Shipping goods across international borders incurs a variety of costs. Among those costs are taxes and fees imposed by Customs. When exporting to a country with a VAT regime, exporters are often required to pay VAT before their shipments can be released. The question is, can VAT be recovered?
As with most things in imports and exports, the answer isn’t black and white. Recovering VAT depends on a variety of factors including jurisdiction, incoterms, and the actual goods being shipped. One thing is for certain: failing to recover eligible VAT is essentially throwing money down the drain.
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VAT Is Not an Excise Duty
The first thing to note is that VAT is not an excise duty. Vigilant Global Trade Services, an Ohio-based global trade management company, says that VAT (value added tax) is very similar to a sales tax. Customers pay VAT on certain goods and services purchased at retail. Some countries with VAT regimes in place prefer to collect VAT at the border just in case all the goods in a particular shipment don’t get sold.
Unfortunately, there are jurisdictions that do not allow for VAT recovery. They are double dipping for all intents and purposes. Jurisdictions that do allow recovery are playing the game a bit more fairly, but they do not necessarily make recovery easy.
As for excise duties, they are imposed to make imported goods less attractive to domestic customers. As the thinking goes, excise duties ultimately make retail prices higher. If prices are high enough, consumers will not want the products. Whether or not this is true does not change the fact that excise duties are not recoverable.
Recovery by Jurisdiction
Recovering VAT begins with understanding whether a particular jurisdiction allows for it. Note that there are more than 140 countries with VAT systems currently in place. Nearly all of Europe is covered by VAT regimes, so it is worth looking into their VAT regimes before you ship.
Obviously, the rules in each jurisdiction will be different. As such, recovery methods will also differ somewhat. It is a safe bet that any recovery efforts will require the necessary red tape and paperwork.
VAT and Incoterms
One of the main issues surrounding VAT recovery relates to incoterms. For the record, incoterms are a group of standardized terms established by the International Chamber of Commerce (ICC) to streamline the legalities of imports and exports. The terms cover a variety of topics including export destination, means of transport, and costs and fees.
Contractors providing global trade services are all too aware that the use of some incoterms is ambiguous. Different terms could be used on the same shipment depending on circumstances. Sometimes, using the wrong incoterms can create what is known as ‘VAT leakage’.
This is most commonly observed when a company’s financial and logistics departments do not communicate regarding export issues. Duties and VAT fees may be lumped together by customs officials and, because the finance department never sees invoices directly, they are unaware that recoverable VAT is being paid.
Worth the Effort
Exporting goods is already expensive enough. Every cost involved is ultimately passed on to the customer by way of higher prices. Knowing that, it seems reasonable to say that recovering all possible VAT is worth the effort. Every dollar recovered represents a lower tax burden to pass on to customers.
Companies exporting to VAT countries would do well to investigate whether the tax is recoverable. If it is, getting that money back could make an enormous difference to the bottom line. On the other hand, letting it go is truly a waste.