Anil Paranjape serves as a Director at Avalara. He has a work experience of more than 25 years where he worked with esteemed organizations like Intel Corporation, Infuse Ventures and Aagami Lighting Technologies and continues to work for many of them. He was awarded the Intel Achievement Award, Intel’s highest award for technical design excellence during his tenure at Intel. He holds a BE in Electronics and Telecomm from the University of Pune, MS in Biomedical Engineering from the University of Texas at Austin and an MBA from Wharton. In his spare time Anil likes to read, travel, enjoy wines and microbrews.
The COVID-19 pandemic might have shut down brick and mortar business operations, but it also led to a dynamic shift in online transactions. With the world going digital, businesses have had the opportunity to expand from domestic to international markets. Of course, expanding the customer base and reaching newer avenues is a vision for any business. But this rapid expansion is leading to a new concern- Cross border compliance.
I came across a quote on a blog on LinkedIn. “If you think compliance is expensive, try non-compliance.” I couldn’t agree more. While compliance requirements are cumbersome and expensive, not adhering to compliance requirements could be extremely expensive for businesses. It could even cut into a large chunk of profits. Ergo, all the business effort put into expanding to new markets could be in vain. While adhering to cross-border compliance requirements can be difficult, it is not impossible. Your business needs to understand and navigate through the various challenges around cross-border compliance.
Cross-border compliance challenges have been present even before the Covid-19 pandemic disrupted business operations worldwide. In the aftermath of the pandemic (or at least in the first phase of the aftermath), some new challenges need the urgent attention of businesses. Most cross-border compliance frameworks do not take into consideration the risks under virtual cross-border compliance.
Keeping up with changing jurisdictions
“We are not in Kansas anymore.”
Every country prescribes different types of tax regimens and consequent cross-border compliance requirements. This means the farther your business expands, the more vigilant it must remain while conducting its transactions. In addition, each country will have a different currency, a different direct and indirect taxation system, different shipping and custom duty rates and policies, different product codes, etc.
Let’s give you an instance. The Harmonized System (HS) codes are a system to classify globally traded products. This system enables the accurate calculation of customs duties. Countries usually assign different HSN codes to different products. While the first six digits of an HS code will be universal, the last two digits can change from country to country. As this code changes, the custom duty applicable also changes. For example, the customs duty applicable on a travel bag could differ from 2% to 30%, depending on the country and the relevant HS code. A travel bag could be assigned HS code #640590 universally but the last two or four digits might be different in Australia, the USA, and Japan. These varying HS codes could result in changed tax rates. If your business is supplying travel bags to all three countries, it needs to ensure the relevant code is applied on the shipping manifest.
Failing to categorize products according to their HSN code could result in heavy penalties and delays in delivery. The right HS code will not only determine the tax applicable, it will also let the business stay in the loop of various trade restrictions.
Indian businesses looking to expand overseas will need to keep in mind that there is a massive difference in the taxation systems in other countries. The usual setup to deal with the Goods and Services Tax will not be enough to cut it. For overseas trading, you will need to set up a dedicated team for each country or optimize your cross-border automation software to suit the compliance system of the foreign country.
Keeping up with varied compliance requirements
In the United States, legislative trade policies, tax rates, compliance requirements can change between jurisdictions. Also, jurisdictions can change every hundred or so miles. Now imagine the same scenario but at a much larger, global scale. While setting up operations overseas, you might be required to have separate licenses for different countries. You might also need individual licenses for different products – adding more layers of complexity to your overseas operations. It might not be possible to keep track of all licenses and other compliance requirements manually – making it inevitable to use cross-border compliance automation systems.
Keeping up with dynamic policy changes
We are already familiar with frequent tax compliance policy changes under the Goods and Services Tax in India. Most of these changes happen because India is still learning after establishing its indirect taxation system. Therefore, policies are continually updated to maintain a transparent, smooth functioning compliance system. The same ideology is applicable for compliance requirements overseas. Each country has dynamic compliance frameworks and expects businesses registered under their strategy to remain abreast with changes in legislative policy. Failure to adhere to these requirements could result in hefty penalties and fines.
Concerns over liquidity
Lowering revenues have led countries to increase or tighten the noose around their custom duties and import/export policies. Not having accurate knowledge of duty charges, product codes, etc., can lead to heavy fines, affecting liquidity in an already difficult time.
Customs clearance issues for non-essential goods
Worse than paying hefty fines is dealing with clearance issues for goods that might be classified as non-essential during the pandemic. Not having adequate knowledge of ports that might consider some interests as non-essential could lead to your shipment being confined to a single port for weeks at a time, leading to business interruptions.
In such a time, the advent of automation software for ensuring cross-border compliance is highly crucial. Digital automation is allowing businesses to figure out overseas legislative policies faster and helping businesses function smoothly. This will enable companies to focus on what matters – giving their customers a memorable and positive experience, expanding to further markets, and making considerable profits.
It is essential to learn to navigate these challenges with a robust and comprehensive cross-border compliance framework capable of monitoring and adhering to all countries’ rapidly changing compliance requirements. In today’s day and age, automation solutions form one of the pillars of a cross-border compliance framework. Digitizing cross-border compliance functions will save organizations from heavy penalties and waste of time and resources, increase efficiency, and significantly reduce trade and compliance risk.