Avalara takes a look at what makes cross-border trade so essential for ecommerce businesses, and how the challenges associated with it can be overcome.
Ecommerce is at the forefront of most modern retail strategies as consumer behaviour trends massively towards online shopping. However, one of the biggest challenges faced by e-commerce companies is how to engage in cross-border trade — it’s a crucial part of expanding a business but is incredibly complex. Potential problems range from deciphering VAT regulations to managing the cost of importing goods.
Unfortunately, cross-border trade is more complex in recent years. Brexit and changes to EU VAT regulations mean that it’s more expensive and complicated to sell across borders. Even the COVID-19 pandemic, despite playing a huge part in moving consumers towards ecommerce, makes selling internationally difficult because of the disruption to global supply chains.
Despite the challenges, cross border trade is a vital part of business development, and companies seeking new markets must rely on it to expand their horizons. In this article, we look at what makes cross-border trade essential, and how to overcome the challenges associated with it.
The Importance of Cross Border Trade
What makes cross-border trade important? Here are three reasons why ecommerce businesses should sell internationally:
- Enter a Larger Market: 67% of shoppers in the US are at least spending 10% of their monthly online shopping budget on cross-border ecommerce. The marketplace is enormous, and if you’re continuously expanding your business, it’s inevitable that you’ll need to engage in international trade at some point. Businesses might also find that their profits are limited when they only operate domestically — in these cases, it’s important to enter foreign markets to avoid cash flow problems.
- Embrace the ecommerce boom: COVID-19 showed that businesses need to be agile and adaptable in order to succeed. Now that the world is starting to recover from the pandemic, it’s the perfect time for businesses to use that agility to explore new markets and embrace new technologies. Cross-border trade provides an excellent opportunity to engage in both of these practices.
- Stay Ahead of the Competition: Competition is impossible to avoid. It can be mitigated with good marketing, but multiple competitors can take a noticeable chunk out of your market share. If your domestic market is getting crowded, cross-border trade might be the difference between success and bankruptcy.
Why Keep Cross-Border Trade Switched On
Before engaging in cross-border trade, you must be prepared for the difficulties you might encounter. Your business can’t enjoy the advantages of operating internationally unless you’re able to deal with these issues.
The first problem is cost. Customs duties are the most significant cost for ecommerce businesses, which is often due to a lack of knowledge concerning HS codes. Companies will often apply incorrect (or incomplete) HS codes to items being shipped, which leads to the company being charged the highest possible duties for the item.
Trading within the EU (and particularly between the EU and Britain) is also expensive due to new VAT rules. Before July 2021, no import VAT had to be paid for commercial goods of a value up to €22. Now, VAT charges apply to all imports regardless of cost.
The EU is pushing IOSS to simplify the reporting and payment of VAT. However, this comes with its own costs: it’s estimated that businesses will need to pay nearly £7,000 per year to register and comply with IOSS regulations.
As well as the financial burden, companies will need to deal with a steep learning curve if they wish to begin cross-border trading. Tax law is a particular source of concern for retailers, with 40% admitting to feeling overwhelmed by tax and compliance obligations. IOSS means companies only need to provide a single VAT return, instead of registering for VAT in every company they sell to. But it still requires a significant time investment to ensure a business is correctly registered for IOSS.
These new hurdles exist in addition to the traditional barriers to cross-border trade, like language barriers and a lack of knowledge of new marketplaces. However, with the right application of resources, your business can overcome these challenges.
We’ve looked at cost as a significant barrier, but the reality is that successful cross-border trade can easily offset any costs incurred by increased VAT or customs duties. Many businesses that shied away from EU trade have noticed a significant decrease in annual revenue because they did not sign up for OSS schemes.
Obviously, managing the costs of cross-border trade requires careful financial management, and you’ll only be able to recoup costs if you increase sales by exploring new marketplaces. To ensure success, automation should be at the forefront of your cross-border trading strategy.
The right tax solution takes care of many of the complications surrounding cross-border trade. For instance, tools exist that can identify and generate the correct HS codes for your products, substantially reducing customs duties. Automation can also help calculate customs duties, so that your customers receive an accurate final landed price instead of being surprised with extra charges upon delivery.
Keep Up-To-Date With Ecommerce Tax Trends
At Avalara, we know that one of the biggest challenges faced by e-commerce companies is how to engage in cross-border trade. It’s a crucial part of expanding a business but can be incredibly complex.
So, we’ve put together the Ecommerce Tax Trends 2022 guide to help you find solutions to these problems. Our guide will brief you on the barriers to trade you’re likely to encounter in 2022, and how to overcome them. We’ll provide you with everything you need to achieve business success going forward, from our essential E-commerce Checklist for Avoiding Barriers, to key advice from our Senior Director Sacha Wilson.