The past months have seen a surge in funding towards startups that are operating essentially as a PE shop, acquiring third-party sellers in the Amazon FBA ecosystem with a goal of revamping their operations - benefiting from the economies of scale as these businesses start getting more and more centralized, as well as from operational improvements when it comes to fulfillment, pricing, go-to-market, etc.
Thrasio was a first-mover in this market in the US, and since 2018 raised $1.7bn to grow the team and speed up the pace of acquisitions. This includes a massive $750M round from early February 2021, followed by a $100M extension just this week (check full article here), to support Thrasio’s growth.
Following Thrasio’s success, multiple startups across the globe mushroomed to work on the same vision, and have together raised $650M+ (both debt and equity) in the past few months to acquire Amazon 3rd party sellers. And they will be busy, as Amazon has 9.7 million sellers worldwide, of which 1.9 million are actively selling on the marketplace according to Marketplace Pulse. What's more, they are adding more than 1 million sellers to the platform each year.
Further, as many merchants who sell through Amazon sell through multiple other channels, managing ecommerce platforms beyond Amazon (Shopify, Magento, WooCommerce, Nuvemshop, etc.) are also becoming increasingly relevant for this business model. This is even more pronounced in regions where Amazon is still building up its presence and is not the dominant force, such as in LatAm or SouthEast Asia.
To give some context on the size of the opportunity, Amazon’s marketplace GMV grew by 50% during 2020., and generated approx. $300 billion in GMV. Shopify generated over $120 billion in GMV for 2020 and Magento reports over $100bn in GMV.
Looking at the performance of major publicly traded marketplaces such as Etsy, eBay, Zalando, and Wayfair, their median Price / Sales (TTM) ratio stands at 3.45x (Etsy stands at 15.21x and is an absolute outlier, while others trade at 2.5-4x), suggesting that there is an equity value creation opportunity of over $1,780 billion in this space looking at only the above major ecommerce enablement platforms - and it's growing fast.
What are the major cross-border tax compliance issues to think about?
1) Tax rates
When selling internationally, merchants need to know what indirect tax rate to apply to transactions across different countries in order to be compliant with the local regulations. Tax rates usually depend on the location of your buyer, whether you crossed any revenue threshold that would mandate you to register for local VAT and charge local indirect tax rates, and it depends on the type of the product / service being sold. With products, it then varies across different SKUs, which adds complexity to the equation.
This is not straightforward to manage for a single merchant, but imagine a conglomerate of merchants based in different countries, selling different scope of SKUs to different customers across the World. This leads to quite some complexity.
What’s more, with the incoming EU regulation that will go live in July 2021, these revenue thresholds across different EU member states will be replaced by a single revenue threshold of €10,000 at the EU level - meaning most merchants will be liable to charge different VAT for every country they sell to in the EU.
In order to be compliant in every market they sell, merchants need to issue invoices that are locally compliant and content all the specified fields. For eg. merchants in Portugal selling to Portuguese buyers need to issue invoices that are in a different template compared to those that Italian merchants would issue for their local transactions.
When operating a portfolio of merchants selling from entities across the EU and globally, it is very important to make sure that each of the entities is compliant with the invoice structure in their respective juridisticions, which tends to be hard if merchants are using standard invoicing software which is typically basic and fails local compliance across multiple countries.
3) VAT Returns
VAT returns are another pain these businesses have to deal with, and handle it across their e-commerce portfolio. Sellers will have to register for VAT locally in countries where they hold their stock, regardless of how much in sales they generate in those countries. So, if a seller has stock in Poland and Portugal, but is based in Croatia, it will have to register for VAT in all 3 countries and file VAT returns separately in Poland and Portugal where its stock is based. This gets extra complicated for sellers using (various) fulfilment programs that mean their inventory is moved across countries.
To streamline this process operationally, Amazon or other marketplace seller aggregators will have to think about how to centralize their supply chain and fulfillment across their merchant portfolio, so that they avoid massive amounts of VAT registrations and filings. An additional layer of complexity is added when goods are imported into the EU for direct sale to consumers, which has its own set of peculiarities to handle.
4) Transaction reporting to tax authorities
An increasing number of countries are introducing real-time transaction reporting requirements, that mean sellers need to report sales transactions in (near) real-time to the government.
Such regulations already live across LatAm, in India and in European countries like Croatia, Hungary, Italy, Portugal, Poland, and they cause an additional compliance burden for businesses operating in these markets.
Looking at this from a merchant aggregator perspective, it increases operational costs for their portfolio, as they will most likely end up with dozens of merchants who have a local provider handling real-time reporting for them in their local market, which means that the aggregator will now need to handle relationships with each of these vendors individually.
How can Fonoa help e-commerce aggregators?
Fonoa has an API-first approach to managing indirect tax compliance, and can easily integrate with a portfolio of e-commerce sellers through their ERPs, making it far easier to handle taxes for an ecommerce aggregator, as opposed to working with different vendors for each of the portfolio merchants.
Through our product suite, we help automate tax rate determination, locally compliant invoicing, VAT returns filing, and transaction reporting to tax authorities across the globe - all via single API.
Reach out to our team to learn more about it.