A Paradigm Shift in Cross-Border E-Commerce Regulatory Compliance: Evidence From Brazil

1. Introduction

E-commerce encourages small businesses and individuals to trade internationally (Blegen, 2023), which is beneficial for empowering local communities but poses challenges for customs controls worldwide (Blegen, 2020; Liu et al., 2022). Cross-border e-commerce (CBEC) brings new challenges regarding regulatory compliance and data quality (Singh, Munjal, Kundu, et al., 2023).

International consignments have taken centre stage in global trade and the flow of goods across borders. Changes in this area have been rapid, voluminous, and consistent. Factors that help to explain the phenomenon, particularly in the early 2000s, include:

• digitalisation and use of new technologies, reducing transaction costs and the number of intermediaries (Wang et al., 2015)

• scalable adoption of a platform-type digital business model (Šiuškaitė et al., 2019)

• broadband internet

• massification of digital payment solutions (Fu & Saad, 2023) via fintech, which allows payment in local currency to foreign suppliers

• efficient and increasingly fast logistics (Ding et al., 2017), with cargo tracking and efficient returns in many cases (Giuffrida et al., 2021)

• changing consumer behaviour and shopping experience (Cumming et al., 2023; Vorona et al., 2022)

• mass use of applications and smartphones (N´Da et al., 2023)

• the pandemic and its effects on social distancing (Cumming et al., 2023).

As digital marketing is expensive (Ding et al., 2017) and can make small businesses unviable, the platform business model presents a venue for small businesses to display and sell their products, paying only commission. Thus, this business model has been transformed into a platform-based economy (OECD, 2019). However, regulation and taxation have been chasing it, dealing with data scarcity, poor data quality and high uncertainty (Sirimanne, 2022).

Individuals at destination (import) reveal greater customs risk due to the need for prior information on the players, records of their operations, products traded, value and freight costs. This facilitates under-invoicing and incorrect descriptions of goods, including trade in counterfeit products, which threaten the security of society and generate potential losses for national companies.

As other countries may be dealing with similar problems (Rudneva, 2022), this paper analyses the scenario before and after recent regulatory changes took effect in Brazil, culminating in a paradigm shift for customs compliance programs created for small shipments. We intend to answer the question: To what extent can a customs compliance program help regulate and control small parcels in accelerated and unprecedented growth?

In this regard, CBEC’s exponential growth and the inferior quality of available information present significant new challenges for Customs, which is faced with a vast and growing volume of orders and declarations with little (or no) possibility of prior control of the operation information.

This study investigates the import process by focusing on platforms that sell tangible products across physical borders. Section 2 reviews the literature, and Section 3 discusses the method. Section 4 presents the analysis of the context, legislation and results, followed by the conclusion in Section 5.

2. Cross-border e-commerce as a scalable phenomenon

A few sectors studied have been growing, like e-commerce, at a rate of 15 to 20 per cent per year (between 2014 and 2017), with expected annual growth of 26 per cent by 2030 (Statista, 2022).

In the present globalised world, e-commerce is conducted by small and medium-sized enterprises (SMEs) (Cassia & Magno, 2022) and individuals. Heijmann and Peters (2022) highlight the differences between the typical cross-border trade model and e-commerce. According to the authors, the latter represents a break with the traditional chain of commerce. Physical sales would traditionally involve the manufacturer, distributor and retailer before reaching the final consumer, whereas technological advances in communication have made buying directly from the exporter possible. These changes put pressure on the flow of information to the extent that a more experienced exporter has more prospects of complying with customs legislation and providing the necessary and correct information.

Buyers and sellers trade directly via CBEC platforms (Zuo, 2019), which increases the pressure on customs controls, especially in business-to-consumer (B2C) and consumer-to-consumer (C2C) scenarios.

According to Dong (2019), the literature about the regulatory environment on digital platforms lacks consensus, and the theoretical foundations of CBEC remain unclear (Zhu et al., 2023). Business-government information sharing is essential for cooperation, including national inter-agency alignment (Rukanova et al., 2020). According to Borysenko et al. (2022), globalisation requires new formats of customs cooperation to tackle risk management appropriately.

