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.

12 thoughts on “The problem with “EU-Friendly””

  1. What about:

    Case D: A Kickstarter publisher sets the price of backer rewards to under the threshold of VAT responsibility. Most countries within the EU have a threshold price point (between £10 and £22) of declared value under which the individual import of the declared item is exempt from VAT.

    I understand this to be legitimately and non-fraudulently EU friendly if your import is actually below these thresholds (e.g. Card games at $8…)

    Source:
    http://ec.europa.eu/taxation_customs/common/buying_online/buying_goods/within_non_eu_en.htm

    1. Nick:

      If a creator is making inexpensive items, that’s definitely an option. In my company’s case, many of our games need to retail for more than that, in order for us to be a viable business.

      Some customers simply want to purchase higher-value goods. And in that case, they will need to pay whatever import fees are due. On our last campaign, we offered a $10 reward that was just the “special extras”, encouraging non-US customers to wait and buy the main product through retail channels. We *still* got a lot of non-US orders for the larger rewards… and, of course, complaints about how much the shipping and duties would be!

  2. I am not sure that case C is wrong, it is not much different from having a branch of company in the EU and shipping the goods there yourself. Only tricky issue there is that people buying a product should buy it from the EU based company so that VAT is paid in EU and preferably different VATs depending on individual countries.

    On the other hand the EU demanding VAT to be paid not only from the important goods but the cost of shipping as well is quite silly policy because the shipping often costs more than the product and the extra costs are then quite insane.

    In any case, I am not lawyer, the rules are bit complex, but I am sure there are legal ways of reducing costs, just not easy ones, I suspect that best is to have part of the company (or business partner) EU based and ship to them at factory cost. The tricky part is not to mess up the VAT later.

    1. Of course, if you own a legitimate EU corporation, that could be fine. The difficulty is in setting up and administering a second corporation, and one based in a foreign country at that! That’s not a minor undertaking, and involves lots of legal and accounting fees, and a long-term commitment.

      I worked at Wizards of the Coast when it was a start-up, and we stumbled into having branch offices in multiple countries, quickly and heedlessly, without quite knowing what we were getting into. That was a huge tangle that had to be sorted out. Fortunately, we had plenty of budget. But if you’re not selling Magic: The Gathering cards, diving into owning foreign subsidiaries may not be a good solution.

      Working with an already established local company is another way to do it, but then you do need to transfer the sales contracts to them, and sell them the product to fulfill those sales contracts at a price that makes it profitable for them to take them on, so the creator company is giving up a lot of the profit margin (possibly all of it) on those sales. The overhead and management involved might also eat up a lot of the savings on freight and import duties, and unless VAT is collected from the customers somehow, it will become another deduction from the profit of the companies involved.

      So far, I haven’t seen a solution better than selling products wholesale to international distributors, and encouraging European customers to go through normal retail channels. That way, the creator-company in the US only has to deal with a few bulk sales, and the taxes and fees are dealt with correctly by experienced wholesale importers. Individual international mail-orders are a really inefficient way for goods to get to customers.

  3. Interesting article.
    There IS one way to make the KS shipping slightly more friendly, though.
    The EFP imports the goods at the right value, and pays tolls, VAT and whatever with funds gathered in theKS, then ships it onwards to the backers.
    Take Norway for example, the ‘VAT-free’ amount is 350NOK, or about US$40, but that includes the shipping cost(Ouch!)
    And the handling fee is over $15.
    I don’t mind paying the VAT, but the handling fee is just rubbing salt into the wound…
    With just one customs operation, the fees should be much less,
    Fun anecdote…
    The Norwegian Post once returned a full shipping container to China, with goods ordered at dx.com because everything was declared as ‘gift’/$1, I think it happened in late november/early december one year…

    1. We really do hope that most European customers will buy our products through local retailers, or online retailers who serve the EU. That keeps the customs and freight costs down, since the goods will be imported in bulk at wholesale. By the time an EFP really does all the proper accounting and reshipping of goods, they won’t be able to offer a creator much of a discount!

