What are the challenges of Cross-border Ecommerce?
Selection of adequate markets
The first question before even thinking about localization should be: What markets offer reasonable chances to set up a profitable business within a feasible time frame? Blindly investing in expansion to new markets is dangerous. Often, the obvious choices – for example the large ecommerce markets such as the UK or Germany – are not the only options: the true potential for individual players can very well be situated in smaller or emerging markets. There is no one-fit-all approach. In order to select the right markets for an online expansion, the target countries should be profiled in order to determine their potential. Sellers should also include an analysis of the search frequencies of the products they wish to sell in the new markets. Another important step is a comparison of product prices, CPC (Cost per Click, average costs when running an AdWords Campaign) and CPO (Cost per Order, quality of a marketing measure).
Language is, however, also a challenge when it comes to understanding legal requirements, making agreements with local partners, and offering a customer service in a new target market.
For more information about this subject, please refer to the topic of Translation Management.
Online shopping depends a lot on trust: in order for consumers to transfer their money, they need to feel safe. They want to understand if the product is the right one, how long delivery takes, how the return process works and whether they can trust the means of payment. A new seller will at first have to gain the trust of the new audience in order to build up a "good name". Some factors that influence trust include assuring buyers that they will get what they ordered, being transparent on prices and additional costs and fees, offering a locally trusted payment system, and being available for customers if they have questions or problems. Post-purchase, a good experience is obviously the best driving force of trust.
Perception of data safety
Across Europe, the perception of whether personal data is safe when shopping online varies heavily: An average of 57% of Europeans are worried about their data not being safe. This is of biggest concern to respondents in Spain, where 78% of people do not think it is safe. Germany was the second-highest with 62% and UK-based respondents showed the least concern, at 49%.
HR and internal responsibilities
A new market demands a lot of attention and time investment. Not everybody in the organization might be as enthusiastic about the expansion as the CEO is, or people are simply too busy doing what they were doing before the new market entry. However, if nobody sees the international expansion as his or her project, it is hard to get the attention and dedication of co-workers when something needs to happen. That is why having a country manager is a real asset. You can choose to assign this task to someone internally or hire a new employee, or you could consider outsourcing the management of your foreign shop. The country manager becomes the project owner, able to identify needs and problems, communicate across organizational levels, and request and organize resources needed to cater to the new market.
Adding new target markets means increasing your development team's workload. And even if the new markets might start off as less profitable and thus appear less relevant, they deserve the same dedication as the home market in order to thrive in the future. If companies are unable to free up the necessary development capacities, chances are the new markets will not grow, or at least not as fast. Ramping up development capacities is a key factor for creating scalability and accommodating growth in a new market.
Scalability is key when it comes to the feasibility of an ecommerce expansion across borders. Your business needs to be able to change and grow in order to meet demand. The investments you need to make to operate an online shop in a foreign country should be as scalable as possible, because having long-term contracts and other fixed obligations when the demand fluctuates is hazardous for sellers’ profitability.
Research reveals that many of the obstacles to cross-border shopping are delivery-related: in 2014, Pitney Bowes  found that high shipping costs (68%), additional fees at time of delivery, including duties and taxes (58%) and too lengthy shipping times (42%) were the three dominant factors motivating the abandonment of a filled shopping cart. Doubts about the return procedure and costs count among significant hurdles for cross-border shopping.
A well-streamlined logistics procedure is also important for buyer retention: a good delivery experience would encourage over 80% of German, French and British customers to choose a retailer over others , as research has shown.
Handling returns is a crucial issue in cross-border ecommerce. For customers shopping cross-border, transparency and comprehensiveness of the returns procedure is highly relevant. As evident from the European Commission's Consumer Scoreboard , three out of the ten most relevant concerns when shopping from a foreign online seller relate to returns. Consumers are worried about high return costs, they fear that sending the products back and receiving their money back is going to be complicated, and they are afraid that arranging replacement and/or repair might not be easy.
