In today’s digital age, launching an online shop has never been easier. Platforms like Shopify can transform budding businesses into fully operational e-commerce merchants in just one day, equipped to accept orders worldwide. They’re also robust enough to provide scalability as companies evolve into market leaders. In fact, dominant brands such as Allbirds, Gymshark, and Kylie Cosmetics have all harnessed the power of Shopify to extend their reach to a global audience.
However, as the e-commerce industry has streamlined the selling process, the shipping space has grown increasingly complex. Customs and tax authorities across the globe are now pushing for more accurate data, holding merchants accountable for the information they submit.
Compliance Shifts in Recent Years
Traditionally, when it came to shipping low-value goods overseas, merchants only needed to know how to print a shipping label. Customs brokers and carriers would handle the intricate details, from the description of goods to the product value and HS tariff. However, the past five years have seen more regulatory modifications than the preceding 50, and these are reshaping international e-commerce. Furthermore, this trend shows no signs of slowing down.
Before we get into the significant changes that have recently been implemented, let’s define what’s considered a low-value good (LVG). LVGs vary by market, but are usually defined by customs and tax authorities based on a duty de minimis threshold. For example, they can include orders below 135 GBP in the UK, 150 EUR in Europe, or 1,000 AUD in Australia.
Now we can dive into some of the compliance developments we’ve seen in recent years. These can broadly be categorized into tax reforms and customs changes.
- 2018 – Australia follows New Zealand in requiring non-resident merchants to register for a goods and services tax (GST) ID if they cross a sales threshold.
- 2021 – The EU and UK remove the value-added tax (VAT) de minimis, requiring VAT to be paid on all imports and imposing registration requirements
- 2023 – Singapore and Malaysia launch a new GST program for low-value goods, with the Organisation for Economic Co-operation and Development (OECD) pushing for similar actions in other emerging markets.
- 2023 – Brazil launches a tax reform program encouraging merchants to register and pay taxes on imports in exchange for eliminating the 60% tariff on shipments under $50 USD.
- 2018 – The Synthetics Trafficking & Overdose Prevention (STOP) Act to curb illegal opioid imports into the US has broad-reaching impacts across supply chains.
- 2022 – The Uyghur Forced Labor Prevention Act goes into force with other major markets like the EU expected to follow suit.
- 2023 – ICS2 requires at least a six-digit HS code for all products and an accurate description of goods for shipments to the EU, Norway, Switzerland, and Northern Ireland.
- 2023 / 2024 – The CBSA Assessment and Revenue Management (CARM) initiative shifts the fiscal responsibility for customs surety from the customs broker to the importer, and requires all importers into Canada to be directly involved in the duty and tax settlement process.
Enforcement of New Regulations
What's often not widely published is how customs and tax authorities are going about enforcing new regulations. Take Australia’s tax system, for instance. The requirements seem straightforward – if you sell more than $75,000 AUD (~$50,000 USD) worth of products into Australia within any 12-month period, you must register for a tax ID and collect the 10% GST at checkout. But how is this regulated? The Australian Tax Office (ATO) has contracted a third party to identify merchants who have crossed the sales threshold but haven't registered for or remitted GST. An Australian tax lawyer and former ATO official explained it this way: “The ATO has wide powers of information collection from third parties and regularly receives updated feeds of various information.” These wide powers include surprisingly accurate information about your online sales across e-commerce platforms. Many merchants aren’t aware of the GST requirements and are shocked to receive compliance letters demanding back taxes and payment of penalties and fees.
Importance of Accurate Data
All customs and tax data are connected. Like the Skeleton Dance from childhood, the Product Description’s connected to the – HS Code; the HS Code’s connected to the – Duty Rate; the Duty Rate’s connected to the – VAT Charge, and so on until you get to the Total Landed Cost. A common challenge with cross-border transactions lies in these numerous possible points of failure and an error at any part in this chain can cause major impacts down the line.
While a variety of AI-based solutions have been developed to help merchants accurately determine HS codes for their products, the effectiveness relies heavily on having precise product descriptions. This is where the first problem typically arises. Many companies use product descriptions to catch customers' attention as opposed to describing in detail what the product is, what it’s made of, and what it’s used for – the three key elements required for a proper HS classification.
On top of ensuring customs and tax data is accurate, achieving consistency across multiple platforms, systems, and partners can be tricky. Even if the product data in your e-commerce platform is flawless, it can become distorted, just like a game of broken telephone, as it travels from your fulfillment center to your carrier, then to your customs broker, and finally to the customs authority. Without a structure in place to assimilate this information into a closed loop, data can change unbeknownst to the merchant as it moves through the shipping process.
Navigating the Shifting Compliance Landscape
Cross-border compliance has undergone a notable transformation in recent years with regulatory agencies now requiring merchants to take more responsibility for accurate shipment details. This transition has significant implications for global e-commerce brands that are not experts in customs or tax regulations, potentially leading to fines, penalties, and fees, as well as increased customs holds and inspections.
To navigate this new landscape successfully, it’s important for merchants to work with carriers, customs brokers, and other industry experts to ensure compliance as requirements become more complex. Brands should also consider partnering with providers or investing in technology solutions that can help them manage their customs and tax compliance more effectively. An example of this is implementing a closed-loop system that ensures data accuracy from storefront to stockroom to shipment delivery. This comprehensive approach can identify and rectify data errors at various potential points of failure, leveraging actual customs entry data from successful shipments. By doing so, shippers can reduce customs holds, inspections, and discrepancies in the total landed cost, ultimately ensuring a smoother cross-border shipping process.
While the evolution of compliance in recent years has created challenges for e-commerce merchants, companies who adapt quickly can gain a competitive advantage in the global marketplace. Brands who stay up to date with the latest customs and tax regulations, or partner with professionals who do, will gain access to key markets and unlock international growth opportunities.
Thomas Taggart is a cross-border commerce executive with more than 20 years of experience in international trade, supply chain, and product development. As the Head of Global Trade for Passport Shipping, Thomas helps e-commerce brands go global by simplifying international trade, tax, and product compliance issues. For any inquiries, feel free to reach out to email@example.com.
This article originally appeared in the 2023 Global/Cross-Border edition of PARCEL.