A guide to cross-border tax in the EU, USA, and Australia
Launching into new markets can be one of the most fulfilling endeavors of any business. As the global ecommerce landscape grows, the chance to access an entirely new customer base is an opportunity that has swiftly become very real for businesses of all sizes. And with online cross-border trade predicted to grow fivefold to $130 billion by 2020, it’s an opportunity that can't be ignored.
For all the excitement and growth trading abroad can bring, there is an abundance of legal hoops and financial regulations that must be adhered to, from whichever country the business is based in and to wherever it intends to trade.
Tax is one of the largest and potentially trickiest. While nothing beats advice directly from financial regulators and your local tax authority, this guide will try to break through the legal jargon to tell you the common pitfalls, share strategic advice and guide you through the tax best practice you need to start trading abroad with confidence.
If you fail to accurately register, record and submit VAT information, your business is liable for severe penalties. For many tax authorities (including HM Revenue & Customs in the UK), penalties often start at 100% of the VAT owed before the authority considers whether to lower the penalty. With the threat of hefty penalties, it’s paramount you take the time to work out exactly how much, to whom, and when you are liable to pay.
One of the main complications with VAT is that it is hugely dependent on a variety of factors meaning there is no one-size fits all approach. Factors such as the size of the company, where it is based, where it intends to sell, the quantities of goods to be transacted, and even the type of goods/services themselves all affect retailers’ tax obligations. And that’s before you delve into the nuances of local, regional and national tax rates.
Ultimately, however rapidly you want to start trading abroad, it’s vital that you invest enough time to ensuring you know exactly what tax rates you are liable to pay to avoid a hefty bill or penalty.
Here’s a quick example of the complexity that can be faced by merchants selling cross-border:
A London-based cheese manufacturer recognises it has a number of America-based visitors to its website, and makes the decision to begin selling to customers located in New York.
Sounds simple enough, but here are just a few tax considerations the cheese manufacturer must navigate:
- Physical presence (the retailer does not have a physical store in New York – a factor which can impact tax rates in the US)
- Non-taxable items (some food and beverages are tax exempt in the US)
- The customer’s responsibility (whether customers are responsible to pay any tax on goods)
- Import duties (differing by product type, import duties are applicable)
Depending on the merchant’s answer to each of the above, it will be liable for different VAT rates – and that’s just for trading into New York. Each American state has its own tax rulings so if the cheese merchant decided to sell to customers in Texas, it would face a different set of regulations.
So, how can a business ensure it acts in accordance with localised VAT regulations? From Distance Selling limits to tax returns and customs duties, the next few sections will introduce you to the basics of international tax regulations and help you navigate the waters of cross-border trade.
Tax tip 1: Be aware that if a business does not meet its VAT obligations, it is liable to pay all unpaid VAT on sales made in that country, a charge that can be backdated up to a decade with penalties imposed on top.
Further reading: The New York State Department of Taxation and Finance have compiled a thorough guide to help US and internationally-based businesses make sense of state regulations.
Distance Selling: Know your limits
The location of where goods are sold and delivered heavily determines VAT requirements – especially within the EU and countries such as Australia where tax must be paid in the country of supply. However, many regions maintain thresholds which, if broken, make the business liable to pay more tax.
For instance, each EU country has a Distance Selling threshold which, if exceeded, makes the merchant liable to pay VAT in the destination country.
Imagine that a fashion retailer based in Germany wants to start selling to the UK. The business charges and accounts for VAT at the rate applicable in Germany. However, if the annual value of sales exceeds £70,000 (the UK’s Distance Selling threshold at time of publication) the retailer must register for UK VAT. Tax must then be charged at UK rates and accounted for it in the UK as well.
Tax tip 2: The Channel Islands are not classified as part of the EU and as such are exempt from Distance Selling thresholds.
Tax tip 3: Some EU countries calculate Distance Selling monthly rather than annually so make sure you check the specifics of your target market.
Registering for VAT
VAT registration applications can usually be made directly through the tax authority website of your destination country. Be aware that when registering for VAT, you may have to complete periodical requirements including reports and VAT invoices.
It is important to note that if you have surpassed the Distance Selling threshold before registering for VAT, you will need to contact the relevant European or destination country tax authorities to ensure you are not liable by backdated VAT issues.
Tax tip 4: Be aware that not all registrations can be completed online. Many will require you to download, complete and send a form via post.
Tax tip 5: In Australia and New Zealand, VAT is known as Goods and Services Tax (GST) and is calculated at 10% for most products. You must also register within 21 days of reaching their sales threshold.
Once registered and trading overseas, businesses must submit VAT records to the local tax authority, which can be annual, quarterly or even bi-monthly depending on the country.
The information required by regional authorities can differ between countries. However, most declarations require the following details:
- Customer information
- Supplier information
- Transaction details including product type and volume
- Details of any exemptions
- Any reverse charges
Tax checks are carried out periodically across all countries so check and double check all reports and returns to ensure you are not subject to penalties. In addition to periodical VAT returns, be aware that certain regions ask for further reports on the movement of goods internationally. Two of the most significant when trading in the EU: Intrastat and EC Sales Lists.