In 2016, the World Customs Organization (WCO) initiated a collaborative effort by launching a working group on e-commerce. This inclusive approach brought together stakeholders from the private sector, customs administrations, international organisations, e-commerce players, WCO observers, and academics. In December 2017, the WCO Policy Commission further endorsed the CBEC resolution, the Luxor Resolution, which outlines the fundamental principles of CBEC. Then, in February 2018, Beijing was a testament to this global collaboration, resulting in the Beijing Declaration. The main challenges identified were the prevalence of inaccurate, incorrect and incomplete information and misrepresentations in customs risk management (WCO, 2017).

According to the WCO (2022), CBEC occurs when:

• the order and its communications, purchase, sale and payment are online

• it involves cross-border transactions with cargo handling

• the goods are tangible

• the goods are destined for consumer buyers, whether traders or not.

2.1. Digital platforms as a new business model

Digitalisation creates numerous opportunities for entrepreneurs (Richter et al., 2015). Considered the most significant type of economic development since the Industrial Revolution, the digital economy revolution is primarily driven by digital entrepreneurship (Kraus et al., 2019; Nambisan, 2017).

Kraus et al. (2019) state that digitalisation has significantly shifted from offline to online business. It has changed how entrepreneurs conduct business activities, such as the platform-type business model (also called marketplaces). Disintermediation, vertical value chain integration and the reorganisation of economic activity on digital platforms characterise a new business model across borders (Autio et al., 2018). This business model helps SMEs gain product visibility without investing in digital marketing, as small companies need help to promote their businesses on their websites. Platforms catalyse business and are highly effective channels for internationalising small enterprises less expensively (Singh, Munjal, & Kundu, 2023).

Platforms facilitate transactions, bring buyers and sellers into contact and significantly reduce costs, thereby increasing profitability. They generate scale and network effects (Nerbel & Kreutzer, 2022), opening a new venue for business opportunities in the digital world. Network effects directly favour platforms since the more people patch into a system, the more their presence is a plus for everyone connected on the other side. This principle can best be illustrated in significant B2C marketplaces where growth in the user base leads to more transactions, better information and improved service offerings (Hagiu & Wright, 2015). Due to the comprehensive coverage of these platforms, the platforms become more valuable and attract even more users due to the perceived increase in their value, making the model scalable.

As Senyo et al. (2019) highlight, platforms promote stability for small companies and empower them by enabling integration and interoperability between partners, services, processes, and technologies. This empowerment has led to individuals becoming unconventional direct importers using these platforms (Belitski et al., 2021).

Establishing the technological base is crucial for defining the scalability of platform business models. Due to the large number of transactions and data processing involved, the CBEC industry relies heavily on emerging technologies like cloud environments, artificial intelligence, and blockchain solutions. These technologies enable platform leaders to deliver efficiency, security, and fluent user experiences and open up exciting possibilities for the future of platform scalability (Evans & Gawer, 2016).

Data is the cornerstone of the platform’s business model. These platforms capture a large amount of user engagement data, which is instrumental in improving processes, providing targeted experiences and enhancing supply chain management. The efficient use of data through intelligent techniques and algorithms allows the platforms to forecast purchasers’ behaviour and manage stock more effectively. It reassures the audience about the efficiency of platform business models (Parker et al., 2016). This feedback loop contributes to the system’s scalability, reinforcing the platform’s value proposition.

2.2. Imports by individuals: The challenge of controls, regulation and taxation in CBEC

CBEC has brought new challenges for customs controls worldwide (Giuffrida et al., 2020, 2021). Papis-Almansa (2019) and OECD (2021) stress that the issues in ensuring fair e-commerce taxation go beyond a country’s borders and that taxation of digital business platforms has attracted the attention of policymakers, tax administrations and academics from various fields. Taxation is susceptible to fraudulent exploitation, which individuals and platforms have maximised (Vanhoeyveld et al., 2019).

