Chapter 5: Managing Cross-Border Transactions
Sales tax is a complicated world. We’ve put together this series to give you the information you need to navigate the complexities of compliance, as well as the solutions offered through sales tax technology. In this chapter, we cover some of the added complexities inherent in cross-border transactions.
Selling internationally can be a highly profitable strategy and a smart plan for growth and expansion. But while many businesses often put significant effort into determining product demand, marketing strategies, and supply chain logistics, international taxes are often an afterthought — if they’re a consideration at all.
Don’t make the same mistake. The fallout of non-compliance often comes with angry customers and steep penalties; it can even preclude your ability to sell into a country altogether. The best way to avoid the pitfalls of inadequate cross-border tax management is to arm yourself with knowledge. This primer should give you a solid foundation on which to build.
Speaking the language: frequently used cross-border terms
Harmonized System codes
Also called HS codes or tariff codes, these identification numbers are applied to products based on characteristics, including materials and function. The first six digits are uniform across all major global trading markets, and each market has its own unique set of numbers that follow.
Customs duty
Also called a customs tax or tariff, this is a fee the destination government charges to import your goods. The buyer is ultimately responsible for ensuring the customs duty is paid.
de minimus
The minimum value a shipment must hit for customs duties to apply. The amount varies widely among countries; for example, Canada’s de minimus is CD$20, whereas Australia’s is AU$1,000.
Landed cost
The total cost of getting your products to a customer’s door, including shipping, insurance, customs duty, and other import taxes or fees.
DAP
Stands for “delivered at place” and describes shipments in which the seller ships the goods to a destination country, but the buyer is responsible for the costs of importing the goods once they’ve arrived.
DDP
Stands for “delivery duty paid” and indicates that all applicable customs duties have been received from the seller, prior to shipment.
Value added tax
Often referred to simply as VAT, this is a tax applied when value is added to a product at each step of the supply chain. Many countries impose VAT in lieu of sales tax.
Goods and services tax
Also known as GST, this is a tax on goods and services at the point of sale and is passed on to customers, in much the same way a sales tax is applied in the United States.
The life cycle of an international sale
- A customer buys a product through a website, catalog, or over the phone.
- Ideally, landed cost is calculated and provided to the customer. The process can be done digitally in a few seconds, or manually, taking up to a day or two.
- The seller fills out the requisite shipping paperwork, including HS codes and valuation information. The paperwork and package are handed off to a shipper to deliver cross-border. If the shipment is DDP, the seller pays all customs duties and associated taxes to the destination country.
- The package arrives at its destination country where customs officials verify the paperwork is in order and all proper payments have been made. If the shipment is DAP, the customer is charged for any unpaid duties and taxes.
- The package is released for final delivery to the customer.
Avoiding the pitfalls of international sales
The life cycle described above is based on standard process: All documentation is correct, payments are made, the proper steps have been taken, and the rules have been followed. But sometimes things go awry, whether through ignorance of the law, innocent mistakes, or even outright fraud. Here are some of the more common international transaction mishaps and how to avoid them:
Playing the guessing game
Problem: Depending on the number of products you sell and markets you’re in, maintaining accurate HS codes, customs duty, and tax rates can range from a minor headache to a downright impossible task. You may be tempted to just guess and hope for the best. It’s a strategy that may save you time on the front end, but can cost you dearly if you’re found to be out of compliance.
Solution: If your inventory is limited, create a single document updated with the latest tax information. You’ll need to recheck rates regularly and keep track of legislative changes in the places you sell to, but avoiding penalties is well worth it. If you don’t have the resources to track the information manually, or if your inventory or markets are too broad, using an automated solution can reduce your risk of non-compliance.
Assuming the shipping company is getting it right
Problem: Your shipping company may offer to take on classification and documentation tasks. While this may sound great, it’s crucial to read the fine print in your contract. Shipping companies are often not liable for any mistakes in import/export paperwork, and any penalties will fall to you or your customer.
Solution: Be sure to verify everything in the paperwork and double-check how the shipping company has classified or valued everything you ship. If this sounds like as much work as doing it all yourself, you’re probably right. Unless you’ve set up a specific contract making your shippers liable for any compliance issues, you’re better off completing these tasks on your end.
Fudging the details
Problem: If the stuff you ship is just over de minimus or if the tariff for your product is a lot higher than that of similar products, you may be tempted to fib a bit on the documentation. But if you get inspected and customs officials find out you misidentified the goods, you’ll likely face penalties, fees, and angry customers.
Solution: As tempting as it may be to game the system, do not do it. Customs officials are increasingly aware of this trend and have gotten better at identifying potentially fraudulent packages. It’s not worth the risk. It’s also illegal.
Ignoring the problem
Problem: Figuring out landed cost can be resource-intensive and showing a customer potentially steep fees might kill a purchase. But simply charging for the goods and shipping means your customers may be in for a nasty surprise when they get a call requesting an unexpected payment at customs. They’ll be angry with you and may reject the shipment altogether.
Solution: Provide your customers with the information up front so they can make an informed decision. They may not complete the sale, but no one wants to feel duped. Investing in the right cost calculation software or personnel can help you create a positive customer experience.
Not knowing the rules
Problem: When you sell into a country, you’re responsible for knowing the regulations they impose, including product legislation, bans, and taxes. The more countries you do business in, the more complicated it can be to track everything. Despite this, customs agents aren’t likely to sympathize if you’re caught breaking the rules.
Solution: Be sure to do extensive research when you enter new markets. You’ll also have to pay attention to new legislation and trade rules. This is another area where an automated cross-border solution can save you a lot of time, money, and headaches.
Keeping inadequate records
Problem: There’s no shortage of paperwork with international commerce. Keeping track of everything can be a big hassle, and you may feel like you’re done once a sale is complete. But if you’re audited, or if something goes wrong in the shipping or delivery process, you’ll need to be certain you can back up your part of the transaction.
Solution: Keep a copy of all your paperwork in a clear, manageable filing system. You’ll need to access complete records quickly, should discrepancies arise. Depending on your sales volume, it may make sense to implement a digital records system.
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