Drop-Shipping: the new rising trend in e-shop and the relatively "unknown" logistical support, Article by Mr. Christos Iovanoudis, CEO of EPIDOSIS, in the October issue of the financial magazine EPSILON7.
Demand for e-shops from youngsters increased tenfold after the Covid-19 pandemic and quarantine
In an ever-changing economy with constant challenges at all levels, we are called upon to adapt to business data that may have significant advantages but also require some special knowledge about accounting and tax support. Demand for e-shops from small businesses increased tenfold after the Covid-19 pandemic and quarantine as reported in the press, while according to the S.E.B., sales turnover during the lockdown period increased sixfold on average in Greek e-shops. Moreover, again according to S.E.B., retailing in the digital age consists of the triptych: connected customers, smart store and connected supply chain. The focus of activities remains on customer service. 360o retailing expands sales beyond the physical store, it involves a new group of consumers (connected consumers), but creates the need for increased transparency and service reliability. Service experience is no longer just about low price or product quality. The digital consumer also seeks correct information about the terms of the transaction.
The analyses of the S.E.B. Digital Transformation Observatory show that 54% customers proceed to purchase only after receiving this information. A new form of digital store business model is also drop shipping. A new management system that changes the data of an e-shop as it simplifies the operation process. More specifically, drop-shipping is an ever-growing system implemented by e-shops worldwide. Its main advantage is that it almost eliminates the required start-up capital, as it relieves the e-shop from the need to pre-purchase (stock) and store products.
The whole process has elements in common with triangular transactions as we know them. The e-shop receives the order from the customer from whom it collects the retail value, pays the wholesale value to the wholesaler and the wholesaler ships the product directly to the end customer. It is clear that the wholesaler, the e-shop and the final customer may be located in different countries, inside or outside the European Union. A profitable scheme used by many European entrepreneurs is: e-shop based in a European country with a preferential tax regime such as Bulgaria, Cyprus, or Poland - purchases from China - sales worldwide. Comparative advantages include no start-up capital or subscription requirement as ready-made platforms such as eBay or Aliexpress can provide ready-made platforms for such e-shops, which do not require very specialised IT knowledge.
Moreover, it does not need any special software, although there are available on the market for better organization, while the infrastructure requirements are limited to an internet connection and a computer. There are several reasons why one can fail or experience great success. As in all cases it requires methodicalness, perseverance and professionalism. On the internet if one browses one can find many cases of people who started out timidly at first working from home, and now are amassing a substantial income. If someone wants to get into dropshipping they could start with Shopify. It can set up the website in minutes, has training material on how to best do dropshipping, and the positive thing is that it can connect directly to aliexpress or amazon.com, automatically uploading the selected products or descriptions of them.
The Decalogue to the....victims
As in all professional spaces, outreach and development requires caution and checking the credibility of partnerships and synergies. The 10 key points for potential dropshippers could be summarised as follows:
- Understanding the distribution channels of the industry one intends to engage in. It requires time and study but is important for a successful effort.
- Investigate on the internet and search for information about the manufacturer and their reliable distributors.
- Conduct initial reconnaissance contacts in order to know the minimum order requirements and wholesale prices.
- The beginning should perhaps be made with simple steps and specific products, avoiding from the very first days complex procedures that require specialized knowledge.
- Control initially the large B2B markets and the most prestigious manufacturer markets. In this way the "initiation" into the drop-shipping space will be smoother.
- Seeking advice on the development of the project, by participating in forums, social networks and groups through which the exchange of views and ideas can be extremely useful. However, the adoption of views and practices should be done with caution and increased critical faculties.
- Organization of the company structure from the very beginning both fiscally and legally with consultants who know the procedures of the specific area. The opening of a bank account should always be considered.
- An active presence in all social networks is a given, while there should always be a provision for budgeting the cost of advertising and promotion on the internet and social media.
- Always be vigilant about suppliers, manufacturers and distribution channels.
- This is a case of a business venture that can be quite lucrative and with potential. But it requires, as in all cases, perseverance, organisation and patience.
"Drop-shipping is an ever-growing system implemented by online stores worldwide. Its main advantage is that it almost eliminates the required start-up capital, as it relieves the e-shop from the need to pre-purchase (stock) and store products"
When business is good...trouble starts
And while the trend of drop shipping started 10 years ago, few are skilled in accounting support and how this is shaping up tax-wise. The internet is full of information on how to set up an e-shop with the drop-shipping process, little information is available on how this is supported accounting-wise. The problems mainly arise when sales turnover grows and while something that seemed "innocent" and small starts to become a bigger and bigger entity. This is when accountants and financial advisors are once again called upon to "pull the snake out of the hole" and organise from the beginning all the set-up and operating procedures in order to start operating the e-shop correctly and legally. The responsibility of issuing a tax document (invoice or retail receipt) to the consumer lies with the reseller (e-shop). For his own assurance, he should keep a complete record of a) the details of the electronic order he accepted, b) the order he placed himself with the wholesaler with the instruction to ship directly to consumers and c) all documents relating to the shipment of the product and the invoicing documents. The transaction is taxed in the State of importation of the goods, where the import duties and import VAT are due, in accordance with the legal framework of the country concerned. The treatment is similar when the goods are dispatched to the final consumer in Greece, where any charges provided for in the Customs Code apply. The drop shipping method offers the possibility to get involved in e-commerce without having any special capital. However, if one already has a form of business, it is important to contact one's accountant to check the C.I.D. that may be required, if not already incorporated.
