What is Value-Added Tax and Why Should Your Company Care?

While Value-Added Tax (VAT) is not currently imposed in the United States, all companies interested in exporting should be aware of VAT because it can impact almost every transaction while doing business overseas.

What is Value-Added Tax?

A Value-Added Tax (VAT) is an indirect tax on corporations and individuals that is applied to the value added to goods and services at each stage of its manufacture or distribution. Essentially, VAT is a tax on consumption. In some countries VAT is known as a Goods and Services Tax (GST).

What is the purpose of Value-Added Tax?

The purpose of Value-Added Tax is to generate tax revenues to the government.

How is Value-Added Tax implemented?

VAT is a percentage applied to the sale price charged for goods or services at every point in the supply chain. The taxable individual or entity is allowed to deduct all of the VAT paid on previous stages of production and distribution so they are not double-taxed. Consumers pay VAT on the final price of the product, which is equal to the sum of all of the values added at preceding stages.  There may be more than one VAT rate applied by a country, and rates may vary among a country’s states and territories. Countries may choose to exempt or charge reduced rates for certain supplies of goods and services. They may also choose to charge a zero-rate on specific goods and services.

Where is Value-Added Tax imposed?

Value-Added Tax is imposed in more than 140 countries worldwide, making it the world’s most commonly used tax.

Why should an exporter care about Value-Added Tax?

Many countries charge a VAT on goods and services imports. Exporters need to be aware of this additional cost when pricing goods and services and calculating the costs of doing business overseas.

Learn More

In addition to contacting your CPA for guidance, additional resources for VAT include the following links which were also sources for this blog:

KPMG: http://www.kpmg.com/US/en/services/Tax/indirect-taxes/vat-services/Pages/Default.aspx

EY: http://www.ey.com/GL/en/Services/Tax/Worldwide-VAT-GST-Sales-Tax-Guide—Preface

Tax Policy Center: http://www.taxpolicycenter.org/taxtopics/encyclopedia/VAT.cfm

American Tax Policy Institute: http://www.americantaxpolicyinstitute.org/pdf/VAT/Grinberg.pdf

Deloitte: http://www2.deloitte.com/us/en/pages/tax/topics/indirect-tax.html  and