Over the past year, consumers in the UK and around the globe chose to shop from home because of in-person closures and restrictions – leading to a drastic uptick in ecommerce sales. Not only did consumers begin shopping more online with domestic retailers, but they also began to look beyond their borders to make purchases. In fact, online retail sales globally surged 24.1% in 2020 over 2019, reaching USD 4.29 trillion.
Despite rapid growth over the past year, it’s unlikely that cross-border ecommerce will sustain the same amount of growth as brick-and-mortar stores begin reopening their doors. Still, given the convenience and options that come along with cross-border ecommerce, retailers that want to continue to stand out to consumers will need to fully understand the tax compliance requirements when selling across borders.
To protect the customer experience, establish customer loyalty, and mitigate compliance risk, businesses selling internationally will need to stay on top of the ever-changing global tax regulations to ensure calculations are accurate.
Cross-border compliance management is key to positive customer experiences
The pandemic-fueled growth in ecommerce has created a huge opportunity for online retailers to expand their customer base and retain international customers, but only if they can provide a positive customer experience. Unlike domestic sales, cross-border sales introduce an entirely new range of compliance obligations – from customs duties to import taxes. Failure to get every step of the cross-border compliance journey correct can lead to a number of issues for retailers, including delayed shipments and dissatisfied customers.
Nearly every country has different definitions for everything from Harmonized System (HS) codes to tariffs to shipping costs. Because of this, retailers selling across borders must know the rates and rules specific to each country they are selling in to, which can be difficult to do especially as the number of countries a retailer sells into increases and as rates and rules continue to change.
In addition to getting rates and rules correct, cross-border sellers must also be able to provide transparency at checkout. Because of the complexity around cross-border compliance calculations, some businesses are tempted to omit these fees at checkout, but surprising customers with costly fees on delivery is never a good experience. In addition to creating unhappy customers, it can also result in rejected shipments, placing the cost of return on the business.
As a result, retailers need to address compliance requirements in advance and ensure that buyers clearly understand all the associated cross-border costs at checkout or risk significant impact to the customer experience.
Changing legislation globally adds to cross-border complexity
As customs and tax authorities work to keep pace with the rapid acceleration of global commerce, they are changing rules and increasing enforcement of tariffs, customs duties, and taxes at a rate never seen before. For example, many retailers are beginning to feel the effects of Brexit, the United Kingdom’s exit from the European Union, which took effect on 1 January 2021. This adds new complexity for online retailers that previously were not required by the UK to collect value-added tax (VAT) for imported online purchases of under GBP 135. Now that the UK has eliminated that exemption, online retailers from outside of the country are required to collect and remit VAT on all orders shipped to the UK. This change means that online retailers selling to UK consumers will also be required to register and remit VAT collected on orders to the UK quarterly.
Another example of changing cross-border complexity is Mexico’s new HS code definitions. HS codes frequently have eight to 10 digits or more because governments add numbers to further define and distinguish products, which often varies by country depending on the attributes they want to track. Historically, Mexico has used eight-digit HS codes since the Harmonized System was created in 1988, but as of 28 December 2020, Mexico’s HS codes must contain 10 digits. Mexico has also added new tariff codes for new products and eliminated codes for outdated (i.e., rarely traded) goods. As cross-border selling continues to grow, we can expect more countries to implement changes to their HS code nomenclature, duty and tax thresholds (de minimis) and duty and tax rates.
Despite the complexity surrounding cross-border compliance, retailers can easily manage these changing regulations in real-time by leveraging technology that integrates with other critical ecommerce systems, like payment and shipping platforms. Retailers who want to stay on top of changing legislation, become a global competitor, and retain international customers will need to use technology to automate and integrate every aspect of the cross-border journey from product discovery to final delivery. As we move forward, we can expect that cross-border sales will continue to grow as more retailers find ways to serve an international audience and overcome the compliance challenges that lie ahead.
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