The massive increase in e-commerce operations has created a new path of opportunities. It has generated newer threats, including chemical, biological, radiological, nuclear, or explosive substances, and trade in opioids and other illicit drugs. Associated problems include split-order shipment, incomplete or inaccurate data (poor data quality), false value and content declaration, low percentage of complete DIRs (Import Declaration of Small Shipments) due to the magnification of the flow, and trade in false or counterfeit goods. Declared good value is the venue for the most common problems in customs controls (Alqaryouti et al., 2024).

Customs risk management in B2B is much improved, with established histories of products and importing and exporting firms. Conversely, B2C and C2C open a new world of regulatory and control challenges with unknown and unmapped risks.

Our literature review included works on the Swiss Post case study (Männistö, 2015), commodity risk management for CBEC (He et al., 2017), postal companies and business in Australia (Abbott, 2019), text-image and neural network to streamline the classification of CBEC goods (G. Li & Li, 2019), regulations for platforms (Frenken et al., 2020), customs innovations for fighting fraud and trafficking in cross-border parcel flows (Männistö et al., 2021), use of artificial intelligence to identify declaration of goods (X. Li et al., 2022), data science perspectives for combating online consumer fraud (Soldner, 2023), trade via internet social networking focusing on customs fraud detection using data mining (Dangsawang & Nuchitprasitchai, 2024), and a cluster-based approach to detect abnormal values of goods (Alqaryouti et al., 2024).

However, we found no articles in the Web of Science or Scopus databases analysing the contexts of customs compliance incentive programs, either from theoretical or practical perspectives, as a possible answer to tackling data and risk management. This paper intends to contribute to this lack of information by reporting on Brazil’s novel program.

3. Method

This qualitative exploratory research is significant as it analyses evidence from Brazil on how to deal with CBEC control and regulation. It focuses explicitly on the PRC (Programa Remessa Conforme—Compliant Shipment Program) legislation launched in June 2023 (with further changes up to July 2024), completing a full circle of regulation changes in this area. This legislation is a pioneering attempt to improve data quality management and facilitate risk management, making Brazil a reference in this field.

The data for this research were meticulously collected through in-depth interviews (Table 1) with customs officers and postal service employees who oversee the customs administration in this regard at CEINT (Centros de Tratamento Internacionais, the International Processing Centre of the Brazilian Postal Service). The CEINT processing centre represents the central point of entrance for CBEC in Brazil. The participants’ anonymity was assured.

Interviews were conducted online and face-to-face from June 2023 to August 2024. The convenience sampling method was used, considering customs officers who work in the context of customs clearance in CBEC operations from the locality and beyond. Secondary data was collected from public sources and regulations (Table 1).

The number of interviews met the sample size requirement for a qualitative research design as a case study (Onwuegbuzie & Collins, 2007), and the interviewees met the required trustworthiness and credibility criteria (Nair & Prem, 2020), contributing to internal validity. The saturation point for interviews in qualitative research was reached after the tenth expert interviewed (Alam, 2020) using a semi-structured interview.

4. Results and discussion: The Brazilian context before and after the compliance program

This section considers the data collected and deals with changes in the regulatory environment and the practical level of operation control.

4.1. Regulatory background on CBEC

In Brazil, the first regulation (still in force) regarding small shipments was the 1980 Decree-Law no. 1804, which simplified international postal shipments’ taxation. The decree establishes the generic classification of goods and defines that import tax cannot exceed 400 per cent. Importantly, in 1980, no internet-based business was in place; thus, the decree covered only non-originating commercial small shipments. Moreover, Customs charge import tax at a single rate of 60 per cent under the generic classification of goods.

Brazilian Ministry of Finance (MF) Ordinance no. 156 of 1999 (still in force with six additional text changes) established that import tax exemption of up to USD50 will occur if the sender and recipient are natural persons. This value, called de minimis, refers to the maximum customs value below which goods can be processed by Customs duty-free and with minimal formal clearance procedures (Tavengerwei, 2018). In practice, de minimis is associated with customs categorisation to reduce clearance costs, which is much appreciated by small businesses as a threshold for trade facilitation (Latipov et al., 2017).

With these regulations in place and the onset of the COVID pandemic changing consumer behaviour towards internet purchases worldwide, Brazil began receiving a volume of packages beyond its capacity to register import declarations for DIR. Even though 70 per cent of packages are cleared by customs in Pinhais, DIR processing represented 2 per cent of the total small shipment imports (before December 2023) and has now reached 100 per cent (as of January 2024). Risk management was urgent in this context. New regulations and a new paradigm of control were needed.

