In my last blog, I talked about questions you should be asking yourself if you’re a retailer who wants to sell into Europe — as well as some of the complexities you’ll face, based on rapidly-evolving regulations. Today I want to continue by addressing two more important issues: when cross-border items are considered taxable, and whether maintaining a warehouse in Europe is advisable. My goal is to help you make informed choices as you are entering this challenging and rewarding market.
How item taxability is changing — from the first cent up
The double-digit growth in cross-border e-commerce items has created enormous challenges for postal administrations, integrators and customs authorities. The Universal Postal Union (UPU), established in 1874, originally only had to worry about regulating letters shipped globally to family, friends and some businesses. That was before the Internet came along.
Today, more than 75% of all items shipped globally are commercial items weighing less than 2 KG and valued under €150. This makes use of the legacy UPU — or perhaps it might be better to say, “takes advantage of” the UPU. Now, non-compliant merchants sell something for €100 and add an invoice below €22, so no import duties and taxes are due. Items sent from non-European countries are a particular challenge: in many cases the items lack a verifiable sender’s declaration, accurate details of the value, description of content, or correct VAT registration based on a specific identification number. It is usually impossible to ensure that the lawful VAT is paid in the country of the recipient.
In mid-December 2017 the EU finance ministers agreed to phase out the privileged position of the national postal administrations and the integrators. By the end of 2020, there will be a level playing field where the existing tax exemptions (< €22, > € 22, and > € 150) are history. All import duties and taxes will be collected by the European member state of final delivery, no matter what the value is.
What does that mean for you, a non-European retailer, brand, or web shop? If you want to sell into Europe in a compliant way, you will be liable to transmit all the key data necessary to uniquely identify each individual commercial item: its content, value, recipient and import turnover tax identification number. This will have to be communicated directly to the customs and tax authorities, in a standardized digital format.
New rules will also empower national authorities in Europe to assess tariffs for cross-border parcel delivery services. These rules will put a stronger emphasis on providing information to consumers making international purchases — about prices, cross-border delivery options, and complaint handling policies. It also means that European postal services will need to have a far more comprehensive data file to do a clearance per parcel. The clearance will have to be done in real-time, instead of making monthly declarations when all parcels are already delivered and physical checks by customs are made impossible (as it happens now).
What does this all mean for you? If you, as a merchant, can’t provide correct data in real time to be compliant and to do the clearance, you will miss out on the European market.
Do you need a European warehouse? Some things to consider
I’m going to go ahead and flat-out say no. You most likely do not need to maintain an expensive European warehouse. Allow me to elaborate about why.
Most companies do not need or want to spend the money, time, and resources managing two operations, double stock, and additional European partners. Registrations, thresholds, clearances, customs and tax authorities can be a major drawback when you want to grow in a European market. Your direct B to C e-commerce shipments into Europe don’t need their own warehouse, especially when you already have your own advanced fulfillment center or local 3PL partner in your home country for domestic shipments.
Here’s a reality check: do you want to spend €125,000 (on average for the first year) before you have even sold one product?
- Registration per European country (max 26): €2,500Monthly
- VAT administration per European country (max 26) €500
- Warehouse setup (estimated) €5,000
- Pre-financing double stock (depending on stock value) €100,000
- Pre-financing Import duties (12% over € 100.000 / fashion) €12,000
- Managing your European 3PL (Local FTE / month) €3,500
That money adds up quickly. It’s much more cost effective to spare yourself these expenses and beat the competition by carefully considering the right technology and partner platforms based on your products, market, and competitors in the European market.
Setting your brand and products up for success
Once you find the right partner, then you can market your product in Europe using affordable and fast shipping as a draw for customers. Use social media to sell directly to consumers as much as possible (to avoid partner revenue drain), and focus on products that are unique to your brand to stand out in crowded markets and create demand.
Pay attention to small details, such as changing from a “.com” to a “.e” or “.fr” to help make the European market more comfortable with your product’s website. Partnering with a localization expert can help you ensure that your message is tightly aligned with a target customer’s need from country to country.
Finally, If you want to stay ahead of the curve with regard to changing regulations, you should be looking for a better and more compliant solution to assist with the new European e-commerce rules in your checkout. It is imperative to provide accurate information — such as descriptions and values of the products sold, matching European HS codes and import duty percentages, and the right European VAT percentages per country — to perform correct calculations in the checkout.
By doing the work up front, you will be able to avoid noncompliance, make use of the collected data in your system(s), and offer your customers a positive experience from the first click through the final delivery. It also enables you to:Make more (read: the correct) margin on your products, minimizing riskStay competitive and stand out from other merchantsStay in control of the European customer journey Remain in line with European rules and legislations.
I hope this blog has helped you to be ready for the new and upcoming European legislations — to make the right decisions ahead of time, and not to react when it’s already too late. If you would like to know more about how to make your brand or company stronger, more competitive in Europe, and compliant today, reach out to GO EU Commerce. We’re experts in the field, and we are here to help!