Raffingers E-commerce Newsletter: April 2024
Could the WTO end the moratorium on e-commerce tariffs?
The World Trade Organisation (WTO) could be about to change the way e-commerce is taxed worldwide.
At the moment, a moratorium is in place for e-commerce sales on customs duties, which has been the case for nearly 30 years.
The reason for this was that the WTO needed to react to the sudden introduction of the internet in the 1990s and most countries recognised the importance of allowing digital services to spread – unhindered – across the globe.
However, this is now under more intense scrutiny than we have previously seen, especially from developing countries. Namely, South Africa, India, and Indonesia, who have all threatened to put an end to this tax-free status.
Because the WTO works on the basis of consensus, if one party to the agreement were to pull out or dissent from renewing the agreement, the current rules would be forfeit, allowing countries to decide the customs duties that they impose on digital services from then on.
Why does this matter to you?
If you do not trade internationally, or make money from services provided to overseas individuals, you don’t need to worry.
If, however, you own/run an e-commerce platform that does not restrict users to a singular location (like most platforms) you may soon find yourself paying customs duties on income generated by non-domestic traffic and sales.
This is particularly a problem for global e-commerce giants like Netflix, eBay, etc. who may soon be facing massive bills.
For smaller businesses, it might necessitate a move to domestic-only trade to reduce the tax burdens they might need to pay.
If the e-commerce moratorium were to end, your business could face new challenges, including the imposition of customs duties on all digital transmissions.
What should you do next?
There’s no need to react just yet – the WTO met in February to discuss the issue, but it is not set to meet again until later this year.
However, it might be prudent to start planning for this tax-increase-eventuality regardless.
This might involve assessing the impact of how customs duties could affect your business, including understanding which of your products or services might be subject to duties, estimating the potential costs, and identifying which markets would be most impacted.
You may also wish to consider diversifying into new markets to mitigate the risk of heavy reliance on countries that might impose high customs duties.
Exploring markets with favourable trade agreements or lower duty rates could also be beneficial.
Equally, you might need to adjust your pricing strategies to account for the potential new costs.
This could include absorbing some of the costs, adjusting prices, or finding efficiencies elsewhere in your operation to offset any liability increases.
In any case, it’s worth discussing the issue with your accountant to explore tax mitigation strategies just in case the moratorium ends.
Financial planning for e-commerce businesses – Beyond the basics
Financial planning isn’t always easy for e-commerce businesses.
We often advise clients on complex regulatory and tax compliance issues that could affect their business plans as well as the usual challenges that affect the sector.
Factors like unpredictable markets, supply chain instability and issues with demand variability often plague e-commerce companies.
You are no doubt already aware of the basic financial planning strategies that most e-commerce businesses employ so our team felt it would be useful to go over some of the more advanced methods.
Advanced cash flow management
E-commerce businesses often face unique cash flow challenges, largely due to fluctuating sales patterns.
Seasonal trends, promotional campaigns, and consumer behaviour can all lead to significant variances in revenue.
Recognising and anticipating these cycles is crucial for maintaining a healthy cash flow so having efficient forecasting systems is vital.
To counteract the fluctuations businesses often encounter, you can employ several strategies.
Inventory optimisation, for example, ensures that capital is not tied up unnecessarily, while dynamic pricing models can help maximise profits during peak periods.
Short-term financing options, such as lines of credit, can provide a buffer during leaner times too.
Moreover, efficient accounts receivable processes ensure the timely collection of payments, bolstering your cash reserves further.
As previously mentioned, the cornerstone of robust financial planning is accurate cash flow forecasting.
The foresight it provides allows for informed decision-making and strategic financial planning.
Managing international currency exposure
For e-commerce entities operating on a global scale, currency fluctuation poses a significant risk.
Changes in exchange rates can affect cost structures and profit margins, making effective currency management essential.
To mitigate these risks, e-commerce businesses often turn to hedging instruments like forward contracts, options, and futures.
These financial products allow businesses to lock in exchange rates, protecting against unfavourable shifts.
While these strategies require a deep understanding of financial markets, they are invaluable for safeguarding international operations.
