The problem with “EU-Friendly”

Right up front, I want all of you to know that, on the D&D alignment chart, I’m firmly Lawful. I always file my taxes on time, and I never suggest splitting the check if I’m the only one who had a drink with dinner. I mention that because, fundamentally, that’s why I haven’t been able to get on-board with any “EU-Friendly” scheme that’s been presented to me so far. I live in hope that someone will create one that’s not perpetrating a fraud, but I’ve yet to see one.

Fraud? Really? Kind of a harsh, I know. Let me walk you through it.

When a customer in one country places an order with a supplier in another country, they are entering into a sales contract, upon which they will owe customs duties and sometimes value added tax (VAT), depending on their home country’s specific laws. Most countries have a threshhold below which they don’t charge, on the basis of paperwork reduction. There are usually different rates for different types of goods, as well. If you do something, after the fact, to obscure the sales contract between the buyer and seller, in order to evade the duties and taxes set out by a country’s government? Well, at a minimum it’s tax evasion, but it really looks like fraud to me, since it’s being done with intent.

I’m going to run through a couple examples, to show the export/import process in a little more detail.

Case A: An individual buyer in Europe mail-orders a $40 product from a publisher in the US, and pays $25 in shipping and handling charges.

Correct course of action: The publisher packs up the box, and ships it to the customer, with a declaration attached to it that the shipment is “merchandise” with a value of $40. The customer pays whatever duties and/or VAT is required by their home country.

Incorrect course of action: The publisher packs up the box and declares that it is a “gift”, or that it has a value of less than $40.  (Note that it would be equally incorrect to mark the value as $65, since the extra $25 was paid for a service, not for the goods themselves). The customer fails to pay required duties or taxes.

Case B: A wholesaler in Europe orders 100 of the same $40 MSRP item from the US publisher, but at a 60% discount.

Correct course of action: The publisher declares that they are selling the wholesaler $1600 worth of merchandise. The wholesaler pays duties and taxes based on the discounted price. It is important to note that they are importing goods at wholesale, which they will then sell at a profit, thereby creating taxable income in their home country.

Incorrect course of action: The publisher declares the merchandise at something other than the $1600 paid for it, or declares it as a different type of goods than it is, in order to fall into a different customs category. The wholesaler fails to pay required import duties or taxes.

Note that the specific rules and rates are dependent on the policies of the importer’s home country. Some countries have very high duties to discourage the import of certain types of goods. Bulk importers generally use customs agents, who are versed in preparing all of the paperwork correctly, to minimize both their duties, and their risk of falling afoul of the local customs authorities.

Now, let’s look at the “EU-Friendly” case, where the publisher uses one of the “cost-saving” services I’ve been pitched, and what’s wrong with it.

Case C: Publisher enters into sales contracts with dozens or hundreds of individuals, located in multiple countries within the Eurozone. EU-Friendly-Provider (EFP) “takes possession” of the necessary goods at the US manufacturer in a bulk shipment, importing them into the EU at cost value. EFP then ships individual packages to EU customers from within the EU. EFP then bills the Publisher for: bulk shipment freight, import duty at cost, package handling and local postage for individual shipments.

Notice the fraud?

The EFP is fraudulently pretending to be the publisher of the goods, and the holder of the sales contract with the individual EU customers. If that were truly the case, they would be entitled to import the goods at cost, because all of the profit would go to them, and as an EU company, they would be paying taxes to someone in Europe for that income, as well as boosting the local economy by reinvesting that profit, etc. etc. By stating on the customs forms that they are the purchaser of the goods at factory cost, they are defrauding the customs and taxation authorities in Europe. The EFP is *not* the purchaser of the goods, they’re just a pass-through service provider. For the correct amount of duties to be paid, the EFP’s import value should probably be calculated as the full retail plus shipping and handling paid by the individual customers whose sales contracts the EFP is taking on, less the amount that they will invoice the US company for the fulfillment service.  Which might turn out not to save anyone much money…

And just an aside on another “fraud” angle to this whole thing. I wonder what will happen to a publisher who pays an EFP for their service, and then finds out that they are subject to penalties? Tax-dodging is not a small matter. Will the EFP step up and absorb any judgements and fees, or leave the publisher holding the bag? Does the service they provide include guaranteeing the legality of what they’re doing?

Bottom line: you will see me endorsing an “EU-friendly” solution when I see one of two things (which I find unlikely):

1) An EFP who promises to completely, transparently, accurately declare the value of the goods they are bringing into the EU, assuring that all customs authorities will get their fair payment for the retail purchases made by EU customers from a US company. And this might still be a bit sloppy for my tastes, since the individual customers are scattered over multiple countries, and the EFP will probably only do business in one.

2) A new tax treaty between the US and EU, eliminating customs and VAT for trans-shipped mail-order fulfillment of US manufactured goods.

In the meantime, I recommend that Kickstarter creators stay on the right side of the law. I’m guessing that some EFPs are just ignorant of the law, or can’t do math. Others may just assume – and not without precedent – that they’re unlikely to get caught, since governments have bigger fish to fry than small operators bringing in a few dodgy shipments a year.

I welcome constructive suggestions.

The best I’ve heard so far is entering into a true partnership with a local company in Europe, and either having them publish an EU edition of the project, paying the original publisher a royalty on sales, or having the EU partner purchase a quantity of the US edition at wholesale and handle the local sales in Europe. Notice that in neither of these cases does the US company get to charge EU customers retail, arrange for a delivery service, and evade duties. The US company gets some benefit but the cost to the customer is directly related to how much of the profit of the transaction stays in the EU – which is exactly the concept behind import tariffs.