Taxation of Cross-Border Transactions

Navigating Cross-Border Taxation for Global eCommerce Success

Online shopping has unlocked remarkable opportunities for revenue generation in the modern global economy. Governments around the world are increasingly aware of how online trade can contribute to their tax revenues. As cross-border businesses continue flourish globally, authorities around the globe are implementing new tax laws aimed at capturing these earnings. CFOs and Accountants need to continuously adapt and understand these ever-evolving cross-border taxation rules is for the sustained success of their businesses. This article dives into the key strategies to navigate the intricate landscape of international taxes and maintain compliance while ensuring transparency and customer satisfaction.

The rapid growth of global eCommerce is undeniable, with online retail sales surging by 24.1% from 2019 to 2020, amounting to a staggering $4.3 trillion in additional revenue. This surge offers immense potential for businesses to expand their reach across borders. However, along with this potential comes the challenge of understanding and adhering to the varying tax rates and regulations across different countries.

Effective cross-border business operation demands a thorough grasp of the diverse tax rates imposed by different countries. These rates can significantly impact both retailers and customers. While adding taxes on top of purchase prices may be a recipe for an eCommerce disaster, it’s nonetheless a reality in some countries.

Even if cross-border tax rates as high as 40% seem like a nightmare for a retailer, as a customer, knowing these taxes will be added ahead of time may be the difference between a decision to purchase or looking elsewhere. Not only does this ensure transparency throughout the process, but it also ensures the item is being sold for the correct price based on the location it is being sent to.

Though taking a 40% pay cut on a product may not affect the customer, it is neither a benefit nor a bane for your eCommerce business when you consider that these taxes are affecting both you and the competitors alike.

Not every country has such high cross-border taxation rates, so retailers and customers need to keep up with the ever-changing taxation rules. This may be not easy due to the increasing cross-border taxation rates across multiple countries. Just in the past year, countries that included cross-border taxes increased from 8 to 11. Failure to calculate the correct taxes to charge can result in high-cost mistakes at the expense of the eCommerce cross-border business resulting in numerous complications.

You can ensure you’re staying on top of the ever-changing taxation rates and ensure transparency throughout the process by investing in appropriate technology platforms that integrate payments and shipping platforms.

For retailers and customers transparency means being up-front about charging taxes in a transaction. Nowadays, placing an order online can take seconds to complete, from product search to processing payment, and if you don’t have a fully visible method of showing the customer which taxes, shipping, or other costs they’re paying, it could lead to confusion, or, even worse, anger and dissatisfaction. This is why transparency with cross-border taxes across the entire process is crucial for customer satisfaction.

Businesses have a few ways to integrate additional costs like cross-border taxes and currency exchange rates into their final product price so their customers can fully see where they come from. When businesses decide to apply different currency exchange rates, it can cause dramatic price changes. In most cases, the retailer decides the fees based on marketplace currency or the customer's location. About a third of retailers let the customer decide whether they want the fees applied early on in the buying process or at the end.

Applying fees early in the process. This method increases transparency as it lets the customer know upfront that a conversion fee is added to the purchase price.

Last-step conversions. Displaying fees in the last step of the purchase process may leave customers surprised and feeling slightly taken advantage of. Taxes can then be added on top of the converted price, showcasing the correct amount of money owed.

If a global eCommerce retailer does everything correctly in this process, additional fees will not be charged to the customer without their knowledge. Taking away the ability for customers to opt for last-step conversions gives the customer the correct purchase price right away, increasing transparency and the probability of purchase.

If customers knowingly shop on an eCommerce cross-border retailer, they are likely aware of monetary exchange fees and additional taxes. Keeping these extra charges visible and informing customers will not cause them to back down from a purchase. However, noticing unexplained charges on their card will upset them and dissolve their trust in the business. Whichever way the business showcases its taxes and fees, ensuring transparency throughout the buying process is crucial to customer conversion.

In other words, you’re more likely to win a repeat customer when there are no surprise charges when the customer checks their bank statement.

Also important to the cross-border compliance journey is making the appropriate investments in technology. Relying on old, outdated tools will inevitably lead to various issues for retailers, including delayed shipments, outdated pricing, and dissatisfied customers. New technology that simplifies processes can decrease the chances of error, which leads to elevated customer satisfaction, increased transparency, and improved sales.

The surge in cross-border purchases from everyday items to luxury goods since the pandemic has brought to attention the need for a more efficient system for retailers and consumers. As the years pass, your systems will require consistent updates, and considering the chances that cross-border purchases should continue to increase as customers enjoy a top-flight online purchasing experience, you have even more reason to look into better, more efficient systems. Being vigilant about keeping your systems reliable and seamless keeps your cross-border payment systems optimized, ensuring your cross-border business keeps customers coming back.

Investing in platforms that can take some of the heavy lifting off your plate, such facilitating tax compliance and reporting, can help you serve your customers better, ensure you’ll get the full value of your software investments, and help you stand out from your competition.

As governments implement new tax laws to capture revenue from cross-border eCommerce, CFOs and Accountants must be well-versed in navigating these intricate taxation rules. By optimizing business models and operations for compliance, transparency, and customer satisfaction, global eCommerce companies can thrive in this era of unprecedented growth. Stay ahead by embracing technology, embracing transparency, and seeking expert guidance for a prosperous cross-border business journey.