How Value-Added Taxes Effect U.S. Exporters

The Value-Added Tax (VAT) was created in the 1950s by French economist Maurice Laur. It is a government tax that is charged at each stage of production. For instance, when a company buys parts, then buys more parts - for each purchase, a separate VAT is paid. When a company exports into a VAT country, that company (or the company purchasing the products) must pay a VAT based on the value of the goods. There are nearly 140 countries that use the VAT system, with the average percentage being 15%, though it can go as high as 25% in Norway, Sweden and Denmark.

How does a VAT effect U.S. exporters?

When companies in VAT countries export products into the U.S, they are privy to a great tax advantage. Once their goods arrive in the U.S., these companies are eligible to receive a refund of the VAT that they previously paid. With a 10-20% tax rate, this is significant, allowing these companies to sell their products for less then what they sell for in their own countries. When a U.S. company exports its products into a VAT country, they (or the company buying from them) are required to pay a VAT, based on the price of the goods. In turn, these goods will now sell at a much higher price than they do in the U.S.

This puts U.S. exporters at a big disadvantage, and it's something that needs to be considered when deciding which products to export. There have been many situations where a product that was a great seller in the U.S. flopped overseas because the VAT priced it out of the market.

A partial list of VAT rates for different countries

Outside of the European Union, some countries may have another name for this tax, but it works the same way. For these countries, the local name for the VAT is in parentheses.

* Canada: 5% (GST)
* China: 17% (Pinyin)
* Germany: 19%
* India: 12.5%
* Ireland: 21%
* Israel: 15.% (Ma'am)
* Italy: 20%
* Japan: 5% (Consumption tax)
* Russia: 18% (HAC NDS)
* South Africa: 14%
* South Korea: 10%
* U.K.: 17.5%

As you can see, rates vary with each country, and the impact it could have on your product's success outside the U.S. is enormous. However, it's important to realize that consumers living in countries with a VAT tax are used to their higher prices. And, your competitors have to pay that tax as well. Where the problem arises is when a U.S. company is exporting a new and unique product with limited competition. If the price is already high in the U.S., and profit margins are tight, you need to consider if adding another 10-20% to the price will be received favorably in a country with a VAT.

Just like in the U.S., there are companies overseas who will conduct focus groups and test marketing for products before you endure the expense of exporting. The small expense of a few focus groups can prove to be a bit of insurance for your exporting investment.