
To succeed as they grow, marketplaces will need to lean on tools and technology that can help ease the burden of international tax compliance. Expanding marketplaces already have a long to-do list in the United States.
Most states require most marketplaces to collect and remit sales tax on behalf of third-party sellers. In states where they don’t have nexus, marketplaces may need to comply with non-collecting seller use tax reporting and notification requirements. And a growing number of states, including Arkansas, California, Georgia, and Ohio, are making marketplaces take steps to ensure high-volume sellers are legitimate.
Facilitating international sales adds more layers of compliance complexity on marketplaces.
The United Kingdom and European Union now require online marketplaces, as the deemed supplier, to collect, remit, and report value-added tax (VAT) on certain transactions. In the U.K., marketplaces must identify the value of each transaction, where each seller’s goods were at the time of sale, and whether the seller is a U.K. or foreign business.
If goods were shipped from the U.K., the marketplace must indicate whether the seller is a U.K. resident. If the seller is an overseas business, the marketplace is responsible for charging and remitting VAT. When goods are shipped to U.K. consumers from outside of the U.K., the marketplace is responsible for VAT on all consignments under £135. All this information must be recorded and the records maintained for six years.
The EU also requires marketplaces to record the value of goods, as different rules apply for imports valued above and below €150. Transactions involving a non-EU seller fulfilling orders from a warehouse in the EU for a European consumer face additional deemed seller requirements, no matter the value of the goods sold. And marketplaces must retain electronic records of third-party sales in the EU for 10 years.
It’s complicated, and these obligations are in addition to the day-to-day tasks international sellers already must do, such as assigning the proper Harmonized System (HS) code to every product that crosses a border, processing payments in multiple currencies, and complying with all VAT and other tax requirements.
Moving invoicing and reporting online and to the cloud can help.
The digitalization of global tax compliance: It’s happening
A new VAT system for online shopping took effect in the EU on July 1, 2021. The changes included the implementation of Import One-Stop Shop (IOSS), an online system for ecommerce firms selling into the EU from outside the block, and One-Stop Shop (OSS), an electronic portal through which EU-based online sellers can register and “take care of all their VAT obligations for their sales across the whole of the EU.”
According to the European Commission, creating a more level playing field for all businesses, simplifying cross-border ecommerce, and introducing greater transparency for EU shoppers have “delivered strong results.” Member states collected about €1.9 billion in VAT revenues in the first six months alone. By March 15, 2022, more than 8,000 traders had registered to use IOSS.
Participation in IOSS and OSS is optional, but a growing number of countries are implementing mandatory registration and reporting requirements for foreign ecommerce sellers, shifting VAT collection from the customs border to the point of sale. As well as increasing tax revenue by targeting foreign businesses, tax authorities are increasingly looking to digital reporting and electronic invoicing requirements to hamper tax evasion and boost VAT collections domestically.
E-invoicing and digital reporting mandates are spreading
“E-invoicing is the clear direction of travel for tax authorities globally,” says Alex Baulf, senior director of Global Indirect Tax at Avalara. “To comply with the growing list of mandates, tax, finance, and IT professionals need advanced knowledge of upcoming e-invoicing mandates. Understanding e-invoicing terminology and nuances is also critical, as requirements around the globe have both differences and similarities.”
Here are some upcoming developments on the e-invoicing front:
- Portugal requires PDF invoices to have a digital signature as of January 1, 2023, and requires businesses to add a unique document code to invoices, in addition to the existing requirements to add a QR code and use certified billing software.
- Serbia implements e-invoicing requirements effective January 1, 2023, while Saudi Arabia rolls out phase two of an e-invoicing mandate between January 1, 2023, and June 30, 2023. Japan will launch a new tax invoice system for Japanese Consumption Tax on October 1, 2023, when it could also require e-invoicing.
- Poland will mandate B2B e-invoicing starting January 1, 2024. Spain’s on track to mandate B2B e-invoicing in 2024 too.
- France will implement mandatory B2B e-invoicing and e-reporting for B2C and cross-border sales and purchases starting July 1, 2024. All businesses will need to be able to receive electronic invoices from that date forward. The French government has confirmed that penalties will apply to businesses that fail to follow applicable e-invoicing requirements.
The European Commission is exploring a move to a harmonized common standard for domestic B2B e-invoicing across the EU. It’s also considering gradually introducing obligatory e-invoicing across the EU. Alex Baulf predicts one of the EU’s main proposals under the VAT in the Digital Age initiative will be a new Pan-European digital reporting requirement, to replace the current European Sales List requirement for intra-community sales.
“The transition to digital tax compliance is picking up steam around the world,” says Liz Armbruester, EVP of Customer and Compliance Operations at Avalara. “While the purpose is simplification and efficiency, the transformation process can be both long and challenging for businesses. The U.K.’s digitization program began with VAT but future phases include income tax self-assessment and corporation tax. Businesses everywhere would be wise to build their own transformation plans to accommodate the shift to digital for all of their tax compliance.” E-invoicing software can help.
The UK made tax digital
As of November 1, 2022, the U.K.’s Making Tax Digital (MTD) program is in full effect. Having eased taxpayers into the new system April 1, 2022, HM Revenue & Customs (HMRC) has turned off the ability for businesses to file monthly or quarterly U.K. VAT returns through legacy web-based VAT online accounts. Affected businesses must sign up for Making Tax Digital for VAT.
The most significant new requirement, and arguably the most challenging for businesses, is the requirement to ensure there are clear “digital links” between the underlying digital records of the transactions and the final U.K. VAT return that’s submitted via an API link. In practice this means there must be a digital audit trail relating to the movement or modification of the tax and transactional data in the digital records. This means the days of copy and paste within a spreadsheet are over.
Other issues likely to affect global tax compliance in 2023
Digital services taxes
Many countries have introduced or plan to introduce legislation requiring foreign businesses to register for VAT or goods and services tax (GST) and charge, collect, and remit the tax on sales of digital services to consumers. The first digital services tax legislation was put forward in the EU in 2003. Today, more than 100 jurisdictions globally have introduced similar rules. Digital services tax requirements are complex, varied, and difficult to navigate; they include low thresholds, identifying and evidencing customer location, and different rules on invoicing, currency, and exchange rates.
Governments worldwide are turning to tax policy to help encourage sustainable choices.
For example, the U.K. implemented a new plastic packaging tax on April 1, 2022, at a rate of £200 per tonne. Italy and Spain began taxing certain plastic packaging on January 1, 2023, and other countries will likely tax plastic packaging eventually — especially since the EU now requires member states to make an annual contribution based on the amount of non-recycled plastic packaging waste each member produces.
Expanding e-invoicing requirements
Multinational businesses will need to learn how to navigate a labyrinth of expanding e-invoicing requirements. Sooner or later, nearly every country will digitalize tax compliance to some extent. It will fall to businesses to keep track of new requirements in each jurisdiction, update systems so they can comply with new mandates, and manage the continual flood of changes.
Visit the Avalara Tax Desk to keep your finger on the pulse of ongoing global tax changes.