With tariffs largely negotiated away, one important trade facilitation issue which remains is the de minimis threshold (DMT)—a valuation ceiling for imports below which no duty or tax is charged and the clearance procedures are minimal. There is considerable heterogeneity in DMTs applied around the globe and products that are eligible for exemption can also vary across countries. These relatively large differences across countries can distort the balance of the economic benefits and costs that de minimis regimes generate.
Low vs. high DMT
While higher DMT is preferable for a lot of trade stakeholders, it’s not always the case. Below, we present various DMT viewpoints based on the stakeholder’s role in the market.
Small businesses tend to favour higher DMTs, which facilitate lower duties and fees, less paperwork, less delay and easier product returns.
Importers and foreign e‐retailers tend to favour high DMTs because of the relatively high transaction costs in connection with the import of low‐value items. These groups see low DMTs as a barrier to trade, and claim that the high transaction costs (fees, delays, official procedures) and costly product returns have an overall “chilling effect” on imports.
Domestic retailers tend to favour low DMTs and claim that generous exemptions at the border put them at a disadvantage vs. foreign sellers, since the former may have to charge sales or value‐added taxes even for small items while the latter are exempted and are able to “hitch a free ride.”
Express courier service providers charged with the logistics of inbound parcels complain about the burdensome administrative tasks for low‐value parcels, which often require significant resources that are outside their core business, so they prefer higher DMTs.
Most consumers would benefit from higher DMTs, as it would increase their choice and reduce how much they pay for e-commerce purchases.
Large businesses generally prefer higher DMTs due to the backlog at the border that a low threshold can create, which can slow down the importing process and create supply chain bottlenecks.
Here follow 3 case studies of countries where DMT is under discussion, including a country with a high DMT (Australia), a low DMT (Canada) and analysis of a region where DMT and VAT changes will soon impact the market (the European Union):
From 1 July 2018, the Goods and Services Tax (GST) will apply to overseas sales of low value goods to consumers in Australia, where the goods have a customs value of less than or equal to AUD1,000 (US$769). The AUD1,000 thresholds for GST, duty and reporting at the border will remain. Overseas vendors with Australian sales that are subject to GST of AUD75,000 or more per annum, will have to register with the Australian Taxation Office (ATO) and collect the GST.
In March 2018, the Australian federal government was reportedly considering plans to impose a $5 tax on overseas parcels coming into Australia, to cover the costs of border security and screening checks. According to Post&Parcel’s sources, the tax would apply to parcels containing e-commerce goods worth less than AUD1,000. The Global Trade Professionals Alliance has warned that this could spark a retaliatory move from other countries, including China (one of the primary sources of the e-commerce parcels coming into Australia).
These measures, if introduced, could lead to decreased cross-border e-commerce flows but will be positive for local retailers, both physical and online.
Canada & the US
Canada is an interesting case study because its DMT is among the lowest in the industrialised world and was last touched by the government decades ago. Under the current system, duty and sales taxes apply to shipped products valued at C$20 (US$16) or more. The de minimis threshold in Canada is set by the Government of Canada through the Postal Imports Remission Order and the Courier Imports Remission Order.
In an analytical paper from 2017, using a unique data set with transaction-level information for Canada, the relative inefficiency of a too-low DMT was demonstrated. The paper considered raising the de minimis to C$80, C$100 and C$200. Of the three scenarios considered, raising the de minimis to C$200 results in the largest net economic benefits, found the paper. However, the size of the gains would depend on the government cost savings approach too.
Meanwhile, in the US, the DMT was recently increased from $200 to $800, which is one of the highest values globally.
According to a 2016 report by Copenhagen Economics, lack of payment of VAT and import duties on postal shipments accounts for more than half of items purchased online. This has a substantial negative impact on public income at both EU and member state level, because it means that VAT and customs revenues are not at their full potential. VAT fraud for distance sales in the EU is estimated at €5 billion per year – as cited in a press release by the European Council.
The incomplete import duty collected for cross-border postal packages coming into the EU yields a lower import duty income for the EU than what is expected given current e-commerce inflows via postal operators. This incomplete levy of import duty directly translates into a loss of public sector finances for the EU of approximately € 0.25 billion.
According to European Commission’s press release, a new VAT for e-commerce package - consisting of a directive and two regulations - will enter into force gradually from 2019 up to 2021 and will effectively:
Simplify VAT rules for start-ups, micro-businesses and SMEs selling goods to consumers online in other EU Member States. These measures will enter into force by 1 January 2019.
Allow all companies that sell goods to their customers online to deal with their VAT obligations in the EU through one easy-to-use online portal in their own language, with which they do not need to register to pay VAT in each EU Member country where they want to sell.
For the first time, make large online marketplaces responsible for ensuring that VAT is collected on sales on their platforms that are made by companies in non-EU countries to EU consumers.
Address the problem of fraud caused by a previously misused VAT exemption for goods valued at under €22 coming from outside the EU which can distort the market and create unfair competition.
What will the impact for express carriers and postal operators following the removal of the VAT exemption?
According to the press release, postal operators and couriers will see additional reporting obligations. But this will be counteracted by significant simplifications. Operators will also be able to act as intermediaries for non-EU traders in the VAT One Stop Shop. Most importantly, operators will be able to make periodic reports to tax authorities for VAT purposes, as opposed to the individual declaration for each package at the moment. As the rules are only foreseen to come into effect in 2021, operators should have sufficient time to prepare. In any case, and independently from any changes to VAT rules, the new Union Customs Code (UCC) already foresees important changes for small packages on the grounds of safety and security.
Will prices for consumers go up?
The projected rise in VAT revenues for Member States will occur thanks to more trade and easier rules for businesses, rather than extra VAT on consumer goods. In fact, the new rules should lead to a decrease in prices on goods thanks to increased competition and fewer administrative burdens. Following the abolition of the VAT exemption for imported small consignments, there may be a slight increase in prices on imported goods from outside the EU up to a value of €150. This is because VAT will in future always be applied on certain goods which are currently exempt (up to €22) or which are currently undervalued or misrepresented when reaching EU borders (non-compliance). However, this increase in price should be counterbalanced by more efficient delivery times and consumer certainty that the price paid online will not need to be topped up by extra charges on delivery.
The new rules will ensure that VAT is paid in the Member State of the final consumer, leading to a fairer distribution of tax revenues amongst EU Member States and fulfil a commitment of the Digital Single Market (DSM) strategy for Europe.