Leveraging financial technology can also ease the complexities of dealing with multiple currencies.
Multi-currency accounts and payment platforms offer streamlined solutions for managing international transactions, reducing exchange rate losses, and enhancing the customer's checkout experience.
Inventory management for tax efficiency
Inventory levels directly impact both tax liabilities and cash flow.
Excess stock incurs storage costs and ties up capital, while too little inventory can lead to lost sales.
Effective inventory management is thus a balancing act with significant financial implications.
The method chosen to value inventory affects financial reporting and tax calculations.
FIFO (First In, First Out) tends to inflate profits during inflationary periods, potentially leading to higher tax liabilities.
In contrast, LIFO (Last In, First Out) can reduce tax bills but is not permissible under all accounting standards.
The Weighted Average Cost method offers a middle ground, smoothing out price fluctuations over time.
Adopting a Just-in-Time (JIT) inventory system minimises holding costs and reduces tax liabilities by keeping inventory levels closely aligned with demand.
This approach not only optimises cash flow but also lessens the tax burden associated with unsold stock.
Advanced tax planning and compliance
The digital nature of e-commerce complicates sales tax compliance, with regulations varying by country and even by region within countries.
Businesses must stay abreast of these laws to avoid penalties.
Automation tools can assist in calculating and collecting the correct amount of sales tax, ensuring compliance across jurisdictions.
E-commerce businesses have access to a range of tax credits and deductions that can significantly reduce their tax obligations.
These incentives include credits for environmental initiatives, investments in technology, and research and development activities.
Maximising these benefits requires a detailed understanding of tax laws and strategic planning.
Global operations introduce complexities such as VAT, GST, and Digital Services Taxes.
Compliance with these international tax laws is critical to avoid fines and penalties.
Understanding the tax implications in each market and implementing systems to manage these obligations is essential for global e-commerce businesses.
Government grants: A financial lifeline for e-commerce startups
Securing adequate funding often represents a significant hurdle for e-commerce startups.
Yet, many entrepreneurs overlook Government grants and incentives as a crucial source of support.
Government grants and incentives are essentially financial awards provided by the Government to support businesses in specific sectors, including e-commerce.
These initiatives aim to foster innovation, economic growth, and competitiveness on a global scale.
Available grants might include funding for research and development, support for digital innovation, and incentives for businesses looking to export goods and services abroad.
Eligibility criteria for e-commerce startups
While the allure of government grants is strong, understanding the eligibility criteria is crucial.
Generally, these grants target businesses that demonstrate a potential for innovation, economic impact, and growth.
For e-commerce startups, this might mean showcasing how your digital service or product meets a market need or offers an innovative solution.
Avoid common pitfalls by thoroughly researching grant requirements and preparing your application accordingly.
How to find and apply for Government grants
Finding the right government grant involves research and strategy.
Start with the Government website and databases dedicated to business support and grants.
These platforms provide comprehensive lists of available grants, along with details on application processes and deadlines.
When applying, it’s essential to prepare a detailed business plan that outlines your objectives, market analysis, and financial projections.
Your application should clearly articulate how the grant will contribute to your business goals and the broader economic benefits.
Attention to detail and adherence to application guidelines are paramount for success.
Common challenges and how to overcome them
The journey to secure a government grant is not without its challenges.
Stringent eligibility criteria and a competitive application process can pose significant hurdles.
To increase your chances of success, focus on clearly defining your business’s value proposition and its alignment with the grant’s objectives.
Should your initial application be unsuccessful, seek feedback and consider alternative funding sources, such as loans or external investors.
Navigating the complex landscape of government grants and incentives can seem daunting.
However, with the right approach and preparation, these funding opportunities can serve as a vital resource for e-commerce startups looking to scale and innovate.
While the process requires diligence and patience, the potential financial and strategic benefits make it a worthwhile endeavour for any ambitious e-commerce entrepreneur.
Raffingers has partnership with Swoop, this partnership allows us to expand our advisory services by providing you with the best options across the full funding suite. Click here to find out more. Stage - Raffingers LLP (swoopfunding.com)