What Does Value-Added Tax (VAT) Mean in Shipping?

Value-Added Tax (VAT) is a consumption tax encountered globally, significantly impacting the cost of goods, especially in international trade. Understanding VAT is essential for businesses and consumers when goods are shipped across borders. This article clarifies what VAT entails, particularly as it relates to goods transported internationally.

Understanding Value Added Tax

Value Added Tax (VAT) is a consumption tax applied to goods and services at each stage of their production and distribution. Businesses collect VAT on sales and pay VAT on purchases, remitting the net amount to the government. This system levies tax on the value added at each step of the supply chain.

The ultimate burden of VAT typically falls on the end consumer, as businesses generally pass on the tax cost. Unlike sales tax, which is usually collected once at the final point of sale, VAT is applied at multiple stages. Businesses can reclaim VAT paid on inputs, preventing a cascading tax effect. VAT is a significant revenue source for governments in over 160 countries.

VAT in International Shipping

When goods cross international borders, VAT rules become more intricate, primarily involving “import VAT” and “export VAT.” Import VAT is levied when goods enter a country or customs territory, such as the European Union. This ensures imported goods are taxed similarly to domestically produced goods, maintaining fair competition.

Conversely, export VAT is “zero-rated,” meaning no VAT is charged on goods leaving a country. This prevents double taxation, as the tax should be collected in the country where the goods are consumed.

The “place of supply” rules determine which country’s VAT regulations apply. For goods, the place of supply is generally where they are located when dispatched to the customer. This dictates whether a sale is an export (zero-rated) or an import subject to VAT in the destination country. The importer is typically responsible for paying import VAT.

Calculating and Paying VAT on Imports

Calculating import VAT involves several components beyond the price of the goods. The tax is assessed on the “customs value” of imported items. This value includes the goods’ cost, plus associated shipping, handling, and insurance costs incurred up to the point of entry. Applicable customs duties are also added before the VAT rate is applied.

For example, if goods have a customs value of $1,000, with $100 in shipping and $50 in customs duties, the total taxable base for VAT would be $1,150. At a 20% VAT rate, the import VAT due would be $230. The VAT rate applied is usually the same as the domestic VAT rate for similar goods.

The payment process for import VAT can vary. Often, the shipping carrier or a customs broker pays the import VAT on behalf of the importer upon arrival. The importer then reimburses the carrier or broker for these charges. Importers may also pay directly to customs authorities. Some jurisdictions offer deferred payment schemes, allowing businesses to account for import VAT on their regular VAT returns, which can aid cash flow.

Regional VAT Considerations

VAT systems exhibit variations across different global regions. Within the European Union (EU), VAT is harmonized across member states, but rules distinguish between “intra-community supplies” (goods moving between EU countries) and imports from outside the EU. Goods imported into the EU from non-EU countries are subject to import VAT upon entry, typically at the rate of the destination country. Since July 2021, all goods entering the EU are subject to VAT, with the abolition of previous low-value consignment relief thresholds.

Following its departure from the EU, the United Kingdom (UK) implemented its own distinct VAT rules for imports. Goods entering the UK from the EU are now treated similarly to imports from any other non-EU country, incurring import VAT at the border. The UK introduced Postponed VAT Accounting (PVA) to allow VAT-registered businesses to declare and recover import VAT on their VAT returns, rather than paying it upfront. For low-value consignments, typically those under £135, VAT is collected at the point of sale rather than at importation.

In contrast to most countries worldwide, the United States does not operate a federal Value Added Tax system. Instead, the US relies on a combination of federal income taxes and state and local sales taxes. While similar in that they are consumption taxes, sales taxes are generally applied only at the final point of sale to the consumer, unlike the multi-stage collection of VAT. This means that individuals and businesses in the US typically encounter VAT only when importing goods from or doing business with countries that levy VAT.