From a customer perspective, shopping online means sacrificing the ability to see, touch and try an item in exchange for other advantages, such as convenience, a better price and better availability of a certain good. Despite of that, the idea that the product might either not be as imagined or might arrive damaged creates the demand with customers to know exactly how to return the products and how to receive their money back. An unclear return policy is the second-most occurring reason for shopping cart abandonment, according to a survey by ComScore in March 2015.
Taxes in the European Union
Open borders and the free movement of goods and services: the European Union and its single market would seem to be a veritable Mecca for online merchants and suppliers of services. The positive trade climate in the EU has come about in large part thanks to the harmonization of numerous laws and constantly improving telecommunications and logistics infrastructure. As a result, the environment for online merchants has greatly improved over the course of the last decade. At the same time, VAT rates differ in many countries, and often sellers are responsible for determining what tax rate is applicable to their products or services in another Member State. In addition, in a number of countries individual, reduced rates apply under respective national law.
Things are changing, but for whom?
Are you a B2C online seller of goods in other EU countries? If so, then nothing will change for you. You will still need to calculate and pay your VAT according to the European VAT regulations on distance selling. More information on this can be found in point 1 of this segment below. Are you selling electronic services to private customers, e.g. music and movie downloads, software, online courses or apps? If so, starting immediately you will have to apply the VAT regime of the country in which your customer is located. Vendors who sell to business customers continue to use the reverse charge procedure, i.e. the biller does not charge VAT. Consequently, the change primarily affects sellers of electronic services abroad. See point 2 of this segment below for more information on this.
Why does the regulation mean trouble for companies like Amazon and eBay, which primarily sell goods?
American giants like Amazon and eBay opted to establish their European headquarters in Luxembourg since that country levies a very low VAT rate of 3% on digital services. This is especially advantageous for sales of e.g. e-books. Amazon is increasingly focusing on selling digitized media. This advantage is done away with under the new regulations. Beginning now, the country where the consumer resides determines which tax rates must be applied. In Spain, for example, VAT on e-books is 21 percent. In addition, Amazon only registered its Luxembourg headquarters as a seller of products - e.g. the British branch is officially nothing more than a "logistics service provider". Consequently, the VAT rate in the UK was always extremely low. While countries such as France and Britain have long railed against this "tax dumping", this proved to be a bonanza for Luxembourg: out of its 2013 GDP of 43 billion euros, no less than 950 million euros were collected from ecommerce alone. The EU has now put an end to this game.
1. You sell goods to private customers in other EU countries
In principle, the delivery of goods to consumers in other EU countries is subject to the VAT regulation of the country of consumption (destination country) if a certain threshold value is exceeded. In such cases, the seller must register itself in the Member State for VAT purposes. The following two informational documents of the EU Commission provide additional details: "VAT in the European Community" and "VAT thresholds - Annex I (26 kB)". A seller also has the right to register itself for VAT purposes even if the threshold is not exceeded. This can be advantageous, for example if you are unable to accurately assess whether you will exceed the thresholds in certain countries. This will end up saving you additional work later on, should a threshold be exceeded. You can find the different rates of VAT in the EU Member States here. In addition, the European Commission also provides a list of national contact points for questions regarding VAT.
2. You sell electronic, broadcasting or telecommunications services to other European countries
Example: A Dutch customer downloads an application from a German app developer. In this case, the German seller must charge the Dutch customer the Dutch VAT rate. Apps fall under electronic services, as well as under other Internet services, web sites, web hosting, software (including updates), video streaming, lotteries and fee-based online broadcasts. Broadcasting services are all television and radio stations which are made available to users through various media. Telecommunication services include inter alia landline and mobile telephony as well as web-based services such as Internet telephony. As a rule, under the new regulations the location of the "service recipient", i.e. the user, is determinative for the applicable rate of VAT. You can find all information on the new guideline, questions, answers and document downloads on this EU information website.
VAT receipts from sales of the above-mentioned services rendered to other European countries must be collected and paid in the country of destination. To assist entrepreneurs with registration and administration, EU countries are offering a MOSS (Mini One-Stop Shop, more information can be found in this EU practical guide (pdf)). Entrepreneurs can take advantage of this service via their local responsible tax office, at which they can centrally report and remit their Europe-wide taxes. Points of contact for any questions, advice and registration regarding the change to the law have been set up in all countries and you can find them on this list.