The increased volume of CBEC imports has generated dissatisfaction among national competitors, especially retail chains in the apparel and accessories sector, which claim that the phenomenon of importing without paying taxes creates unfair competition (Dangsawang & Nuchitprasitchai, 2024) and unequal treatment by instituting a digital camelódromo. The word camelódromo, in Brazilian Portuguese, refers to trade without controls or taxation where buyers and sellers are unknown, a kind of ‘black-market shopping mall’ or street market.

According to interviews conducted with customs authorities, around 80 per cent of the goods imported into Brazil via CBEC belong to the apparel and accessories sector. International e-commerce, notably, has significantly disrupted conventional retail industries, leading to job losses (Zhu et al., 2023) and affecting tax competition (Agrawal & Fox, 2017).

Another approach competitors have taken to CBEC is called ‘digital smuggling’ because it improperly uses de minimis. The Brazilian government shares the community’s concern about imports via international shipping that circumvent de minimis by entering a foreign product into Brazilian territory without paying the appropriate taxes.

Until 28 June 2023, Brazil had no specific CBEC legislation, contributing to natural persons’ misunderstandings of the import process under CBEC. On 29 June 2023, the government issued MF Ordinance No. 612 and Normative Instruction_IN^[1] RFB No. 2146 to regulate the issue and create a voluntary customs compliance program for international small shipments, the Programa Remessa Conforme, or PRC. Importing goods acquired via e-commerce was mentioned for the first time in Brazilian history.

In the 12 months since then, a massive regulatory change has set the stage for CBEC to implement a new compliance program. State tax (ICMS^[2]) began to be levied on all imports as CBEC. Brazil has no Value-Added Tax (VAT). ICMS plus IPI (import tax for industrialised goods) roughly corresponds to VAT in other countries. Coincidentally, with the PRC in force, the states also approved and published ICMS Agreement No. 81/2023, authorising all states to adopt a 17 per cent rate on such operations, with no de minimis. The inventory of changes in tax and compliance regimes has been massive from June 2023 to July 2024. This paper analyses a one-year complete cycle of implementation of legal changes.

Due to the pressure from local competitors on the government, the de minimis exemption ended on 1 August 2024, and a tariff of 20 per cent is now considered for consignments up to USD50, plus 17 per cent of the state tax. From USD50.01 to USD3,000, 60 per cent of the national and 17 per cent of the state tax will be levied. In this case, from the total, a discount of USD20 will be applied for tax collection. Exemptions are guaranteed for medicines. These changes intend to contribute to a fairer business environment and better controls for the CBEC phenomenon (MF Ordinance No. 1086 of 2024).

4.2. The compliance program of CBEC

One year after implementing the new program, 25 platform, and logistics companies have adhered to the compliance program (July 2024), corresponding to roughly 67 per cent of all shipments inflowing to Brazil as CBEC (Receita Federal do Brasil [RFB], 2024). Most of them are significant players, known globally and operating worldwide.

Article 12 of IN RFB No. 2124 of 2022, amended by IN RFB No. 2146 of 2023, establishes that the Brazilian postal service and PRC-accredited e-commerce companies are obliged to provide the RFB (the Brazilian Customs Administration) with access to their files (including computerised ones) for shipment control and deliver the import consignment to the consignee only after payment of the import tax and fines.

For PRC-adherent companies, import declarations for small consignments must be made in advance. Advanced DIR has the advantage of providing accurate data on the payment of national and state taxes, correct description of goods, volume of shipment, and relevant taxation regime, among other information. The compliance program also requires the accredited company to provide information separately regarding the price paid for goods, freight, insurance and other expenses. The accredited company must also commit to tax and customs compliance and combat embezzlement, smuggling and counterfeit products. The accredited company must also monitor commercial practices accomplished by sellers (Article 20-B, IN RFB No. 2146).

