In the digital age, it’s become easier than ever for companies of all sizes to broaden their reach and sell to new markets. But along the way, global digital sales also carry a host of regulatory hurdles when it comes to satisfying various tax regimes.
Richard Asquith, vice president of Global Indirect Tax at Avalara, told PYMNTS in a recent interview that eCommerce tax policies are fragmented when viewed across the international stage — and they’re about to get even more challenging.
As he told PYMNTS, challenges confront eCommerce firms that seek to understand the broad range of compliance and taxation frameworks that can differ greatly among the countries into which they sell. Critical concerns include which country the tax is due to, the various rates at which they should tax sales, how they must register with tax authorities, what invoicing rules may be in place — and even where to send tax returns.
“When you put on top of that all the different languages that must be considered, there is so much that is impenetrable,” he said. “When [eCommerce companies] can’t get through the language barrier, the outcome is large-scale tax evasion, whether through ignorance, or whether through deliberate actions across the world.”
To get a sense of scope, he said that in Europe, tax evasion on the part of eCommerce companies alone is estimated to be on the order of 5 billion euros per year, and the European Commission has estimated that the tally will soon hit 7 billion euros per year — a “VAT [value added tax] gap” that authorities will of course seek to narrow across several regulatory avenues of action.
Asquith said tax authorities are turning attention to a number of players across the eCommerce supply chain, but especially credit card companies, Apple Pay, PayPal, mobile and wallets — basically, any firms that are processing eCommerce payments from providers.
Tax authorities, he said, are prodding those firms to perform “split payments,” which separate the payment for the goods or services from a payment for the VAT amount. Speaking to other approaches, he said, authorities have trained their sights on the larger platforms and marketplaces, such as Alibaba, eBay, Amazon and Etsy (to name a few).
In the case of those firms, he told PYMNTS, EU regulators and legislators are seeking to make the marketplace the legal supplier of eCommerce goods from foreign companies into local markets beginning in 2021 in certain situations. The marketplaces take legal title to what’s being sold and are responsible for the VAT calculation.
“It’s a big challenge for the marketplaces,” he told PYMNTS, “because they have to understand all of the individual country’s rules, and have to be able to apply those rules across thousands and even hundreds of thousands of transactions per day — equating to millions of transactions per year.”
Many of these companies, he said, are just realizing that beginning in 2021 (in Europe) they will be liable for transactions conducted between end customers and U.S. or Chinese sellers.
What Lies Ahead: Brexit
In at least one corridor of European trade — between the U.K. and the European Union — the VAT and tax collection landscape is clouded by a looming seismic event.
That’s Brexit, of course.
As we hurtle toward the end of October, in the case of a no-deal Brexit (and in the event there’s no postponement in the offing), there will be an immediate effect on trade and the collection of customs and duties, he said.
Many changes will affect the flow of goods and some services between the U.K. and the EU for the first time as the U.K. leaves the EU’s customs regime, Asquith said, noting that, effectively, the U.K. becomes what is termed a “third-country” among the EU’s trading partners, similar to China or the U.S. Goods from the U.K. will be levied EU import tariffs and must clear customs. The charges can range from between 3 percent to as much as 40 percent on some goods sent to the EU.
In addition, the paperwork increases considerably. U.K. companies selling into the European Union will have to navigate national commodity codes, fill in declarations documents and may choose to register for what are known as Authorized Economic Operator permits. These sweeping changes, said Asquith, will impact as many as 245,000 firms based in the U.K.
Many trading partners will not wait for their British counterparts to figure it all out — resulting in lost business across the B2B and B2C realm. For firms that make mistakes in navigating the bureaucracy, goods may be held up at customs, and end recipients may in fact have to pay out of pocket to have those items released from customs and delivered. That’s another surefire way to lose business, said Asquith.
It’s becoming paramount for firms to embrace automation, he said, as companies do not have the labor-hour staff on hand to grapple with these bureaucratic challenges. He noted that companies such as Avalara help take paperwork and guesswork out of the equation. Through the use of artificial intelligence, he said, Avalara is able to identify the commodity codes and the different tax rates, for example, for goods headed to Poland from the U.K.
The move toward automating such functions, he said, may help smooth some of the frictions of Brexit, but also dovetail well with larger trends in place in Europe, where various countries, such as Italy, mandate eInvoicing. In that case, before a company (of any size) sends out a sales invoice, it must electronically send a sales invoice to the Italian tax authorities. The authorities will calculate and check that the seller has estimated the taxes correctly, and then will pass the invoice to the end customer.
“It’s a move toward digitization and real-time reporting,” Asquith said, and has proven successful as the Italian government has recovered billions of euros in previously missing tax revenues. Other countries are taking up such processes, he said.
“You’re going to see huge amounts of bureaucracy imposed on companies and they are not ready for it,” he told PYMNTS.
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