Article provided by Xero
So you’ve got your first international order. How do you invoice your customer? Which currency do you choose? And what do you do about tax? Here are the basics.
Which currency should you use?
There are no rules around using the exporter’s currency or the importer’s currency. It’s easier for whoever gets to deal in their home currency, so your customer may request you use theirs – or you may offer it as a courtesy.
How will you handle exchange rate risk?
If you’re billing in your customer’s currency, then you may be affected by exchange rates. If your home currency falls against theirs, you’ll end up getting less for your goods. Small businesses generally either:
- accept the going rate on the day payment is made, knowing there will be ups and downs
- or get forward cover through their bank.
What is forward cover?
When issuing an export invoice, you can ask your bank to lock in the current exchange rate for you. That way you won’t lose if the exchange rate moves against you while waiting for payment. Of course you won’t win if it moves in your favour either. There are other ways to hedge against currency risk, but this is the most common for small businesses that don’t do a lot of international trade.
Where do you pay tax?
You declare the income you make from exports in your tax return, and pay tax at the same rate as if it were local. Nothing changes there. However, you won’t need to collect any sales tax for your home country. Don’t just leave sales tax off your invoice. Include a line showing it was 0%.
It’s not common to pay tax in the importing country, but that could be starting to change. Australia, for instance, may require you to collect 10% tax on goods you sell to their residents through Amazon. Check with an accountant or bookkeeper if you’re unsure.
Do you need to worry about tariffs?
The government of the importing country may apply a tariff or duty on your goods. If that happens, your customer will be charged the tariff costs when your shipment goes through customs. There will be nothing for you to do.
What about shipping and insurance costs?
When negotiating the deal with your overseas customer, make sure you’re really clear about who’s picking up the shipping and insurance costs. There are all sorts of ways you can split the costs. Spell it out in your terms of trade – a contract that should be signed before the deal is confirmed.
If you’re paying for any part of the shipping or insurance, you’ll pass those costs onto the customer. Add them as a line on your export invoice.
Email your export invoices (don’t post them)
You should really email invoices no matter where they’re going, but it’s especially helpful when exporting. Foreign postal addresses follow unfamiliar formats, which can be hard to get right. And besides, international post is slow. Email your invoice as a PDF attachment or send an online invoice.
Receiving money from abroad
When trading overseas, aim to use a well-established international payment gateway. Debit card, credit card and automated clearing house (ACH) are trusted and convenient methods. Just be aware that there will be a transaction fee of 2% to 4% of the total invoice, so it’s not ideal for really big orders. See our guide on how to accept online payment.
For larger orders, consider a telegraphic transfer through your bank. If you’re worried that your customer may not have the money to pay, request a letter of credit from their bank. It’s not a guarantee that you’ll get your money, but it will assure you they have the cash available to do the deal.
Make payment instructions very clear on your export invoice. It pays to get them translated into the official language of the country you’re exporting to.
What are the traps for exporters?
Some businesses are nervous about trading overseas because it’s harder and more expensive to resolve disputes. And if an international customer refuses to pay, there are fewer options for debt collection or legal action. Keep these risks in mind when deciding whether or not to enter an international negotiation.
The basics of export invoicing
Exporting can be complex, but the invoicing isn’t. Here are the main things to remember:
- Make the invoice out in the agreed currency (probably the destination country’s).
- Don’t charge sales tax like you normally would. Include a line on your invoice saying sales tax is 0%.
- But check if you’re required to collect sales tax in the importing country and, if so, follow their local rules.
- Declare exports as part of your revenue, just like any other sale.
- Offer online payment options like credit card, debit card, ACH – or telegraphic transfer for larger amounts.
- Send your invoice by email.
If you send export invoices to several countries, get accounting software that does the currency calculations for you. It’ll save a lot of headaches.