As more small to medium-sized businesses look to international e-commerce markets to boost sales, differences in tax laws can cause complications for sellers—and an opportunity for payment gateway companies offering workarounds.
One difference is the value-added tax, or VAT, which is assessed incrementally based on calculations that determine the increase in value of a good or service at different stages of production or distribution. Most countries, particularly in Europe, levy a VAT, but the U.S. does not—opting instead for a sales tax, which is levied at the point of sale as a percentage.
For U.S. companies adding international markets for e-commerce, that difference can cause complications, as can the frequent changes in VAT rules and rates in different countries. While larger sellers are more likely to have accountants, tax experts and lawyers who are aware of tax laws in different countries, small businesses are less likely to be up to date and can suffer unexpected penalties for shortfalls.
So far in 2018, the U.K. has updated its VAT laws to combat fraud, Luxembourg has changed VAT policies and South Africa has changed its VAT tax rate. And VAT compliance got even more complicated this spring as Amazon and eBay entered deals with the U.K. government to cooperate and share data to ferret out VAT underpayments, creating more exposure for companies that sell on Amazon and eBay internationally.
"Contending with VAT is one of a number of additional considerations an e-commerce merchant needs to reckon with when expanding into the EU and U.K.," said David Nicholls, director of enterprise development at OFX, a San Francisco-based transfer and forex company that offers local currency accounts to simplify VAT and other forex matters.
Filing is one complication, but the payments can often be the most time-consuming process for exporters, Nicholls said. "With VAT payments due in the country that you sell into every three months, merchants can find themselves having to move money back and forth."
With global retail e-commerce payments doubling nearly every four years, payment technology companies are making VAT management part of their product mix.
Payoneer, for example, has released a bundle of updates to address tax payments. Payoneer will launch a VAT payment service that allows merchants to use Payoneer balances to pay VAT obligations with no fee in the U.K., Germany, France, Italy, Czech Republic and Poland. Other new features address local currency payment acceptance, allowing sellers to link online stores from different marketplaces in one central location; and a new billing service for small to medium sized businesses.
The New York-based Payoneer sees the VAT features as a relationship builder—and an encouragement for small businesses to expand e-commerce into new markets. As part of its service, Payoneer also supports VAT transfers directly to government collection accounts, eliminating correspondent banks or international documentation.
"The payment side of an online business has to be an afterthought," said Iain McNicoll, the U.S. country manager for Payoneer. "You want someone who knows the regulations. Many American aren't aware of these issues."
For a U.S. seller on Amazon's U.K. site, for example, there could be three fees tied to VAT—a withdrawal fee when withdrawing earned pounds from a Payoneer account to the U.S. dollar bank account; an fee to convert the owed VAT funds back to points, then a wire transfer fee when sending the VAT to the U.K. government. McNicoll estimates this eats up about 5% of a seller's U.K. pound income. Payoneer's service is designed to avoid the double conversion.
"We used to have Amazon UK transfer the funds to our American bank— that took a fee. Then we’d have to wire money from our U.S. bank to the HMRC, which cost us because international bank wires aren’t cheap, and we’d pay another currency conversion fee," said R. Blank, founder of Shield Your Body, a Las Vegas-based company that sells equipment for consumers concerned about radio waves emitting from electronic devices. The new service has cost less than an international wire, Blank says.