The Value-Added Tax, or VAT, is a
general, broad-based consumption tax that is assessed on the incremental value
added to goods and services at each phase of production. It applies more or less
to all goods and services that are bought and sold for use or consumption in
the nations that use a VAT system.
In those countries, goods and
services that are sold to customers abroad are normally not subject to a VAT.
Conversely, imports are taxed at the same VAT rate applied to domestic
producers. The VAT is just one kind of indirect tax system that may be
adjusted at the border in this manner, but it is a very common system with a
broad impact on U.S. trade.
As of January 2007, 137 nations
have a Value-Added Tax. By contrast, the U.S. relies primarily on a direct
tax system that taxes income and property. No portion of those direct taxes
is rebated on exported goods or services nor does the U.S. impose on imports a
tax that is equivalent to U.S. direct taxes. Thus, most imports into the United
States are subsidized by foreign VAT rebates and all U.S. exports are not.
In 2005, 94 percent of all U.S.
exports and imports of goods were traded with VAT countries. Foreign
governments paid their producers an estimated $239 billion of VAT rebates on
goods and services exported to the United States. Foreign governments also
collected from U.S. producers an estimated $131 billion of VAT equivalent taxes
on their imported goods and services.
VAT harms U.S. investment.
Thousands of U.S.-headquartered companies that have shifted production to
nations that use a VAT can get a VAT rebate on their exports and avoid the
double taxation (U.S. direct tax plus national VAT equivalent tax on exports)
placed on U.S.-based exporters.
Because the United States cannot
rebate direct taxes under the terms of global trade agreements administered by
the World Trade Organization and must pay VAT equivalent taxes on exports to
the 137 countries that use a VAT, U.S. exporters are competitively
disadvantaged domestically, in nations with a VAT, and in those few nations
that do not use a VAT, such as Saudi Arabia.
Equally important, as global trade
negotiations over the past half-century have lowered tariffs on imports, global
trade rules have not regulated the rate of VAT taxes that countries may apply
to imports. In the 1960s, the Governments of Europe imposed a 10.4 percent
average tariff on imports and only three EU nations imposed a VAT, with an
average standard rate of 13.4 percent. Today, the EU nations impose an average
tariff of 4.4 percent, plus an average 19.4 percent VAT equivalent tax
– a total levy of 23.8 percent on
U.S. goods and service imports. The protection is the same, whatever its name.
Thus, the WTO rules on indirect
taxes such as the VAT give European and other nations the benefit of lowered
U.S. tariffs for their exports, while allowing them to protect their domestic
producers with a high de facto tariff on U.S. imports. Consequently, U.S.
producers face a massive and unfair trade obstacle that is totally legal under
current global trade agreements, and is cumulative to other unfair trade
distortions U.S. manufacturers must over come. Altogether, imports into the
U.S. face average tariffs of 1.3% and no VAT penalty, whereas U.S. exports face
average tariffs worldwide of about 40% plus VAT border adjustment penalty of
15.7%
The global trade rules on the
Value-Added-Tax (VAT) permit other nations to (1) impose high, de facto tariffs
on U.S. imports into their country (2) provide across-the-board tax subsidies
on their exports of goods and services to the United States, and (3) create
massive tax incentives for U.S. -based producers of goods and services to
offshore their work and jobs.
Over the past four decades, the
United States has failed in all its multilateral attempts to eliminate such
VAT-based discrimination against U.S. manufacturers and service providers.
Moreover, none of the many recent Free Trade Agreements, including NAFTA and
CAFTA, address the trade distortions caused by those trading partners’ use of
the VAT.
The Value-Added-Tax, or A VAT, is
a broad-based consumption tax that is assessed on the incremental value added
to goods and services. It applies generally to all goods and services that are
bought and sold for use or consumption in those nations that use a VAT system.
On January 2007, one hundred and
thirty-seven (137) nations used a VAT. Many of those countries also used direct
and other taxes, besides the VAT.
The global trade rules administered
by the World Trade Organization (WTO) permit the 137 nations that employ some
type of indirect tax (VAT) to rebate all or part of those taxes on exports,
while also levying them on imports.
The U.S. uses a direct tax system
– taxes are imposed on those generating income or owning property. Under the
WTO tax regime, no portion of those taxes can be rebated on the export of goods
or services. Equally important, the United States does not impose on imports a
fee equivalent to direct taxes. Most imports of goods and services into the
U.S. are subsidized, and most exports are not. (See History Section for an
explanation of how this became.)
This difference in the way that a
VAT and a U.S. -type direct tax system are treated under WTO trade rules is
meaningful.