Please note: The European Court of Justice has ruled (Judgment of 26.10.2010 (C-97/09)) that the national small business regulation does not apply to other European countries. As a result, while you may not have been required to register in your home country, you may be obliged to do so under the new regime if you have foreign sales of e-services. However, there are similar regulations in many EU countries. Only the Netherlands, Spain and Sweden have no such regulation in place. Small businesses can find useful information on the European Small Business Portal.
For pricing, the following applies: the total price must always be shown to the customer. Starting now, this depends on where the user is located, i.e. where the service is consumed. There are two ways to implement this new regulation. You can either calculate the appropriate price based on your existing prices per country, which can be confusing at times: how do you determine the customer's origin and are programming costs transferable? The second option you have is to sell your service for the same price throughout Europe and absorb any potentially resulting losses on your margin. In general, it is recommended that the customer always be informed of how the price is composed.
Make sure to pay attention to country-specific rules when invoicing. Italy, for example, requires every invoice issued to a private individual to designate the person's tax number.
Help with cross-border sales
Sellers need to answer numerous questions and take care of formalities when making cross-border sales through the Internet, for example how to obtain international protection for a business idea, how to correctly register for and pay VAT, and how to handle online payments in other countries. To help meet this need, the European Commission has published an informational page as part of a project dubbed "Watify" (currently only available in English) which provides answers to questions in a step-by-step manner, offers tips and delineates the correct procedure for various formalities. As mentioned above, you can find VAT rates, reductions and regulations on this list. A list of national contact points is available on the info page of the European Commission.
- VAT in the EU
- VAT thresholds in EU Member States
- VAT invoicing rules
- EU guide to the new regulation & the Mini One Stop Shop
- MOSS contact points in the EU
- EU Watify information page for cross-border online retailers
Taxes when selling tot the USA
Most countries apply a VAT or GST tax system. The USA is one of the only OECD countries with a final sales tax system. This means that the sales tax is actually a consumption tax on the final transaction of a good or service.
There are over 12,000 taxing jurisdictions in North America, each applying sets of individual rules depending for example on the specific products or exact location of the buyer.
The website of service provider Avalara provides a lot of useful insights about sales tax for non-American retailers in the USA. This video explains all important factors:
The question where the seller has to collect or remit taxes depends on Nexus:
NEXUS: In US tax law, the term ‘NEXUS’ is used to describe a situation in which an out-of-state business has a physical presence in a state and thus has to pay state income taxes and collect sales taxes within that state. The Nexus determines how much business activity a company must pursue in a state before it is subject to taxes. As a foreign seller, you will have NEXUS when exceeding a $20,000 turnover or 200 orders, or when warehousing in the USA.
This is a simplified overview of taxes in the US:
- If buyer and seller are located in the same US state, seller collects taxes for the buyer and remits them to the state.
- If buyer and seller are in different US states, but the seller operates any kind of presence in the buyer’s state (e.g. a warehouse or office), the same applies.
- If buyer and seller are in different states, the buyer is obliged to pay the sales tax to his state.
Taxes when selling to China
The Chinese Enterprise Income Tax (EIT) is levied on all income of any Chinese enterprise that is incorporated or managed in China. This includes presences and websites of foreign enterprises in China and also applies to any income sourced in China according to the applicable rules.
These tax laws are highly connected to territorial notions, and have thus been fundamentally shaken up by the rise of ecommerce, which is redefining the role that territory plays in trade.
China has invested a lot of efforts in adapting the rules to the new business dynamics in order to prevent the state from losing tax revenue. Online stores are now required to register and disclose their actual ID to enable supervision and taxation of ecommerce by the governmental authorities.
Taxes in China
In general, VAT in China is 17%. However, there are also other taxes that might apply to goods sold in China, such as consumption tax. All taxes are summed up in this document by PwC. In addition, information can be found on the website of the General Administration of Customs of the People’s Republic of China.
