Navigating international e-commerce taxes can be a complex endeavor for US merchants looking to expand their reach across borders. With each country enforcing its own set of tax rules, it's crucial for brands to understand and adhere to these regulations to ensure compliance with local laws and inform customers about the final price of their purchase. In this article, we'll break down the most common taxes that apply to global e-commerce, obligation thresholds you should be aware of, and a seamless solution for handling collection and remittance.
What is VAT and GST?
VAT (Value-Added Tax) and GST (Goods and Services Tax) are types of consumption taxes levied on the purchase of goods and services. Both taxes are paid by the end consumer and typically collected at the point of sale by businesses who then remit the collected amounts to the government. Although VAT and GST are similar in function, their implementation and use vary across different countries. Here's a brief overview of each:
Value-Added Tax (VAT):
VAT, or Value-Added Tax, is collected at every stage of the supply chain where value is added to a product from production to the final purchase. Because end consumers are responsible for paying this tax, companies can recover VAT paid for any business-related expenses, as they are not the final bearers of this cost.
Goods and Services Tax (GST):
GST, or Goods and Services Tax, is applied to the final consumption of a good or service and calculated as a percentage of the total price paid by the consumer. GST differs from VAT in that it is levied on the total cost of a product, not the value added at each stage of the supply chain. Companies can reclaim GST paid on business expenses, provided these purchases are input taxes used in their supply of goods and services, and they comply with the necessary filing procedures and refund rules.
Understanding VAT and GST is crucial for businesses as these international e-commerce taxes can significantly impact the landed cost of a product. Over 160 countries worldwide have some form of indirect taxes that apply to the sale of goods and services. Key markets like Canada, Australia, New Zealand, and Singapore use GST while the United Kingdom (UK) and the European Union (EU) have a VAT structure.
Unlike sales tax in the US which is typically only imposed on transactions within the seller's own state, VAT and GST can be assessed anytime you sell to consumers abroad, no matter where your business is located. Additionally, most countries will require VAT and GST to be paid at the time of import along with any duties. Some countries however, do require merchants to report taxes periodically, similar to a US federal tax return.
When do International E-Commerce Taxes Apply?
E-commerce businesses need to stay informed about tax regulations in any country where they have customers, due to the potential of payment obligations. There are two main thresholds to be aware of when it comes to fiscal compliance in international markets – the tax de minimis threshold and selling threshold. The term "de minimis" in the context of taxation refers to the minimum value of goods or services that must be reached before taxes such as VAT, GST, or duties are applied. Orders valued below this amount are exempted from incurring any international e-commerce taxes. In addition to a de minimis tax exemption, oftentimes countries will set a selling threshold, allowing smaller merchants to forego tax registration until their revenue exceeds a specified limit. Let’s take a closer look at these two types of thresholds.
Tax De Minimis Thresholds
Many countries have a tax de minimis threshold that allows low-value shipments to be imported without incurring VAT/GST. This exemption saves customers from paying import duties and taxes on smaller purchases. However, once an order exceeds the threshold, VAT/GST gets applied to the full shipment value.
De minimis thresholds can vary greatly across countries. For example, Canada allows products valued under $40 CAD (~$29 USD) to be imported tax-free when shipped by a carrier, while Australia has a much higher threshold, allowing shipments valued up to $1,000 AUD (~$640 USD) across the border without being taxed.
Some countries like Australia and New Zealand offer "distance selling thresholds" that benefit small and infrequent sellers. This means that only if your revenue exceeds a certain amount within a specific time period do you need to register for a local tax ID and handle VAT/GST at the point of sale rather than on import. Meanwhile, markets such as Switzerland and Singapore have a more complex threshold system, where registration and tax obligations only apply if your sales of low-value goods (LVG) surpass a predetermined limit.
Evolving E-Commerce Tax Rules
The international e-commerce landscape is ever-evolving, with new regulations emerging to keep pace with the expanding digital economy. There have been more global tax changes in the past three years than the last three decades as countries are introducing new electronic services and revising compliance laws. While understanding and adapting to these developments can be a challenge, we’ve put together a few helpful resources that break down the e-commerce tax rules in some of the top global markets.
- EU VAT Compliance: What E-Commerce Brands Need to Know for B2C Imports
- UK VAT Guide for E-Commerce: Understanding B2C Import Rules
- Australia GST for E-Commerce: What DTC Brands Need to Know
- 2023 Singapore Import Tax Changes
How Passport Can Help with International E-Commerce Taxes
Here at Passport, we understand the intricacies that come with international e-commerce taxes. That’s why we created our Seller of Record (SOR) solution, designed to give brands a simpler way to handle VAT/GST compliance with a quick and seamless enrollment process. Under the SOR program, companies will use Passport's tax IDs to clear shipments, avoiding complex registrations and filings. As a merchant, you’ll simply collect VAT/GST at checkout, and Passport will manage the rest, including tax returns with the proper authorities and even monitoring sales thresholds that apply to certain countries.
Passport currently offers a Seller of Record solution for the following markets:
By partnering with a shipping carrier like Passport, you can take advantage of outsourcing international tax collection and remittance – so you can focus on growing your brand. Our in-house compliance experts are ready to help guide you through any complex regulations and get your products to customers around the world. To get started, reach out to our team here.
Frequently Asked Questions:
What is VAT?
VAT, or Value-Added Tax, is a consumption tax collected at every stage of the supply chain where value is added to a product from production to the final purchase.
What is GST?
GST, or Goods and Services Tax, is a consumption tax applied to the final cost of goods and services at the point of sale.
What is the difference between VAT and GST?
VAT (Value-Added Tax) is collected at every stage of the supply chain where value is added to a product from production to the final purchase, while GST (Goods and Services Tax) is applied to the final cost of goods and services at the point of sale.
How does VAT work for e-commerce?
US e-commerce merchants must stay informed about VAT regulations in any country where they have customers, due to the potential of payment obligations. Typically brands will need to account for VAT if their shipment exceeds the tax de minimis or they reach a selling threshold in the destination country.
How does GST work for e-commerce?
US e-commerce merchants must stay informed about GST regulations in any country where they have customers, due to the potential of payment obligations. Typically brands will need to account for GST if their shipment exceeds the tax de minimis or they reach a selling threshold in the destination country.
Do US companies have to pay VAT?
While VAT is ultimately paid by end customers, US e-commerce companies may need to collect and remit VAT depending on the tax regulations set in the consumer's destination country.
Do US companies have to pay GST?
While GST is ultimately paid by end customers, US e-commerce companies may need to collect and remit GST depending on the tax regulations set in the consumer's destination country.
Disclaimer: This post is for informational purposes only and does not constitute legal or tax advice.