In other words, it is a paradigm shift in data quality and compliance practices. This practice intends to curb the main problems associated with small shipments in Brazil, namely data quality and DIR completion. The following excerpts from the experts’ interviews confirm the above:

“The main cause of returns is related to the imprecise description of goods.”

“The huge volume of goods from pandemics to now on was unprecedented. Nobody could predict this phenomenon. With the compliance program, we have adapted and focused attention on non-accredited companies.”

How does it work in practice? Data is sent in advance to the Brazilian postal service and courier companies, which are responsible for registering the customs declaration for this kind of import. Considering this practice, the Brazilian Customs Administration can manage the risk more appropriately. Not only is the accuracy of registered data better, but taxes are also paid before customs duties. From the companies’ perspective, they receive a faster customs clearance, contributing to a higher service level from the customer´s perspective.

The interviews with the customs authorities reinforce that the DIR must be registered correctly; otherwise, the triggering event for import tax does not occur, nor does customs clearance. In this case, the ICMS, the amounts advanced by the recipient, must be returned.

According to IN RFB No. 2146 of 29 June 2023, only companies with a contract signed with the Brazilian postal service or a courier company can be PRC-accredited. The DIR will be given differentiated treatment in import customs clearance when registered no later than two hours before the transport vehicle’s estimated arrival time in the case of express consignments or 48 hours before postal consignments. One interviewee said, “The idea is maximising the effectiveness of controls.”

Such differentiated treatment includes: a) early DIR risk management, b) priority customs clearance processing, and c) reduced selection percentage for customs conference channels for risk management about other declarants. Customs clearance and tariff payments are two of the four top risks identified in the recent research (Zhu et al., 2023) that have contributed to the CBEC research mapping in the literature from 2003 to 2021.

PRC thus contributes to improving data quality and customs controls, allocating human and technological resources in the RFB risk management, stimulating good practices and increasing tax collection. This compliance program is one answer to address this enormous challenge that has been in place for the last few years. Compliance seeks to prioritise cargo handling, contributing to good practices, as Widdowson (2020) argues. High compliance means low risk and low intervention and reward mechanisms in the regulatory response. As noted by one interviewee, “Inducing compliance is a foremost target, as well as reducing the expectation of the tax evader.”

The WCO advocates eight guiding principles for customs under CBEC, with a strong emphasis on partnerships. These principles, including cooperation between Customs and companies (WCO, 2022), underscore the importance of collaboration. Couriers and platforms play a crucial role in this collaborative effort, as they can gather the necessary information in advance for customs analysis. With advanced information, Customs can offer more efficient and intelligent risk management, further highlighting the value of these partnerships.

As the WCO (2017) noted, Brazil has adopted and fully implemented an intermediary tax collection model (for PRC adherents) for e-commerce imports. This model, which assigns foreign platforms the responsibility of collecting the taxes and passing them on to Customs in the destination country, offers significant benefits. It streamlines the tax collection process and ensures that the taxes are collected and passed on efficiently. This model is a testament to the potential for increased efficiency in international e-commerce tax collection.

Collection in partnership with digital trade platforms contributes to data accuracy, increased tax collection and competition law. It is also the highest type of partnership (environment type), engaging customs administrations and the private sector. According to Grainger and Morini (2019, p. 965), it ‘[develops] a regulatory environment within which transaction costs are minimised while ensuring that regulatory objectives are appropriately met’.

Based on interviews, Table 2 summarises the comparison before and after PRC implementation.

Considering the original research question, ‘To what extent can a customs compliance program help regulate and control small parcels in accelerated and unprecedented growth?’, this paper investigated the consequences of a compliance program put in practice through Memoranda of Understanding between digital trade platforms and the customs administration, which allow:

• Declaration of goods (DIR) in advance

• Better data quality for risk management. This aspect relates to the description of goods, the value of goods, image sharing, freight cost, and the Harmonised System (HS) code. Data are, therefore, the essential elements of the platform business model

• Streamlined customs clearance for accredited companies. Better allocation of customs control resources, with risk management applied to all and a greater likelihood of enforcement for non-accredited operators

• Better allocation of resources towards non-accredited operators, focusing on counterfeit goods, under-invoicing, and poor description of goods, among others, declared goods value is the most common problem for customs control (Alqaryouti et al., 2024)

• Predictability of the treatment of goods. New legislation contributed to minimising misunderstandings and clarifying the program’s benefits in the current context of international small shipments. Tax complexity and old-fashioned legislation have contributed to misinformation and non-conformities

• A certification seal for the accredited companies

• A new database of trade statistics for CBEC at the national level.

