February2025|Arevalue-addedtaxesabarriertotrade?|1

Arevalue-addedtaxesabarriertotrade?

Policybrief

On13February2025,theUnitedStatesadministrationannouncedthe"FairandReciprocalPlan",directingthedevelopmentofacomprehensivestrategytoaddressnon-reciprocaltradepractices,includingvalue-addedtaxes(VAT),whichtheadministrationconsidersdiscriminatorytowardsUSbusinesses.ThisICCpolicybriefprovidesanoverviewofthemainfeaturesofVAT,operational

mechanics,andneutralityininternationaltrade.ItclarifiesthatVATisaconsumptiontax–notanimporttariff–andhighlightshowVAT,bydesign,treatsdomesticandforeignbusinessesequally.Thisbriefconcludeswithkeytakeawaysontheimportanceofunderstandingthedifferences

betweenVATandtariffsforpurposesofinternationaltradepolicy.

A.WhatisVAT?

VATisaconsumptiontaxleviedonthesupplyofgoodsandservices–similartosalestaxintheUnitedStates–butwithsomekeydifferences.WhilebusinessescollectandpayVATthroughoutthesupplychain,thetaxisultimatelybornebythefinalconsumer.Itisgenerallyconsidered

neutralforbusinesses,ensuringalevelplayingfieldforbothforeignanddomesticcompanies.

B.Howdoesitworkinpractice?

TheVATsystemoperatesthroughamulti-stagepaymentmechanism:whenabusinessbuysa

goodorservicefromitssupplier(inputs),itpaysVAT.Whenthatsamebusinessthensellsitsowngoodsorservices(outputs),itcollectsVATfromitscustomers.Thebusinessthencalculatesthe

amountoftaxowedtothetaxauthoritiesbytakingtheinputVATitcollectedfromcustomers

andoffsettingitagainsttheVATitpaidtosuppliers,resultinginanettaxliability.ThismechanismensuresthatVAT"flowsthrough”thebusinessandultimatelyrestsonthefinalconsumer.

Ateachstageofthesupplychain,businessesareentitledtofullydeducttheinputVATtheyhaveincurred.Thisensuresthatthetaxburdenultimatelyfallsonthefinalconsumeranddoesnot

undulyburdenbusinesseswithinthesupplychain.

February2025|Arevalue-addedtaxesabarriertotrade?|2

BecauseVATcanbeaneffectivewaytoraisegovernmentrevenuewithoutcreatingbarrierstointernationaltrade,VAThasbeenadoptedbyover170countriesglobally.SomecountriescallitGoodsandServicesTax(GST)insteadofVAT,buttheconceptisthesame.

TheUnitedStatesisanotableexception,beingtheonlymajoreconomythatdoesnotapplyanationalVAT.Instead,itreliesonasystemofsub-nationalsalesandusetaxesatthestatelevel.

C.WhatdoesitmeanthatVATisneutral?

VATsystemsaredesignedtotreatallbusinessesequally,regardlessoftheirlocationororigin.

Thisprincipleofneutralityensuresthatnobusinesshasanunfaircompetitiveadvantageorsuffersdisadvantagesolelybecauseofwheretheyarebased,whichmayotherwisedistortinternational

tradeandlimitconsumerchoice.

ThecornerstoneofVATneutralityisthedestinationprinciple,whichstipulatesthatgoodsaretaxedinthecountrywheretheyareconsumed,notwheretheyareproduced.

Underthedestinationprinciple,exportsareexemptfromVATinthecountryoforigin,whileimportsaresubjecttothesameVATasequivalentdomesticgoodsinthedestinationcountry.Thisensuresthatallproductscompetinginthesamemarketfaceidenticaltaxtreatment,regardlessoftheirorigin.

NeutralityforbusinessisensuredateachstageofthesupplychainthroughinputVAT

deduction(therightforabusinesstodeductVATincurredonitspurchasesasinputVAT),whichmakesitataxborneandpaidbythefinalconsumer.

D.IsVATdiscriminatorytowardsforeignbusiness?

No.Duetoitsdesign,VATensuresalevelplayingfieldforbusinesseswhetherlocallyestablishedorestablishedabroad.

Inconcreteterms,thismeans:

?Ifabusinessmakespurchasesfromalocalsupplierforitsoperations(forexample,

manufacturinggoods),itpaysdomesticVATtothatsupplier,whichthebusinessthendeductsasinputVAT.

?Ifthesamebusinessmakespurchasesfromaforeignsupplier(forexample,importedrawmaterials),itpaysimportVAT,whichislikewisedeductibleasinputVAT,therebyensuringVATneutrality.