When competing with foreign
imports in the U.S. market, the American-based producer is against a good or
service subsidized by a foreign VAT rebate, while the U.S. -made good or
service must also bear the cost of U.S. direct taxes.
When competing in the market of
the 137 VAT-nations, U.S. producers must pay that country, at the moment their
good or service is imported, a tax equal to the national VAT.
That tax, moreover, is levied on
the price of the “landed cost,” which means the tax includes the price of the
good, the transportation costs and any import duties. So, the price of the U.S.
export or service must bear both the U.S. direct taxes and the importing
nation’s VAT tax equivalent – double taxation.
When competing in a 3rd nation
with no VAT, the company from a VAT-nation gets a tax rebate from its home
government on its export, while the U.S. export must bear the full cost of its
U.S. direct taxes. Consider an example in which a U.S. -based computer chip
maker is competing with a German-based computer chip maker for a sale in Saudi
Arabia, a nation that does not use the VAT. The German producer will get a 17
percent tax rebate on the chips they export, while the U.S. producer gets none.
The U.S. –made chips also carry the costs of U.S. direct taxes. The German
producer has an automatic 17 percent VAT tax rebate cost advantage, plus an
additional price advantage equal to the value of any U.S. direct taxes imposed
on the U.S. -made chip.
When competing with a company from
a VAT-nation in a 3rd nation that also has a VAT, the U.S. firm must pay both a
VAT-equivalent import tax and its U.S. direct taxes. The foreign firm gets a
VAT rebate from its home government, but pays the 3rd nation’s
VAT. Consider an example in which a U.S. -based chip maker is competing with a
Germanbased producer in China, which uses a VAT. The German government will
rebate its 17 percent VAT on the German export, which offsets the 17 percent
VAT import equivalent imposed by the Chinese Government. The U.S. Company pays
both the 17 percent Chinese VAT equivalent, and its U.S. direct taxes, giving
the German producer a 17 percent immediate price advantage, plus the value of
any U.S. taxes imposed on the U.S. -made chip.
The competitive disadvantages created
by the difference in the way that WTO trade rules treat a VAT versus a direct
tax are enormous. Consider this; in 2005, a VAT was applied to 94 percent of
all U.S. exports and imports. Foreign governments paid an estimated $239
billion of VAT rebates on goods and services exported to the United States.
Foreign governments also collected from U.S. producers an estimated $131
billion of VAT equivalent taxes on goods and services imported from the United
States.
Such a differential provides a
powerful incentive for U.S. -headquartered companies to shift production and
jobs to nations that use a VAT. With such a shift, they get both a tax rebate
on their exports into the American market and avoid double taxation (U.S.
direct tax, plus national VAT) on sales in that foreign market. They pay only
the VAT on local sales. Thousands of U.S. -headquartered companies are now
producing and exporting goods and services from nations that use a VAT and
getting the VAT tax advantage in global trade.
Preventing such distortions in the
flow of trade and investment was a basic goal of the United Nations Conference
on Trade and Employment, which was initiated in February 1946 and authorized
the negotiation of the GATT and eventually led to the creation of the World Trade
Organization.
Yet, other nations are now gaming
the WTO rules on VAT and direct taxes to gain advantage over U.S. producers in
world markets. Specifically, they are substituting a high VAT rates for high
tariff rates, thereby maintaining their protectionist walls against U.S.
imports. While technically legal, this subterfuge flagrantly violates the goals
and spirit of trade liberalization that have guided all multilateral trade
negotiations since the first GATT round in 1947. Consider the numbers.
• The average tariff rates for European Union nations were
10.4 percent in 1968, but only 4.5 percent by 2001.
• In 1968, only three EU countries had the VAT. By 2001,
twenty-five did.
• In 1968, the average VAT rate for thee three countries
using the Value-Added-Tax was 13.4 percent.
• In 2001, 25 EU nations had an average VAT rate of 19.2
percent.
• In 1968, the total rate of the VAT and tariff levied by the
three nations using the Value-Added-Tax then was 23.8 percent.
• In 2001, the total value of the VAT and tariff levied by
the 25 EU countries using a Value-Added-Tax was virtually unchanged at 23.7
percent.
In sum, multiple barriers distort
U.S. trade flows with other nations, such as currency manipulations, higher foreign
tariffs, hidden export subsidies, and invisible barriers to imports. The
discriminatory WTO rules on a VAT versus a direct tax create another enormous
trade disadvantage for U.S. manufacturers and service providers, here and
abroad. Altogether, imports into U.S. face average tariffs of 1.3% and no VAT
penalty, whereas U.S. exports face average tariffs worldwide of about 40% plus
VAT border adjustment penalty of 15.7%.