Tax Administration of Cross-Border Trade

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Two Strategies for the Development of International E-Commerce

Over the past 20 years, local e-commerce and trade has grown to an international level. The largest companies headquartered in one country trade in dozens and hundreds of countries and employ two development strategies. The first strategy involves localization, establishing warehouses, developing local logistics, and paying taxes in the country of sale. The second option excludes local presence, with goods being shipped directly to the buyer from international warehouses or supplier warehouses through international delivery services.

The second strategy is utilized, for example, by Chinese companies in partnership with tens and hundreds of thousands of suppliers, offering an attractive proposition to international buyers. This strategy helps minimize global taxes, except in the registration countries.

The first strategy requires more investments and tax contributions, increasing the final cost for the buyer. As a result, local internet trading companies may lose in terms of price but gain an advantage in service and delivery speed for customers. As a result, a balance is formed in the market between companies of the first and second types.

The ratio is determined by the level of market development in the country. Market development is influenced by internet penetration, non-cash payment methods, currency conversion, and the development of logistical services. Second-type companies occupy up to 25% of developed markets and a much larger share in underdeveloped ones.

Features of Tax Administration for Non-Resident Taxpayers in e-Commerce

The tax administration faces the challenge of how to collect taxes from second-type e-commerce companies—non-resident taxpayers of the country. The movement of goods is characterized by the following features:

• The number of parcels reaches tens of millions.
• Most parcels have a value of a few dollars.
• Often, the supplier rather than the e-commerce company ships the goods, sometimes using their own logistics company. The e-commerce company receives payment and then settles with the supplier.

The standard approach to tax and customs administration sets limits on the import of goods without customs duties and taxes for a specific period, and the full rate is applied for exceeding the limit. There are ongoing discussions about the size of this limit. Government agencies fear negative feedback from residents, while the national postal service wants an increased flow of goods and revenue.

The approach seems reasonable, but customs authorities find it challenging to implement the tracking of goods, collection of payments, and informing the buyer about reaching the set limit. As a result, ordering goods becomes a lottery. The buyer does not know whether the goods will arrive or whether they will need to initiate a return to the supplier. Consequently, the administration either fails to work effectively or acts as a prohibitive measure, as in the case of Turkey.

Tax Collection on the Side of e-Commerce Companies

An alternative approach creates predictability for the buyer and simplifies tax and customs administration by collecting taxes on the side of e-commerce companies:

• The company determines the buyer’s country based on the shipping address provided in the buyer’s profile.
• The buyer’s country determines the tax rates and fees, including at least VAT and possible customs duties.
• The company informs the buyer about the taxes and fees included in the order’s cost before payment. The buyer pays for the goods.
• The company provides order information to tax authorities, who generate a fiscal receipt with a unique code.
• The supplier, responsible for packaging and shipping the order, includes order and delivery details, including a machine-readable barcode, on the packaging.
• Customs authorities check the code and verify its correspondence with the receipt when the goods pass through customs. Orders with a code are allowed, while orders without a code are detained.
• The tax administration of the country monitors fiscal receipts and calculates the taxes payable by the e-commerce company. The e-commerce company pays taxes according to local tax legislation. The issuance of fiscal receipts for orders is suspended, and goods will not pass through customs for e-commerce companies that have not paid taxes.

As mentioned earlier, tax administration for non-resident taxpayers in e-commerce presents certain challenges. There are debates about limits on the import of goods without customs duties and taxes, and the implementation of this approach is often hindered by difficulties in tracking goods and informing buyers about reaching the limit. Tax collection on the side of e-commerce companies can provide a more predictable situation for buyers and streamline tax and customs administration.