By Mark Houtzager and Amy Morgan
Exporting goods and services out of the U.S. isn’t easy. Negotiating in a different language and culture, opaque legal agreements and building a network of trusted distributors and committed customers can create major challenges for potential exporters. Unpredictable financial and commercial hurdles can make exports seem difficult or even impossible.
These factors create a regulatory environment in which U.S. businesses are less likely than companies in any other developed nation to ship their goods overseas. Less than one percent of America’s 30 million businesses export anything at all, and most American exporters (58 percent) export to only one country.
In this brief overview, we will lift the veil of one of the most dreaded aspects of doing business overseas: importing and the associated costs, taxes and fees.
Starting export sales
Companies looking to sell goods overseas should know that the processes associated with imports and taxes are different for business-to-business (B2B) export sales and business-to-consumer (B2C) export sales.
B2B exports are typically sales to overseas distributors, intermediaries, brokers or business end-customers. These are often very attractive to companies new to doing business overseas because the business buyer generally takes care of all import taxes, fees, tariffs and processes.
It’s important for businesses to establish the so-called Incoterms of the transaction from the outset. Incoterms indicate which party is responsible for logistics fees and insurance. For VAT and other indirect taxes, incoterms can provide an initial indication of which of the parties has ownership of the goods at each point of the transport.
Companies that are starting to export to other businesses should agree on Incoterms that transfer risk and responsibility of the goods to the buyer prior to import. Examples of such Incoterms are “Ex works” or “Delivery At Place (DAP).” The buyer is then responsible for the goods at the time of import and is generally required to act as the importer of record. Consequently, the buyer is responsible for fulfilling all customs clearance requirements and paying all import duties and taxes. It’s normally easier for buyers residing in the country of destination to submit the required import filings, as they will either already have the necessary certifications (such as VAT registration), or can easily obtain them (such as an EORI or Customs Identification number).
When the buyer acts as the importer of record, the seller has no requirements or liabilities for the importation process.
Selling goods directly to consumers overseas is sometimes more complex than B2B exportation. Individual consumers are often not aware of the clearance process and the additional costs of importation and they often don’t know when they’re expected to act as the importer.
In practice, if an individual buyer is named as the importer of record, the shipper or freight forwarder acts as the customs broker who fulfills the import in the name of the buyer. In practical terms, this means that the broker charges the buyer for the import taxes and tariffs, as well as their own fees. This adds significantly to the individual’s purchase price.
If the seller does not explicitly inform the buyer that these import charges will be separately charged by the customs broker or shipper, the buyer is likely to be surprised and may reject the shipment upon delivery. This creates an unwanted, negative experience for customer and seller alike.
To avoid these issues, the seller may want to be the importer of record when selling goods to individuals. A number of countries allow non-resident companies to register as an importer and as a taxpayer to fulfill the import obligations.
In this case, the seller is required to pay all import taxes to the customs authorities and filing takes place through the customs broker. The seller is then required to charge local sales tax (VAT, Goods and Services Tax, Consumption Tax and other taxes) to the individual buyer.
An increasing number of U.S. small businesses use facilities provided by fulfillment companies like Amazon and eBay to bring their goods to overseas consumers. “Fulfillment By Amazon” (“FBA”) is one of the most visible platforms, and FBA services may include “Multi Country Inventory” or other value-added amenities. Recently, other providers have developed similar services, often in different regions or countries. These relatively new platforms are actively marketing their overseas fulfillment capacity to their U.S. domestic clientele, particularly in the B2C space.
B2B exports have not yet benefitted as much from these new fulfillment platforms, although that is likely to change. Many U.S. B2B exporters still use the tried-and-tested approach of visiting overseas trade shows to bring their wares to a specialist market of distributors and intermediaries.
Regardless of the method used to export goods from the United States, the seller needs to understand the full impact of the taxes and fees involved in the entire transaction in order to price the sale correctly or communicate the estimated costs to the buyer as a courtesy message before the transaction takes place.
The price of selling goods overseas: Landed Cost
Making a pricing decision and being able to communicate costs involved in cross-border transactions requires awareness of the international landed cost.
An international “landed cost” refers to the total cost of acquiring a physical good from one country and importing it to another. At a high level, the landed cost includes the cost of goods, door-to-door transportation, and all import/export customs duties and tax obligations, whose rates and obligations vary significantly by country. Having an estimated total landed cost can help businesses and consumers to make informed buying and selling decisions.
In a B2B transaction, a landed cost analysis can be used to compare different supply chain scenarios (and alternative incoterms) to determine the most profitable option scenario when negotiating with buyers. This maximizes profitability, enabling a seller to make pricing decisions that don’t erode their margins. Similarly, it’s worth considering how the costs differ per incoterm to maximize transportation savings and tax recovery opportunities.
As mentioned above, for B2C sales, sellers should calculate the landed cost as a part of the transaction process. Applying this calculation in practice depends on the seller’s business decision to support a DDP (Delivered Duty Paid, in which landed cost is paid by the seller) or DAP (Delivered At Place, in which landed cost is paid by the buyer) service to their customers.
Here’s the difference that confuses most people: in a DDP transaction, the seller incorporates duties and taxes into the cost charged at the point of sale and then facilitates the import customs clearance so the end consumer doesn’t have to do anything. In a DAP transaction, the seller communicates the estimated duties & taxes at the point of sale as a courtesy, so there are no surprises when the shipment arrives in the destination country, and the customer is charged the full landed cost.
When a merchant fails to communicate the landed cost at the point of sale, the cascade of downstream pain can be very real and result in a poor customer experience. End customers may be frustrated with additional surprise costs and may even reject shipments altogether — a costly and unpleasant scenario for any exporter to consider.
Calculating landed cost is difficult. Fortunately, a new generation of cloud-based solutions offers always-on convenience, while reducing the friction and headaches associated with compliance risk. These solutions apply the appropriate duty rate and then add it to all applicable country-specific customs duties, as well as import taxes and fees, right in the shopping cart or back-end system. Today’s savvy businesses are saying goodbye to the old way — time consuming and overwhelming do-it-yourself research. Instead, they’re letting automation in the cloud do the tough part and dedicating more company resources to core business activities.
Wrapping it up
It’s no surprise that entrepreneurs are reluctant to access new markets overseas. There are challenges aplenty, and getting a clear picture of all costs associated with doing business overseas is a prerequisite for initiating any negotiation with foreign buyers. Every would-be exporter needs a strategy for getting imports right: who should take on import liability, what “landed cost” is, and how these elements impact the final cost of a transaction. Getting it wrong is a costly mistake that can turn a great business development plan into a costly and embarrassing failure.
Mark Houtzager is the principal consultant at US VAT, Inc., providing Value Added Tax support for U.S. multinationals. His clients are big brand multinationals, online businesses and also smaller companies that have limited operations overseas, yet require practical, hands-on and timely tax advice.
Amy Morgan manages landed cost at Avalara. Her background includes global trade compliance roles at Amazon, Costco Wholesale, Nordstrom and Microsoft. She’s on a mission to use her ‘big trade’ background to eliminate cross-border bureaucracy for everyone.