"Adaptation to new data is a prerequisite for a company not only to survive but also to grow in an ever-changing business environment"
The steps and essentials for a company using drop shipping
If there is no business or company (Sole proprietorship, Private Limited Company, Limited Liability Company, Limited Liability Company, etc.), one must be created. As stated earlier the procedure is as follows: The customer pays the e-shop. The e-shop pays the supplier on behalf of the end customer by sending his details, while keeping a percentage of the profit. The supplier sends the product to the end customer together with the relevant documents. The documents issued Retail Sales Receipts or Invoices either in the Community or in third countries shall not be subject to VAT. What one needs to know about the documents is as follows:
1. The sale of goods within the country by direct shipment of goods from a third country to the recipients has the characteristics of the assignment of the import right. After the repeal of par. 4 of Article 13 of the VAT Act by para. 3 of Article 20 of Law 4141/2013 (Government Gazette A 81/05-04-2013), the deliveries of goods made before their importation are not subject to VAT and therefore the invoice issued by the assignor does not include VAT. The VAT due shall be collected in accordance with the provisions of the customs and tax legislation in force when the goods are placed under the release for free circulation procedure. The formation of the taxable value is carried out in accordance with the provisions of Article 20 of the VAT Code, in conjunction with the relevant Community provisions on the formation of the customs value (POL.1087/2013).
2. The dispatch of the goods to private individuals, by importation by the company and subsequent dispatch to private customers, does not fall within the scope of Directive 2006/79/EC, which regulates the tax exemption for the importation of goods in the form of small consignments of a non-commercial nature from third countries. The retail sales notes (RTIs) issued are subject to VAT as, when they are sent to customers, in accordance with par. 1 of Article 13 of the VAT Code, the delivery is deemed to take place within the country.
3. With regard to the import of small consignments (consignment of goods from a third country directly to private individuals), the actual value of which does not exceed 22 euros per consignment, are exempt from VAT.Therefore, for items of a commercial nature the customs duties are normally paid, while the items whose total value does not exceed 22 euros are exempt from VAT (Articles 23, 24 of Reg. 1186/09 and Articles 20-21 of Law 1684/87) and items whose total value does not exceed EUR 150 are exempt from customs duty. VAT and duties on small packages are collected by the distributor. As of 21/6/2017, the Joint Ministerial Decision of the competent Ministers of Finance and Digital Policy, Telecommunications and Information (Government Gazette B4092/20-12-2016) No. DTT A 1181957 EX 2016/9-12-2016 (Government Gazette B4092/20-12-2016) on "Customs procedures for postal shipments through the Universal Service Provider" is in force. Implementation instructions were given by the Circular of the Governor of the A.A.D.E. No.: DTT A 1094213 EX2017/21-6-2017 (A.D.A.: Ψ96KH-MPD) which was amended by the Circular No.: DTT A 1120203 EX2017/04-08-2017 (A.D.A.: 7X5ΘΗ-T2Κ).
4. In particular, for the issue of the retail receipt, if the company is Greek, it issues the tax information (invoice or retail item) without VAT, indicating that it is a taxable transaction outside Greece (Article 13 VAT). In our view, it should have all the transaction documentation proving that the transaction is outside the scope of VAT in Greece. Such evidence includes, a) the electronic orders received from buyers/consumers (printout with the buyer's details, items, quantities and value), b) the orders placed by the company with the manufacturer or wholesaler established in a third country with the instruction to ship directly to consumers and c) any other documents sent by the manufacturer or wholesaler together with the invoice to the Greek company that correlate the shipments of goods with the orders received by the Greek company from the buyers/consumers.
The new trend in e-commerce requires up-to-date accountants and tax advisors
In any case, we as accountants and as tax experts must be helpful in the developments and new trends in business, as accountants are the ones who will advise and submit the relevant documents on the obligations of such a new company to third parties and the Greek state. Similarly, similar obligations arise in any other country chosen, which has a privileged tax regime such as Bulgaria, Cyprus or Poland. Adaptation to the new rules is a prerequisite for a company not only to survive but also to grow in an ever-changing business environment. I believe that it is the obligation of every accountant to take the necessary steps together with his client towards the development and upgrading of the services of every modern professional.
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