?Whetherthebusinessisestablishedlocallyorabroad,itistreatedonequalfooting--providedthatappropriatebusinessstructuresareinplace.WhileVATiscollectedatvariousstagesinthesupplychain,itsdesignensuresneutralityforbusinessbothforlocalandforeignbusinesswhoareonlythecollectors.

February2025|Arevalue-addedtaxesabarriertotrade?|3

Figure1.VATinadomesticsituation

Source:ICC(2025),Policybrief:Arevalue-addedtaxesabarriertotrade?

Figure2:VATinanimportsituation

1

Source:ICC(2025),Policybrief:Arevalue-addedtaxesabarriertotrade?

1Forsimplicity,thisexamplefocusesonlyonVATanddoesnotincludecustomsdutiesorIncoterms?-relatedaspects,whichcouldaffectthefinalretailpriceofimportedgoods.

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E.So,isVATcomparabletoatariff?

No.VATisnotthesameasatariff.Here'swhy:Definitionandmechanism:

?VATisaconsumptiontaxappliedtothevalueaddedateachstageofproductionand

distributionofgoodsandservices.Itistypicallycollectedatthepointofsaletothefinalconsumer.EvenwhenVATisdueonanimport,itisdeductible,meaningthatthetaxburdenultimatelywillbebornebytheconsumerandwillbethesamefordomesticandimportedgoods.

?Tariffs,ontheotherhand,aretaxesleviedspecificallyonimportedgoods.WhiletheygenerallydonothaveadeductionmechanismsimilartoVAT,certainschemessuchasdutydrawbacks,freetradezones,andinwardprocessingmayallowfortariffreliefinspecificcases.

?Scopeofapplication:VATisabroad-basedtaxappliedtomostgoodsandservicesconsumedwithinacountryregardlessoforigin,whereastariffsarelimitedsolelytoimportedgoods.

?Impactonprices:WhilebothVATandtariffscanimpactprices,theydosothroughdifferent

mechanisms.Tariffsdirectlyincreasethecostofimportedgoods,whileVATisgenerallypassedontoconsumersaspartoftheproductpriceandappliedequallytobothdomesticandimportedgoods.

F.Conclusion

VATandtariffsaresubstantiallydifferentnotonlyinscopebutalsointermsoftheimpacttheyhaveontradeandtheoveralleconomy.VATisneutralbydesign.ViewingitasareciprocaltariffcouldleadVAT-imposingcountriestoadoptretaliatorymeasures,potentiallyescalatingtradeconflictsunnecessarily.

Figure3.DifferencesbetweenVATandtariffs

Feature

Tariffs

VAT

Purpose

Tradepolicyinstrument:toprotectdomesticindustriesbyincreasingthecostofimportedgoods

Revenueinstrument:togenerategovernmentrevenuefrom

domesticconsumption

Scope

Appliedonlytoimportedgoods

Appliedequallytobothdomesticandimportedgoodsandservices

Cost

Increasescostonlyforimportedgoods;canbeabsorbedby

businessesorpassedontoconsumers

Finalconsumerbearsthecostforallgoodsandservices,whether

importedordomestic,with

businessesabletorecoverthetax

Collectionpoint

Collectedattheborderwhengoodsenterthecountry

Collectedthroughoutthesupply

chain,fromproductiontofinalsale

Treatmentsof

importsvs.domesticproducts

Discriminatorybydesigntomakeimportsmoreexpensivethan

domesticproducts

Neutralbydesign–same

treatmentfordomesticandimportedgoods

Internationaltradeimpact

Directlyaffectstradeflowsby

makingimportsmoreexpensive

Neutralimpactontradeunderdestinationprinciple

Source:ICC(2025),Policybrief:Arevalue-addedtaxesabarriertotrade?

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Finally,someadditionalconsiderationstonote:

?TargetingtheuseofVATregimescouldencouragetheadoptionofotherharmfultaxornon-taxpolicies(suchasimposingcustomsdutiesonelectronictransmissions).

?WhileVATisneutralfromataxperspective,itspracticalimplementationcreatessignificantburdensforbusinesses,particularlymicro-,small-andmedium-sizedenterprises(MSMEs).SimplifyingVATcomplianceandrefundprocesseswouldbenefitbothbusinessesandtax

authorities–reducingcompliancecostsandimprovingcomplianceforcompanieswhileloweringadministrativecostsandimprovingtaxcollectionefficiencyforgovernments.

February2025|Arevalue-addedtaxesabarriertotrade?|6

Pleaseciteas:

ICC(2025),Policybrief:Arevalue-addedtaxesabarriertotrade?

,/news-

publications/policies-reports/are-value-added-taxes-a-barrier-to-trade?/

Copyright?2025InternationalChamberofCommerce

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