Value Added Tax - Imports and Exports

Imports and Exports

Being a consumption tax, VAT is usually used as a replacement for sales tax. Ultimately, it taxes the same people and businesses the same amounts of money, despite its internal mechanism being different. There is a significant difference between VAT and Sales Tax for goods that are imported and exported:

1. VAT is charged for a commodity that is exported while sales tax is not
2. Sales Tax is paid for the full price of the imported commodity, while VAT is expected to be charged only for value added to this commodity by the importer and the reseller

This means that, without special measures, goods that are imported from one country that does have VAT to another country that does not have VAT will be taxed twice. The exporting country will charge VAT and the importing country will charge sales tax. Vice versa, goods that are imported from a country that does not have VAT to another country that does have VAT will result in no sales tax for those goods, and only a fraction of the usual VAT. There are also significant differences in taxation for goods that are being imported / exported between countries with different VATs. sales tax does not have all those problems – it is charged in the same way for both imported and domestic goods, and it is never charged twice.

To fix this problem of VAT, nearly all countries that use VAT use special rules for imported and exported goods:

1. All imported goods are charged VAT tax for their full price when they are sold for the first time
2. All exported goods are exempted from any VAT payments

This causes VAT to work in exactly the same way as sales tax (not charging exports and charging imports). Unfortunately, this is not obvious, and it is a common misconception to view these rules as trade barriers and tax credits for countries that use VAT. This misconception is strongly supported by the particular mechanism used to avoid VAT taxation for exported goods. One might expect that a country using a VAT should track the purpose of all goods manufactured, and tax them differently depending on their purpose, so no VAT will be collected for goods produced for export. Unfortunately this is extremely difficult to implement, since VAT is collected nearly everywhere, and it is simply too difficult to track all the goods produced. Instead, all countries use a much simpler way to achieve the same goal: VAT is charged for all goods, but it is rebated to exporters (that pay VAT as a part of the commodity price) when the commodity is actually exported.

For these reasons VAT on imports and VAT rebates on exports form a common practice approved by the World Trade Organization.