To reach new growth horizons, brands and retailers are looking across borders.
The global eCommerce market is expected to total $6.3 trillion in 2023 and grow to nearly $8 trillion by 2026, according to eMarketer. Moreover, 21.2% of total retail sales will happen online by 2024.
To ensure a successful expansion across borders, brands need to strategically hone in on specific markets that represent the most efficient and effective growth opportunities. That is why many brands with U.S. roots consider Europe to be a high-value entry point.
At the most basic level, Europe has a lot of economic power; it is the third-largest market globally and accounts for 12.6% of global retail sales. Within Europe, there are five key economies – Germany, the United Kingdom, France, Italy, and Spain – that are poised to collectively post retail sales of €2.5 trillion in 2027.
Beyond this financial influence, there’s a lot of room for potential growth. European consumers are incredibly eager to discover and buy from global brands, creating a lot of opportunities for brands that want to expand their reach and customer base beyond U.S. borders. The cross-border eCommerce market was worth 171.2 billion euros in 2021 – a growth rate of 17% over 2020. More than 25% of all online revenue in Europe was generated cross-border.
If you’re looking to expand into Europe or scale operations into more of Europe, you should first understand the intricacies of tax rules and the legal requirements for reporting and invoicing. These nuances will impact businesses of all sizes–whether they decide to expand via branded eCommerce sites or marketplaces.
When unknown, mishandled, or completely ignored, these tax rules can create a lot of internal frustration and complexity. But perhaps most importantly, they can open your business up to significant financial and litigation risk – something small brands with big growth goals simply can’t afford to ignore.
That’s why we’ve partnered with Adobe and Vertex to help you think through five key questions you should ask (and answer) before deciding to expand into Europe.
What’s the Big Difference Between the United States’ Sales Tax and Europe’s Value Added Tax (VAT)?
The U.S. and Europe have very different approaches to taxing goods and services sold within their borders.
Merchants with budding U.S. operations are likely already familiar with sales tax. It’s a one-time tax applied to items at the end of the supply chain and it isn’t collected until a consumer makes a final purchase.
European nations, however, have a more complex yet equitable approach. They use the Value Added Tax (VAT) system, which other nations globally also have applied.
VAT is a general consumption tax based on the value added to goods and services. As a multi-tier tax applied at each stage of the supply chain, the end consumer ultimately bears the burden of the accumulated VAT.
The biggest distinction to call out is that while U.S. sales tax is added to the price of goods, VAT is typically included in the advertised price of goods, which ultimately creates a lot more transparency for consumers and also levels the playing field for brands.
When are Taxes Collected in Europe?
In the U.S., sales taxes are collected when a consumer completes a transaction. Before then, tax jurisdictions do not receive tax revenue. If you live in the U.S. and participate in commerce (don’t we all?) you have certainly seen the “sales tax” line on a receipt or order confirmation email.
The process is very different in Europe: sales tax is collected at each stage of the process. Suppliers, manufacturers, distributors, and retailers all apply VAT to the value added at a particular stage of the process. For example:
Strategic takeaway: With these intricacies in mind, you should consider how this tax collection process impacts you and, most of all, your customers. For example, if you want to add cross-border capabilities to your eCommerce site, are you able to accurately reflect these tax nuances without hurting the customer experience?
Are Tax Rates the Same All the Time between the US and Europe?
U.S. tax law is so complex because there are different requirements by jurisdiction, including state, county, city, and district. Ultimately, thousands of different jurisdictions have their own distinct tax laws that your business must know and comply with. If you have a national presence, you already are familiar with these intricacies.
Not to mention, within each of these jurisdictions, there are different tax rates based on the product category/makeup as well as the platform/channel through which the product is sold. Factors like sales price, volume, ingredient, or item type can also influence tax. For example, an apparel brand has certain tax rules they need to follow when consumers are from New Jersey and Florida. There also can be specialty taxes and fluctuating holiday tax exemptions.
The rates are just as nuanced in Europe. Each European country has its own VAT rate. Additionally, some tax jurisdictions, like the Vatican, Monaco, and Jersey, independently manage their tax rates.
There are more specific guidelines for countries that belong to the EU. (As a reminder, those countries are Austria, Belgium, Bulgaria, Croatia, the Republic of Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, and Sweden.)
EU nations must charge a minimum VAT rate of 15%, although some items may qualify for a reduced rate. Other European countries are not required to meet the tax minimums.
Strategic takeaway: Additional context around tax rates should inspire you and your team to consider where, exactly, you want your business to grow. What is your short- and long-term roadmap for expansion and what tax guidelines do you need to fully understand and comply with?
Is Invoicing a Requirement in Europe?
Invoicing may be somewhat new to some U.S.-based brands because it is currently not a requirement. In short, tax invoices are more than just transaction records or bills sent to customers. They outline similar details, such as the buyer's or seller's name and address, the item's description, quantity/volume purchased, sales price, and applied taxes. But tax invoices also play a role in reporting and verifying tax compliance, especially for countries that have VAT.
Businesses in the transaction chain want to deduct their input tax and they can only prove that input with an accurate and detailed invoice. That’s why European countries and regions have different regulations around how digital and physical goods should be invoiced.
There are two ways invoicing can be done. Digital invoicing simply requires that a seller delivers an invoice to a buyer that is compliant with the invoicing rules of the buyer’s jurisdiction. E-invoicing is a bit more nuanced. Sellers need to send the transaction details to the tax authority in a stipulated format in real time. The invoice must be validated, structured, signed, archived, and distributed to the buyer per country-specific mandates. When deciding on your invoicing process, it is important to note that digital invoicing is designed to be read by humans, while e-invoicing is designed to be machine-read.
Each invoice needs to be accurate for tax compliance purposes — if VAT calculation, FX rate, language, and formatting within each invoice are inaccurate, it can lead to noncompliance with a country’s VAT regulations which will open you up to significant legal and financial risk.
Strategic takeaway: After understanding the invoicing requirements for Europe, consider whether you have the systems in place for real-time invoicing. Do you have an automated solution to track and report taxes in the correct formats at scale?
What Are the Possible Risks and Challenges?
The variance of U.S. tax guidelines based on state, county, city, or district, makes reporting multi-tiered and extremely complex. If you have a branded eCommerce site, adhering to these guidelines is a bit different than if you sell in a physical store or marketplace.
This complexity amplifies even further when a brand decides to expand into Europe.
If you decide to sell in more than one European country, you have to comply with the various tax regulations and adhere to record-keeping requirements. You need to ensure that your eCommerce site adds accurate tax rates based on the consumers’ location.
You also need to understand and adhere to the invoicing requirements of different markets. Do you have systems and solutions in place to automate the creation and delivery of these invoices? Automated invoice and tax compliance solutions can help streamline this process.
Strategic takeaway: While having a localized and compelling eCommerce site is key to winning customers abroad, your back-end systems need to measure up to the legal and regulatory requirements of each territory in which you plan to expand. If you don’t have the capabilities to meet these requirements, you can open yourself up to financial penalties and legal risk, severely hindering your expansion across borders.
Begin Your Expansion to Europe
Understanding and tackling the tax intricacies of specific locales is just one part of a much larger, strategic puzzle.
You also need to understand tax registration guidelines for each market you want to expand to, as well as any limitations on products you can sell. Once your inventory and financial and tax systems are in place, you can revisit and optimize your front-end experience for European consumers. That means ensuring that content is localized, messaging and offers are personalized, and products are merchandised based on local trends and preferences.