The rational for the application of new tariffs by the US Government has been expanded to include value added tax. This comes as the reality of imposing reciprocal tariffs versus Europe and UK face the reality of low tariffs on American goods to these countries. With that, the conversation - some might say hyperbole - has expanded to include non-tariff obstacles. (Spoiler alert: VAT is not one of them).
VAT and Non-Tariff Barriers to Trade explained
Understanding the difference between VAT on imports and import duty is crucial for businesses engaged in international trade. A simple way to view VAT is as a sales tax. While the USA sales tax applies at the state and local level, VAT is applied at the national level.
While state and local sales tax average less than 10%, VAT in Europe and the UK averages around 20%.
VALUE ADDED TAX VERSUS USA SALES TAX
VAT is imposed at every stage of the process (“value added” at each stage). While VAT is paid by businesses, they can claim back VAT paid on all their purchases. This ensures there is not an escalation or cumulative taxing effect on a finished product. By contrast, most businesses in the US are unable to claim back sales tax they pay on purchases.
- VAT is a national tax as US sales taxes are based on the rate where they are consumed.
- If a European resident orders from a US retailer, they do not pay US sales tax.
- A European (or other country with a VAT regiment) does not charge US consumers VAT
Nearly half of US sales tax revenue comes from business to business intermediate transactions. Contrary to VAT, this cost is accumulated with every purchase US producers. By contrast, VAT's reclaiming mechanism avoids the duplication of tax.
With the general lowering of tariffs over the last several decades, there has been a rise in what are called non-tariff barriers. Learn more about non-tariff barriers.
Non- tariff barriers include such things as certification requirements. Many can be viewed as reasonable restrictions necessary for wellbeing and safety. But, many are also viewed as unfair limitations
- Licensing Requirements
- Technical Barriers to Trade (TBT)
- Sanitary and Phytosanitary (SPS) Measures (mostly related to agricultural products)
- Quotas and Restrictions
- Documentation and Customs Procedures
- Standards and Labeling Requirements
- Government Procurement Policies
- Local Content Requirements
- Investment Restrictions
- Environmental and Safety Standards
- Intellectual Property Issues
- Foreign exchange restrictions and Exchange rate deviation
READ MORE: IMPORT DUTY EXPLAINED
Heretofore, value added tax was not considered a non-tariff barrier. VAT applies to all goods - whether imported or domestic.
Contrary to being discriminatory, several years ago, international companies shipping e-commerce orders largely benefitted from no VAT. This disadvantaged local businesses and was rectified several years ago. Now VAT applies to all goods regardless of value and duty status.
Value Added Tax Versus Duty
Value Added Tax (VAT) and import duty are two distinct taxes that apply to imported goods. They serve different purposes and are calculated differently. Let's break down these key differences to help importers better understand their tax obligations.
- Duty is not recoverable only applies to importing goods
- VAT is charged for domestic goods and services as well as importing goods
- VAT on importing goods can often be claimed back by the importing business
- Rate of Import Duty is levied on specific categories of goods
Import duty is a direct tax levied usually as a percentage of the value of the importing goods. It's primarily designed to protect domestic industries and generate revenue for the government.
Value Added Tax Applies to All Goods - both imported and domestic
VAT is a consumption tax that applies to both domestic and imported goods. It's charged at each stage of the production and distribution process. with each business in the chain collecting and remitting the tax. For imports, VAT is typically paid when goods clear customs, alongside any applicable duties.
Calculation Method of duty
Import duties are usually calculated based on:
- The customs value of the goods (read more about value for duty)
- The commodity code (read more about HS codes) of the product
- The country of origin (read more about country of origin)
VAT calculations is a straightforward fixed percentage of the value of the goods plus any applicable duty. VAT rates vary by country but is typically a fixed percentage. There are sometimes lower VAT rates for some specific items.
Businesses can often claim back VAT but not duty
A crucial distinction lies in how these taxes can be recovered. Import duties are generally a final cost. They're essentially a sunk cost that importers must factor into their cost of goods.
VAT, however, is typically recoverable for registered businesses. When a company imports goods for business use, they can usually reclaim the VAT paid on imports through their regular VAT returns. This makes VAT a cash flow consideration rather than a final cost for most businesses.
Understanding the differences between VAT and import duty is crucial to stay informed on the discussions of free trade between trading partners.
Other helpful resources:
IOSS and VAT payment to Europe