      Recently, we’ve alerted customers to the merit of doing group-pledges. We set up our Kickstarter to allow add-ons, so up to 10 people can make one group purchase, pay a lower per-person freight charge, and possibly get a slightly better per-person customs fee – if there’s any minimum or transaction fee involved which would only be charged once. The first few pounds of a parcel are the most expensive. Our price chart indicates that 4 games to one address costs about half as much as 1 game to each of 4 addresses. Still not great, but it’s a bit of relief.

      I’m glad to hear that customs authorities are getting wise to the under-priced/”gift” packages that some manufacturers are trans-shipping out of China. It annoys the heck out of me when I get a parcel that’s been purposefully mislabeled!

  4. Out of curiosity, why don’t you set up a subsidiary company in the EU. That company would then:
    1. Finance the initial capital in the company with a loan from the parent company.
    2. Buy the rights to sell the game in the EU from the parent company
    3. Buy the sales contracts for EU buyers from the parent company
    4. Manufacture the EU edition in Europe (perhaps by entering into a manufacturing contract with a separate entity)
    5. Repay the initial loan & interest on the loan using the proceeds of the sales contracts it bought
    6. Pass any additional profits made as dividends back up to the parent company

    1. Peter:

      That’s a definite option for larger companies.

      Setting up a company is not free, though. We just set up as a simple corporation here in the US (previously we were a sole-proprietorship), and that has cost us a few thousand dollars in legal and accounting fees, and does increase our administrative overhead considerably. Our current level of business can sustain that, but we’d take a serious financial hit to navigate the legal and tax systems in another country.

      Additionally, as an exporter to Europe, we are not responsible for collecting and remitting VAT. That is the responsibility of the importer (in this case the individual customer). Kickstarter is not a store, and is not set up to allow for collection of sales taxes or VAT based on a customer’s location. In our case, we’re still responsible for sales taxes to WA State customers, being a WA State business, so we just absorb that cost, since we can’t pass it on to the customer. That’s a 10% hit on a small amount our sales, so it’s manageable. But if we also had to absorb something like a 15% hit on another portion of sales, we’d have to raise prices all around – putting the burden of EU taxes on our non-EU customers, which hardly seems right.

  5. Hi,

    is making a pledge on kickstarter considered a sales contract, especially in regards to import/export laws and taxation?

    1. Chris:

      It is certainly safest, from a legal standpoint, to consider it that way. Though Kickstarter is not precisely a store, a person is paying a publicly stated price, in exchange for a set collection of “rewards”. In the situations we’ve been discussing – tabletop game kickstarters, or similar – where the stated pledge is essentially equivalent to the MSRP of the goods involved, it would be quite a stretch to classify the rewards as anything other than “merchandise” for customs purposes. There are some campaigns – I’m considering things like Indiegogos, where folks are chipping in $75 for an art project, and get a (maybe) $15 T-shirt as a thank-you – where one could make a case for not valuing the goods at the pledge amount, but that wouldn’t be the case here.

  6. I’d definitely go for cooperating with a company in the EU for the production there.

    All love for Tak aside, paying 50%-80% of the pledges I was considering to get shipment on top is not something I can condone.

    I’d much rather you guys’d find a nice producer in Europe (I’ll gladly look through the manuals of games I have here if that’s what is required) and just have them ship it.

    If it proves to be more expensive than the cost of producing it in the US, you could still drop, say, 10$ as an EU production cost into the Kickstarter shipping costs – going with a guesstimate of 10-20$ for in-EU shipping still makes that come off as a lot better of an option.

    1. Tobias:

      We definitely want to license Tak, but that’s not something we could get lined up in time to promise during the Kickstarter. The final price of a licensed edition could vary from our edition, also, since unit costs are so dependent on print-run sizes. We are not in a position to arrange for local publishing in Europe ourselves.

      Our edition of Tak will be available to non-US retailers through standard international game distribution, too, shortly after we ship our campaign rewards. We understand that backing the Kickstarter may not be the best option for folks outside of the US.

      -Carol Monahan
      VP, Cheapass Games
      Something Pretty Clever Consulting

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