Overview of exchange rate risk management and British tax system in import trade

In international trade, exchange rate fluctuations and tax regulations are two important factors that affect corporate costs and benefits. In import trade, importers face the challenge of how to avoid exchange rate losses, while cross-border e-commerce sellers need to pay attention to the tax rate in the UK. This article explores both topics in detail.

Avoid exchange rate losses in import trade

In import trade, due to the exchange between multiple currencies, exchange rate fluctuations may cause companies to face potential financial losses. In order to reduce this risk, importers should carefully select the pricing currency when determining the price of goods, taking into account exchange rate movements and market trends. You can use foreign exchange hedging transactions in the international financial market to lock in procurement costs. For example, importers can purchase foreign exchange in advance, deposit the funds into a foreign exchange account, and use them directly when payment is needed, so as to lock in the exchange rate in advance. In addition, if the contract is priced in “soft currency”, it can also reduce the impact of higher exchange rates on RMB payments in the future.

Although the choice of pricing currency depends on the trade habits of buyers and sellers, if importers can use cross-border RMB settlement, they will be directly protected from the risks caused by exchange rate fluctuations.

Basic knowledge of the UK tax system

For cross-border e-commerce sellers operating in the UK, it is extremely important to understand the UK tax system. The UK VAT system, although similar to other countries, generally has lower rates. Under normal circumstances, the standard tax rate for British goods is 20%. It is worth noting that under certain conditions, sellers can apply for lower tax rates (such as 0% and 5%), but they must meet the requirements of the tax bureau, such as sales limits and reporting compliance. These conditions indicate that sellers who choose a low tax rate need to accurately evaluate future sales forecasts, otherwise they may face the consequences of automatically switching to a normal tax rate of 20%.

While implementing low tax rates, sellers also need to pay attention to the provisions for deducting import VAT. Since sales and purchase costs at low tax rates may result in different tax treatments, sellers should carefully choose the declared tax rate based on their own sales and delivery conditions.

Exchange rate and how to check it

Exchange rate refers to the ratio between two currencies, and its changes will directly affect the profitability of import and export enterprises. Fluctuations in exchange rates are usually determined by a variety of factors such as market supply and demand, political and economic changes, etc. In the short term, exchange rates are dominated by demand for and supply of foreign currency, while in the long term they are affected by multiple factors such as relative price levels and productivity.

How does a company check the exchange rate? You can search through the following ways:

1. Online query: Use the RMB exchange rate midpoint announcement from the official website of the People’s Bank of China.
2. National agency query: Query exchange rate information through relevant agencies such as the State Administration of Foreign Exchange.
3. Commercial bank inquiry: Go to major banks, especially Bank of China, to inquire about historical exchange rates.
4. Financial software: Use relevant foreign exchange trading software to easily query historical exchange rate data.

To sum up, when importing companies face exchange rate fluctuations and tax burdens, they need to take effective measures based on specific circumstances to ensure competitiveness and compliance in international trade.