Online trading and VAT exemption: international comparison2019-08-21T09:59:16+00:00

Online trading and VAT exemption: international comparison

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Since technological improvements in the ’90s, online trading has increased significantly around the world. Many customers prefer buying durable goods online, from the comfort of their homes and with a superior worldwide variety, then going out for a physical store.

Nowadays, every year increases worldwide online trading in about 15%. In 2017, online trading has encompassed 2.3 Trillion USD. Out of which, the US has 388 Billion USD, the biggest 3 European economies (UK, France, Germany) with 227 Billion USD, and China leading with 682 Billion USD. The biggest share of online trading out of GDP is the British one, with online trading encompassing 7.9% of GDP.

E-commerce turnover (selected countries), in billions of USD, by country, 2017(f). Source: Ecommerce Foundation, 2017

The growth rate of online trading also varies greatly between nations and regions: While online trading in Australia grew by 40% in 2017, it did so in the UK by only 16%, and in Israel by just 8%.

E-commerce growth rate (selected countries), in millions of USD, by country, 2017

As can be seen from Paypal research from 2018, most online trade involves durable goods such as clothes, shoes, jewelry, electronics and toys.

Cross border purchases (% of cross-border shoppers shopping cross-border in each category). Source: PayPal Cross-Border Consumer Research 2018.

Even though the shift to online trading seems like a direct product of technological advancement and customer preferences, some policy incentives also have their effect, mostly VAT exemption. Under such an exemption, personal imports under a certain threshold don’t have to pay VAT or equivalent sales tax. Under such a tax regime, foreign producers and traders, selling through online trading, have an inherent advantage compared to local businesses, doing selling mostly through a physical store.

As this creates market distortion and loss of government taxes, the current global trend for many countries is to either uphold or eliminate this exemption, with no country planning on increasing the VAT-free threshold. One of the most significant exemptions was the Australian one, giving such an exemption to any import under 1,000 AUD (756 USD). In 2018, the exemption was completely eliminated, taking it down to 0. The US is a special case, as sales tax is state-based, and in many cases low or non-existent. Practically, this means that large-scale imports can be ordered to a low-tax state, and then moved to the origin, such as from New Hampshire (which has no sales tax) to New York (8.875% tax).

Low-value import threshold values across countries, in USD. Sources: Global Express Association (2016b)

Canceling such an exemption can slow down the growth in online personal import, but it’s not likely that it will stop it. Our world continues to turn more global, with international trade becoming ever more accessible to laymen. We project that countries will adjust to that by eliminating exemptions, and local retailers by offering a better online experience to compete with global marketplaces.

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