Despite the widespread imposition of Value Added Tax (VAT) in other countries, Americans usually manage to escape this particular charge.
However, for those of you who buy or sell goods to or from a country other than the United States, VAT is a real and important consideration.
For those who are not acquainted with the concept, VAT can be difficult to understand.
Read on as we look at what VAT is, and when you’ll have to pay VAT in shipping.
What is VAT?
VAT is a consumption tax. This term describes any tax that is levied on the consumption of a good or service. Consumption taxes can be contrasted with income or capital gains taxes.
VAT is applied to goods at any stage in the production chain at which value is added.
The amount of VAT to be paid is calculated on the basis of the product’s value. However, the cost of materials that have already been used in production are deducted.
This means that, between the manufacturing and consumption of a good, VAT may have been charged a number of times.
VAT vs. Sales Tax: What’s the Difference?
While America does not charge VAT, we still have tax added on to our shopping bill when we pay. Why is that?
This tax is called sales tax. It bears some similarity to VAT, but there are some important differences.
Firstly, as mentioned above, VAT is imposed at different stages in the production process, as well as at the point of sale. Sales tax, as the name implies, must only be paid when a good is sold to the consumer.
Where a government wants to levy a certain amount on the production or consumption of goods, this burden falls entirely on the consumer in a sales tax system.
Where VAT is charged, however, this liability is shared by producers, distributors, retailers, and consumers.
Because the VAT system breaks this liability down, there is less risk of a product being double taxed.
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VAT in Shipping: When Will You Have to Pay It?
The rules on the charging and collection of VAT are different everywhere. Depending on the rules in the country you’re operating in or selling to, you may be able to reclaim VAT through certain mechanisms.
There are a number of factors that determine your VAT liability in foreign countries, including the following examples.
Who You Are Selling To
If your business involves selling goods to other businesses, you may be able to reclaim any applicable VAT through refunds. However, this is generally not possible in respect of sales to consumers.
What You Are Selling
Different products attract different VAT liabilities in some countries. Many jurisdictions charge lower VAT rates for necessary items, or for goods or services that fulfill some social or economic objective. An example of this are books.
Method of Delivery
Some countries draw a distinction between collection and delivery when it comes to VAT. The UK gives us an example of this. Where a customer collects their purchase, and they are not a consumer, VAT may be zero-rated for the transaction.
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VAT on Goods vs. VAT on Services
VAT can be charged differently in relation to goods and services.
Generally, when VAT is charged on services, it is charged in the place of supply. Certain zero-rate mechanisms apply between EU member states in respect of such charges.
The VAT rules in relation to the sale of goods vary depending on the country in which business is done.
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What Countries Charge VAT?
The rate charged varies considerably from country to country. Many countries have a negligible VAT rate of 1-2%, while others charge over 20%. The highest rate of VAT in the world is reportedly charged in Hungary (27%).
There may also be varying VAT rates within countries. In Ireland, for example, the standard rate of VAT is 23%. However, there are reduced rates of 13.5% and 9% for certain purchases, such as energy, reading materials, and certain services.
As well as the US, there are a number of countries in central Africa that do not charge VAT, as well as Saudi Arabia.
However, there are a number of countries that have a VAT system in place, but that have their rate set at 0%. These countries include Hong Kong, Bahrain, the British Virgin Islands, and the Cayman Islands.
Should the US Start to Charge VAT?
There is currently a lot of debate as to whether the US should abandon its traditional sales tax system in favor of VAT.
There are many advantages to the VAT system.
VAT is levied at the same rate for everyone. It doesn’t discriminate on the basis of earnings or family situations.
Encouragement of Savings
Because VAT does not affect taxpayers until they spend their money, it could encourage people to be more fiscally responsible.
If VAT were imposed at a federal level, it would put an end to the wide differences that currently exist in the levels of sales tax in the US currently. It would also spread the tax burden across the production cycle, rather than imposing it all on the consumer.
The main disadvantage that critics propose in relation to VAT is a lack of transparency. Unlike sales taxes, VAT is usually included in the stated price of a good or service. This means that consumers are unable to see how much of the price they pay is made up of tax.
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Knowing Your VAT Liability
While VAT can be difficult to comprehend if you’ve never had to pay it before, it’s quite straightforward once you know how to approach it.
When it comes to VAT in shipping, you’ll probably have to pay it if you’re doing business in other countries. However, the extent of your liability will vary broadly depending on the specific country you’re doing business in.
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