The rationale for the application of new tariffs by the US Government has expanded to include value-added tax (VAT). This development arrives as the challenges of imposing reciprocal tariffs against Europe and the UK collide with the reality of historically low tariffs on American goods entering those countries. Consequently, the conversation—which some might characterize as hyperbole—has broadened to include non-tariff obstacles. (Spoiler alert: VAT is not one of them).
Understanding the difference between VAT on imports and import duty is crucial for businesses engaged in international trade. A simplified way to view VAT is as a sales tax. However, while the USA sales tax applies at the state and local levels, VAT is applied consistently at the national level.
For context, while state and local sales taxes in the US average less than 10 percent, VAT in Europe and the UK averages around 20 percent.
VAT is imposed at every stage of the supply chain process (taxing the "value added" at each step). While businesses pay VAT, they can claim back the VAT paid on all their business purchases. This mechanism ensures there is no escalating or cumulative tax burden on the final finished product. By contrast, most businesses in the US are unable to claim back the sales tax they pay on intermediate purchases.
Nearly half of US sales tax revenue comes from business-to-business intermediate transactions. Unlike VAT, this cost accumulates with every purchase made by US producers. The reclaiming mechanism built into VAT successfully avoids this duplication of tax.
With the general lowering of tariffs over the last several decades, there has been a corresponding rise in what are known as non-tariff barriers. Learn more about non-tariff barriers.
Non-tariff barriers include requirements such as specific product certifications. While many can be viewed as reasonable restrictions necessary for public well-being and safety, others are criticized as unfair trade limitations. Common examples include:
READ MORE: IMPORT DUTY EXPLAINED
Historically, value-added tax was never considered a non-tariff barrier because VAT applies universally to all goods—whether they are imported or produced domestically.
Rather than being discriminatory against imports, international e-commerce companies actually benefited from VAT loopholes several years ago by shipping low-value orders tax-free. This heavily disadvantaged local domestic businesses. Authorities rectified this discrepancy, and now VAT applies to all goods regardless of their value or duty status.
Value Added Tax (VAT) and import duty are two distinct financial assessments that apply to imported goods. They serve entirely different economic purposes and are calculated using different methodologies. Let us break down these key differences to help importers manage their tax obligations effectively.
Import duty is a direct tax usually levied as a percentage of the value of the imported goods. Its primary design is to protect domestic industries from foreign competition and generate revenue for the national government.
Import duties are usually calculated based on three primary factors:
VAT calculation is generally a straightforward fixed percentage applied to the total value of the goods plus any applicable import duties. While VAT rates vary by country, they are universally applied as a flat percentage, though reduced VAT rates exist for specific essential items.
The most important distinction between these two costs lies in how businesses can recover them. Import duties represent a final cost. They act as a sunk cost that importers must permanently factor into their pricing models and cost of goods sold.
VAT, on the other hand, is typically recoverable for registered businesses. When a company imports goods for commercial use, they can usually reclaim the VAT paid at the border through their regular periodic VAT returns. This mechanism transforms VAT from a final expense into a temporary cash flow consideration.
Understanding these fundamental differences between VAT and import duty is essential for businesses trying to stay informed on ongoing free trade discussions between international trading partners.