Instrat reports show cross-border goods transactions between EU member states. At the time of publication, if your business reaches a £250,000 value for dispatched goods and/or £1,500,000 for goods, you will be contacted by HM Revenue and Customs (HMRC) and requested to submit an Intrastat Supplementary Declarations form (SDs) for that month.
Tax tip 6: Intrastat values are calculated using the value of goods only, and not any other charges such as insurance, labour or freight costs.
EC Sales lists for UK VAT-registered companies
If you are VAT-registered in the UK and supplying goods or services to another EU member state, you are obliged to complete an EC Sales List (ESL). HM Revenue and Customs dictates an ESL applies if you have:
- filled in Box 8 of your VAT Return; HMRC will automatically send you an ESL to complete
- supplied any goods to a VAT-registered business in another EU country (this applies even if you didn’t invoice for them, unless they count as samples for VAT purposes)
- moved any of your own goods to a VAT-registered branch, office or subsidiary company that you own in another EU country
- given a VAT-registered customer in another EU country a credit note for goods, even if you didn’t supply them with any goods in this period
- sold goods to a VAT-registered customer in another EU country and arranged for your supplier, who is located in one EU country, to send the goods directly to your customer (this is triangulation)
- supplied services to a VAT-registered EU business and that business accounts for the VAT (this is the reverse charge)
As a point of interest, if your business has individual branches or individual companies within a group VAT registration, you can choose to send separate ESLs.
Tax tip 7: ESLs can be completed online via HMRC’s online service portal or downloaded, completed and posted to HMRC.
Further reading: For full details on when and how to complete an ESL, visit the HMRC website.
Export, import and customs tax
Companies are usually responsible for clearing goods through their own customs regulators when exporting. Once the goods reach their destination, the customer will normally be responsible for clearing any relevant taxes incurred. Then, in order for your customer to clear the authorities, you must supply the customer with the documentation they need (usually an invoice detailing products and pricing etc.).
As a side note, if your business model relies on imports it’s important to be aware of import tax requirements. If you are importing into the EU, VAT is normally paid at the customs border and, as above, can be paid by the seller, the customer or a shipping firm. A business can recover Import VAT with the necessary documentation – check with the regional tax authority for further details.
If you are importing to the EU from a non-EU Member State, you will need an Economic Operator Registration and Identification (EORI) number, which can be obtained alongside VAT registration. You will need your unique EORI number whenever you deal with customs officials.
Tax tip 8: Australia actively encourages cross-border trade online and maintains import tax exemptions. Currently, any imports valued at less than 1,000 AUS Dollars are exempt from customs duties and taxes.
Tax tip 9: If you are shipping large quantities of goods from the UK, freight handlers can manage the customers clearance on your behalf, providing they have the necessary VAT registration and EORI details. Visit the British International Freight Association for more information.
Tax tip 10: If you are based in the UK, advice from an international trade advisor from UK Trade & Investment is free.
MOSS: VAT for digital products
The rise of digital goods has put a cloud-based spanner in the works for many international tax regulators. It is important to note that as of January 2015, businesses which provide digital services within the EU are now subject to new VAT regulations known as MOSS (Mini One Stop Shop).
While a vague term, ‘digital services’ covers both products (ebooks, online magazines, games etc.) and services (telecoms, web hosting, online video providers etc.), you will be affected by the new regulations, even if you only have a small turnover in digital services.
This has prompted outcry from many UK-based SMEs (check out the #VATMess hashtag on Twitter for a taster). HMRC has since relented and made a number of changes.
As of January 2015, there are two ways of complying with the new MOSS regulations:
- Register for VAT in each EU country where you have customers.
- Register for VAT in the UK and submit a VAT MOSS return, from where HMRC will divide the payment to the relevant tax authorities across the EU.
However small a sale to a country (one product priced at £5 to a single customer in Slovenia, for example), you must be VAT-registered in that country or sign up for MOSS in the UK. The main gripe small businesses have with the new MOSS regulations is the lack of a threshold and the need to gather much more information from customers, including:
- Customer’s billing address
- The customer’s Internet Protocol (IP) address
- Location of the bank
- Country code of SIM used by the customer
- Location of customer’s fixed land line through which service is supplied
- Any other information deemed ‘commercially relevant’ by HMRC
The battle between small businesses over-collecting potentially intrusive and personally identifiable information from international customers (such as IP addresses) continues, but for now all UK VAT-registered businesses must abide by the new regulations.
Tax tip 11: You must now keep VAT MOSS records for 10 years from 31 December of the year the transaction was made.
International tax regulations can be a daunting prospect. It isn’t glamorous or exciting and lengthy documents detailing regional-specific tax regulations are not the most riveting of bedtime reading. However, the threat of sizeable penalties for breaking VAT compliance is very real. Don’t put your business at risk by trading overseas without the necessary registrations and paperwork complete.
By thoroughly researching and double-checking registration, returns and compliance, you can trade internationally with confidence and tap into the international ecommerce market set to grow fivefold within the next five years.
If in any doubt, consult a third party advisor or your regional tax authority for more information.
List of major international tax authorities
- UK – HM Revenue and Customs
- Australia – Australian Taxation Office
- USA – Internal Revenue Service (tax regulations differ between states)
- France – Impots, Douane
- Germany – Bundeszentralamt für Steuern
- New Zealand – Inland Revenue