Comment by Andrew_nenakhov
15 days ago
Hey, thanks for the tutorial, I’ve been running my company and paying VAT for only 20 years, so finally I'll know how it works! But, kidding aside, your breakdown is fine in theory, but it misses the real world sting for a US exporter selling to Europe. US goods start outside the VAT system, no offsets, just raw costs. When they hit Europe, the importer slaps VAT on top, jacking up the price before it even gets moving. Local producers? They’re already in the game, balancing input VAT with what they collect. So from the US point of view it is virtually indistinguishable from tariff, making US stuff pricier than the local competition.
Take two producers - one US, one local - selling their identical products at $100. US costs are $80, all out of pocket, no VAT relief, US producer's profit is $20 after the importer adds 20% VAT ($20) to reach $120.
The local guy’s $80 includes 20% VAT on inputs ($13.33 reclaimable), dropping his real cost to $66.67. He sells for $100, collects $20 VAT (total $120), then pays the government $6.67 ($20 collected minus $13.33 reclaimed). His profit’s $26.67 - still 33% more than US's $20, thanks to VAT offsets.
You have to agree that this is a very tangible advantage for local companies, no?
The case for the local guy is not calculated correctly for EU VAT, leading to the misunderstanding. The cost of the input increases proportionate to VAT, with the VAT refund cancelling this out exactly.
Let's assume as you did that the actual input has the same real cost to manufacture (ignoring e.g. local labor cost differences, fuel cost differences, government incentives, etc.), and that your example therefore needs exactly 80 USD worth of real, untaxed input in both cases.
The US producer buys this for 80 USD out of pocket as there's no VAT to pay, adds 20 USD profit and sells it for 100 USD. An importer adds 20% VAT, making it 120 USD.
The local producer has to pay VAT so their price for the same thing is 96 USD out of pocket. They get 16 USD VAT back from the government next time they file VAT (irrespective of what they sell), i.e. the "relief" undoes the VAT entirely. They add 20 USD profit making the price 100 USD, add 20% VAT, and what do you know, same 120 USD price tag.
In both cases the final consumer price is 120 USD, and after VAT is cleared the input seller gets 80 USD, the producer itself gets 20 USD profit and the government at the point of consumer sale gets 20 USD VAT.
If the local guy exports the goods to the US the VAT is refunded, making both prices 100 USD. Input seller earns the same, profits remain 20 USD, but no VAT is earned.
This is also why all companies only discuss prices excluding VAT, as the VAT is purely symbolical if it's not a consumer sale.