The compliance program is also beneficial from a tax compliance perspective, as tax is collected when the order is placed with the digital platforms. The following excerpts from the experts’ interview reinforce the above:

“Minimising the complexity of legislation and raising the awareness of the importance of compliance is a part of continuous improvement.”

“We noticed a huge discrepancy in data from the declaration and the platform websites before the compliance program took place.”

“There are reports of prices declared at one-hundredth of the original value.”

“In times of cost constraints, we needed a national strategy to deal with the CBEC phenomenon.”

No comparison can be made given the different comparable bases regarding customs revenue losses. This is beyond the scope of this article. Although 2 per cent of small shipments were previously registered via DIR, problems related to false information, deliberate errors, misclassification of goods (G. Li & Li, 2019), and undervaluation (Alqaryouti et al., 2024) abounded.

With the DIR registered in advance for 100 per cent of the accredited companies, declared data accuracy should increase rapidly since the platform controls the sales price and the price invoiced. Before, the invoiced price differed from the sales price, and the platform could not visualise it.

5. Conclusion

Small parcel flows would be acceptable if they were not so numerous. The massive number of consignments addressed to natural persons incorporates a new phenomenon in customs controls and customs risk: CBEC.

The digital economy and businesses challenge the original assumptions of how economy and taxation define some traditional concepts. Confusing legislation in Brazil before the PRC took effect (2023) also contributed to misperceptions and misunderstandings regarding the CBEC operations.

Substantial changes in regulations set the scene from June 2023 to July 2024, which caused a paradigm shift in how to deal with CBEC at Customs. The regulatory environment fulfils a full circle of identifying the problem, analysing solutions and discussing with stakeholders and third parties before implementing the new legislation, comprising a customs compliance program (called PRC in Brazil) and a new taxation system from the national and state levels. Possessing a significant emerging market with a growing population, internet users, and a developed online payment system, Brazil is the largest e-commerce market in Latin America (Statista, 2022) and thus can serve as a reference for other emerging markets facing similar problems.

More users, especially individuals, have participated in the international flow of goods. The compliance program tackled the problem of inaccurate, incorrect, and incomplete information (of goods and values) by sharing such data, essential to the platform business model, with customs administrators.

One catalyst was the pressure from national retailers to end de minimis in Brazil as the market share increased in favour of foreign platforms. Considering this movement, no de minimis has been applied in Brazil since August 2024 (MF Ordinance No. 1086 of 2024).

A compliance program that stimulates cooperation with foreign digital platforms provides better data quality, minimising transaction costs. Those who join the compliant shipping program are expected to provide better customs risk management. Customs focuses on companies, platforms and operators that have yet to join the compliance program. Individual importers benefit from platforms participating in the program since they receive their cargo more quickly.

As noted, studies that analyse customs data using technological tools are scarce (Dangsawang & Nuchitprasitchai, 2024). Future studies could examine the databases and statistics dedicated to CBEC and the standards set to ensure their accuracy. Further studies may also clarify whether the accreditation applies to all the platform´s sellers, the completeness and reliability of the shared data, and continuous monitoring.

Acknowledgements

We thank the São Paulo Research Foundation (FAPESP), Grant n. 2023/09754-0. We also thank the Espaço da Escrita at Unicamp for the language service.

Dedication

This paper is dedicated to Dr Juha Hintsa. His sudden death on 6 September 2024 in Engelberg, Switzerland has left a profound void in the customs community, where he made significant contributions over many years. Juha’s impact extended beyond academic achievements. His was committed to creating a better and safer world.

The authors wish to dedicate this paper in his memory — a heartfelt tribute to a visionary who touched the lives of many.

May Juha’s legacy continue to inspire and resonate with those who follow in his footsteps, ensuring that his contributions to the customs community are never forgotten.