Value-added tax (VAT) is a widely used consumption tax in international trade and shipping. This article will explain the basics of VAT in shipping and clarify its purpose in this context.
What is value-added tax?
The value-added tax applies to the increased value of goods and services at each stage in the supply chain. It covers elements like labor costs, interest, profits, and materials.
For business owners, including those in eCommerce, VAT is collected from customers and later remitted to the government during tax filings. Therefore, as a business owner, you act as an intermediary, passing value-added tax from your buyers to tax authorities.
It’s worth noting that businesses can deduct VAT and VAT shipping costs, but this option isn’t available for individual consumers.
Regarding VAT, the US is one of the few countries that doesn’t impose a value-added tax on goods. However, it is a key tax across the European Union and in over 120 other nations globally.
VAT rates can vary significantly by country, ranging from as low as 1% to as high as 27%. For instance, Germany set a 19% VAT, while France’s rate is 20%.
In addition to location, the type of product being sold also influences VAT. For example, books in the UK and Ireland are “zero-rated,” meaning no VAT is levied. Many factors impact VAT rates and policies, so it’s essential to understand them fully.
Understand value-added tax in practice
The concept can seem complex for those unfamiliar with VAT shipping. Here is a simple example that helps clarify how it works：
Imagine a lumber supplier in Germany sells raw wood to a furniture manufacturer for €1,000. With Germany’s VAT rate at 19%, the supplier charges an additional €190, totaling €1,190. The supplier then remits the €190 VAT to the government. Since VAT is deductible, the supplier can reclaim this amount later.
Next, the furniture manufacturer turns the wood into a table, which it sells and ships to a furniture retailer for €2,000. To account for the VAT, the manufacturer charges €2,380, which includes €380 in VAT. When the manufacturer files taxes, they owe €380 in VAT to the government but can subtract the €190 it paid for the wood.
What’s the purpose of VAT?
Like other indirect taxes and income taxes, the primary goal of value-added tax is to generate government revenue. Unlike taxes managed by state or local governments, VAT is generally overseen by federal authorities, making its administration more centralized.
How does it differ from sales taxes?
Sales tax in the U.S. is quite complex. Unlike VAT, which is applied incrementally through each production stage, sales tax is a single, flat-rate charge added at the final point of sale to the consumer.
Another prime distinction is that the U.S. sales tax operates on multiple levels. Some areas may levy local, state, and federal sales taxes, each with its own rate, while others may have just one level. It creates challenges for businesses operating in or shipping to multiple regions as they must navigate various tax rates and regulations.
In contrast, countries that impose VAT apply a single rate uniformly across the entire jurisdiction, simplifying tax calculation and administration.
What's the difference between GST and VAT?
GST (Goods and Services Tax) is similar to VAT in that it is applied in stages throughout the supply chain and refunded to everyone except the final consumer. Businesses can also reclaim the tax they’ve paid, just as they can with VAT.
However, the main difference between GST and VAT is the calculation. While VAT is based on the value added at each production stage, GST is a flat-rate tax applied to the total value of the transaction. Countries like Singapore and Australia implement GST, applying it directly to consumers.
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How to calculate VAT for international shipping?
To calculate import VAT, start by determining the taxable customs value of your shipment. It generally includes the purchase price, freight costs, and insurance. Next, identify the applicable VAT rate, which varies by country. Here is an example calculation:
Suppose you’re importing a car to the UK with a purchase price of €28,000 and shipping and insurance costs totaling €2,000. It gives a taxable value of €30,000. If the VAT rate is 21%, the import VAT would be calculated as follows:
€30,000 x 21% = €6,300
When is import VAT due?
Import VAT is typically due once goods arrive at the entry point in the destination country. For example, if shipping by sea to France, VAT would be assessed at the port where the shipment first lands.
Generally, you must pay these taxes before customs will release the goods. However, some countries offer deferral options, allowing you to delay the payment.
How do you file and pay VAT?
VAT returns are official tax documents that report your business’s taxable transactions and calculate any VAT owed or refundable.
Each country has specific filing deadlines, reporting schedules, and formats. While some tax authorities mandate electronic filing, others make it optional but generally preferred. EU countries, for instance, must allow online submissions.
Payment methods vary as well; some countries accept international bank transfers, while others require local payments via direct deposit or bank transfers.
Submitting VAT returns demands detailed record-keeping. You’ll need organized receipts for all purchases, invoices with VAT details, and summaries of your reporting periods, including:
- Total sales and purchases
- VAT owed
- VAT eligible for reclaim
A VAT return may still be required even if there is no VAT to report. The EU VAT Directive mandates at least one filing annually, with many countries requiring monthly or quarterly submissions.
Failure to maintain accurate records, file on time, or provide truthful information can lead to substantial fines, penalties, or serious legal consequences.
Who pays the value-added tax?
In international shipping, VAT payment generally depends on the agreed Incoterms. For instance, under DDP (Delivered Duty Paid), the seller or shipper is responsible for covering all duties, including VAT. You can request a free quote for our DDP shipping service, allowing you to receive your shipment at home with complete peace of mind.
Is VAT applied in the U.S.?
No, the United States does not implement VAT. Instead, it relies on a retail sales and use tax system. Nearly all U.S. states impose a state sales tax, and 38 states allow local sales taxes, resulting in over 13,000 different sales and use tax jurisdictions across the country.
Can I be exempt from VAT?
Certain goods and services are exempt from VAT in EU countries. Common exemptions include sectors such as education, healthcare, and financial services.
How does VAT affect eCommerce sellers of physical goods?
If you’re selling physical goods to customers within the EU, VAT generally is not your concern. Since your shipments will be treated as imports, your customer will typically handle VAT and import duties upon arrival. While this may seem straightforward from your side, it could create an unpleasant surprise for your customers.
It’s advisable to inform them on your website that VAT and import fees will be levied upon delivery to minimize any frustration. However, there’s another option to improve the customer experience.
Non-EU businesses can register for VAT in the EU. It allows you to manage VAT directly, so your customer won’t need to pay upon delivery.