VAT is administered by the State Administration of Taxation (import VAT is collected by the customs on their behalf).
When importing goods, the following taxes might be applicable (Source: Dutycalculator.com):
Chinese duty rates vary from 0% to 100%, with an average duty rate of 12.47%. Some products can be imported free of duty, such as laptops and other electronic products.
Goods imported into China are subject to VAT at a standard rate of 17%, or a reduced rate of 13% on certain products, calculated over the CIF value plus any applicable duty and consumption tax.
Duty and VAT are only charged when together they account for more than RMB 50; otherwise the import is exempt from both.
Other taxes and customs fees
Consumption tax is imposed inter alia on imports of alcohol, petrol, jewelry and cars. The relevant rates are between 1% and 45%. It is calculated over the CIF value plus any applicable duty.
Throughout the past years, the importance of cross-border ecommerce on the Chinese political agenda has increased, which has resulted in several measures facilitating online trading towards China in the areas of logistics, customs and shop registration. It is for example no longer required to have a Chinese entity, import duty and VAT are not applicable, and also several other barriers have been significantly eased.
The Chinese government also launched several pilot zones for cross-border ecommerce, in cities including Hangzhou, Shanghai and Chongqing.
The Cross-Border ECommerce Pilot Zone in Hangzhou is striving to reduce online transaction costs by adapting VAT, postal tax and export tax refund.
The country’s regulatory framework for foreign investment in the ecommerce industry has been liberalized to an impressive extent. In May, the State Council published a document outlining future policy directions entitled “Opinions on Vigorous Development of ECommerce to Accelerate the Cultivation of a New Driving Force in the Economy”. This document, hereinafter referred to as "the Opinions", set a deadline in 2020 for China to achieve a unified, orderly competitive, safe and reliable ecommerce market. The document elaborates specific political measures, including lowering the barriers for market access, the reduction of tax burdens and the streamlining of registration processes (Source: PWC).
In June 2015, the Ministry of Industry and Information Technology ("MIIT") published a note easing foreign ownership restrictions in the ecommerce sector. This note allows 100% foreign ownership in ecommerce services under the more general "online data processing and transaction processing services" category ("Ecommerce Services") under the telecommunication services catalog issued by MIIT in 2003. On 20 June 2015, the State Council issued the "Opinions on Guiding Healthy and Smooth Development of Cross-border Ecommerce" ("Cross-Border Guiding Opinions") (source: Hoganlovells.com).
Lots of interesting research and information on taxes in China can be found on the site of PwC China.
Cross-border sellers should be aware that customers are more willing to buy from a site where the prices and all other applicable costs are displayed in their own currency. This has a positive effect on conversion as over 48% of retailers surveyed by Payvision (2014) said that offering multiple currency options has boosted cross-border sales. For the sellers, selling in multiple currencies harbors various challenges. First of all, there are exchange rate fluctuations that might affect pricing. Secondly, selling in multiple currencies is administratively more difficult.
When selling in a new country, make sure you are aware of how much the new customer group differs from the one(s) you have catered to before. Cultural differences can range from the tone of voice appreciated by the customers (Germans are generally known for preferring a formal approach) to religious elements (in some Arabic countries, it is advisable to have models in product pictures not expose too much skin). They also include habits such as the Southern European "siestas", a very extended break, or opening hours of local businesses. Cultural differences impact the consumer preferences and are something sellers should always take into account. Also, marketing campaigns can relate to locally relevant cultural events, such as festive days, national holidays, and customs like Halloween, Carnival and King’s Day, for example.
When selling in a foreign country, it might be useful to gather insights into how the local people prefer to do their shopping. Preferences might include picking up orders from a (third-party) store, parcel lockers, shopping from tablets during evening hours, shopping from desktop PCs during office hours, or – like the Germans – ordering multiple sizes of the same item and sending back all but the one that fits. These insights help to make adaptations of your offer and anticipate the behavior of the local customers.
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- Rifat Azam, ECommerce Taxation in China ' <http://sydney.edu.au/business/__data/assets/pdf_file/0010/156286/RifatAzam.pdf> (2015)
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