Complexity of Import VAT in the EU

In recent weeks there has been a lot of commentary attempting to argue against the "not so informed" American political establishment that considers VAT as part of import duties, which is simply "not true".

I will dare to share a different perspective.

DISCLAIMER: This without wanting to support, condone or criticise USA's trade protectionisms called RECIPROCAL, nor the justifications thereof, especially considering USA's own impediments/tax on imports.

Similarly, I am also not here criticising EU tax policy, although the general sentiment is likely that no-one likes paying those, yet here we are.

BUT, for one, I must state that well targeted and well thought out protectionist policies are capable of wielding good results on a national level.

Additionally, this is not a technical piece as it lacks a lot of nuance.

By the general definition, Value Added Tax (VAT) in Europe is a consumption tax that is essentially charged at any point there is a sale to a consumer/buyer. It is, therefore, "a domestic, non-discriminatory tax, which is allowed by the WTO, GATT Article III, since its creation in 1947."

In this respect, just because VAT is charged to everyone does not necessarily mean that it does not constitute an impediment to international trade. And I would like to call your attention to IMPORT VAT in that respect.

While import VAT is recoverable under specific conditions and in most cases, the upfront cost and administrative burden of import VAT can create cash flow challenges and deter (smaller) businesses from entering the EU market. Similarly, despite the available facilitations, EU countries are not aligned in their VAT policies.

1. Every time a business wishes to import goods into one of the European Member States, a duty rate (tariff) will be charged on the basis of the declared value of the goods + freight + insurance. Duty rates vary, but overall they are usually below 20%. IMPORT VAT is also charged on import and that constitutes between 17% to 27%, depending on the EU country of import. Mind you, import VAT is charged on the value of the goods + freight + insurance + duties already charged...

   
   

   Where the importer is unaware of specific fiscal facilitations, import VAT will be paid and there will be an impact on cash flow.

2. While import VAT can, in most cases, be recovered, by means of different mechanisms, a business or an individual importing the goods must be well informed on the exact process. This can be costly. Not only because a business may need to guarantee cash flow, but also because, in many cases, a business (let's assume it is a starting business of a medium size wishing to enter the EU market) must secure a fiscal representative, a Customs representative  and ensure other compliance points are tackled.

3. Each EU country has adopted a VAT policy that is not exactly the same in all of EU countries and assuming imports are done in different countries, a business may be required to VAT register in a variety of EU countries and hire representatives/consultants to deal with complexities in different EU countries.

4. Now, lets assume that a non-EU  business wishes to import goods without a formal business establishment in the country of import. While establishment, may not necessarily be required, a VAT registration is desirable, in fact it is encouraged by a myriad of fiscal requirements that would allow a business to deal with VAT returns and get their money back.

   
   

   Non-established businesses can only hire an indirect Customs representative which holds liability in case of any Customs-related issues. Customs brokers are usually unwilling to provide such representation and so businesses are often forced to proceed with setting up an EU entity which in turn generates further compliance requirements like an existence of an address, a bank account, a possible live-in-a-country-of-import director, employee(s), and existence of specific/sufficient operations to even deem the business active. This in turn affects corporate/company tax, personal tax modalities, etc., etc. Not the best scenario for irregular importers, for example.

And this, ladies and gentlemen, is how, for example, bigger online marketplaces are able to charge high(er) percentages out of the sales of imported goods brought by smaller merchants.

This is how ladies and gentlemen, individuals buying abroad are charged import VAT on all goods they decide to buy abroad (above a certain value). This is how, ladies and gentlemen, SMEs struggle to ensure full EU market access.

Now, if you as an owner of a business, manger of operations or any other person involved in the proper functioning of a business believe that these requirements are usually very easy to deal with, I congratulate you for your work! But, it is probably because you already have a business structure that is well informed and built upon proper knowledge of how things should work, and even then, there is never guarantee of full compliance unless you audit your processes regularly. It's never ending.