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VAT is not a tariff. However, President Trump has further expanded the scope of the tariff wars with the recent announcement to include VAT as he is concerned it is a type of tariff.
While we wait to see what the announcement on tariffs will contain, companies who are dealing with VAT on import or export need to optimise their position by conducting a current state assessment of where reciprocal tariffs could apply and begin what-if scenario planning for potential changes to their supply chains to mitigate the negative effects. This analysis should be expanded with a view to making sure global VAT processes are also being managed efficiently to avoid any tax leakage.
Since President Trump took office for a second time in the US, he has moved quickly to communicate his intention to use tariffs as a central part of his economic plan. Although President Trump has promoted the premise that tariffs will produce additional revenue for the US Treasury, he also emphasised that the imposition of tariffs will increase US production for existing companies, as well as attract new companies to the US, all of which should provide new jobs and grow the US economy.
While the position being taken by Trump on tariffs seems to adjust on a regular basis, it was widely expected that the new tariffs would target imports from countries where US companies faced high tariffs – in effect where the US would impose “reciprocal” tariffs. That result would have been well received in the UK and EU as they both have low tariffs on US imports.
On 13 February 2025 President Trump signed a presidential memorandum ordering the investigation of harmful “non-reciprocal” trading arrangements with foreign trading partners, to potentially result in the determination of an “equivalent reciprocal tariff’ on such arrangements. Non-reciprocal arrangements that will be investigated include “unfair, discriminatory, or extraterritorial taxes such as value-added taxes.”
Given that over 170 countries have VAT systems, imposing a tariff to in response to a VAT could trigger tariffs on every product from a VAT country.
The presidential memorandum stated that an assessment on the impacts of the investigation will be provided to the President within 180 days of 13 February 2025.
Our view is that there are fundamental differences between a tariff and VAT, and we would conclude that a VAT does not function like a tariff at all.
Firstly, VAT can be viewed as non-discriminatory, as it applies to both products sold that are manufactured within the country and those imported into the country in that way, VAT functions as a domestic consumption tax. The VAT ends up being borne by the ultimate consumer of the product in that country. (US sales taxes also are borne by the ultimate consumer and are charged on both foreign manufactured products and US manufactured products.) If VAT were not charged on imported goods, foreign manufacturers would be at a significant advantage over domestic manufacturers in the VAT country.
Some critics say that VAT could be viewed as a type of tariff because it applies to US imports while foreign exporters are refunded the VAT. However, the export VAT refunded no longer becomes a domestic consumption tax in the exporting country. Upon a US import and sale of those goods, the product will be subject to US sales tax, just like a US manufactured product and US sale. And an export of US product is also not subject to US sales tax, which results in similar export treatment to a VAT refund on export from a VAT country.
The VAT amount charged upon import from the US into a VAT country is similar to the VAT charged on a product manufactured in the VAT country for the same cost base. The VAT charged on import therefore functions as an equalizer for imports and domestically produced goods and is therefore non-discriminatory.
A VAT is a transaction-based tax which is borne by the final consumer of a product. If a business is not that final consumer but instead is merely part of the supply chain, the business will have to pay amounts of VAT but will also have the chance to recover it. That makes VAT cost neutral as a rule.
As VAT is charged on a transactional basis, businesses are required to collect it and remit to the tax authorities. They will submit returns declaring the amount payable based on sales made but importantly, that return will allow for recovery of VAT incurred on costs. These VAT costs can be offset against the VAT payable with only the balance required to be remitted. In a normal supply chain with small mark-ups a selling business should only have a small amount of VAT to pay (relative to the total values).
The only exception to this treatment is with import VAT, which is levied by tax authorities when goods enter a country, calculated by reference to the normal VAT rules and the value of the goods. Critically, that value will include any tariffs that are payable, so that results in a tax added onto a tax. However, just like VAT charged by a domestic business, import VAT is also recoverable and should not become a cost for businesses, assuming they are not the final consumer of the goods.
That the VAT can be recovered is a key differentiator when compared to an import tariff. A tariff is not recoverable after it has been assessed whilst very often VAT can be.
It is uncertain as to how VAT will ultimately be viewed and whether reciprocal tariffs will be assessed. In the meantime, companies should be conducting an analysis of the potential effects of additional tariffs on their US importation of goods from VAT countries and considering changes to their supply chain to mitigate the effects.
In addition, multinational companies should be taking this opportunity to examine whether their global VAT processes are being managed efficiently. Often, we find that businesses do not recognise, inadvertently or not, import VAT and duty costs. If a company is not established or VAT registered in the UK or EU there are very short timeframes to recover local VAT costs, so being aware is critical. Use of tools like Crowe’s Customs ID can be very helpful in this process., A recent review for a client resulted in a six-figure refund of VAT for the company.
Businesses can inadvertently end up with VAT costs if they do not take the appropriate steps to correctly manage their VAT position.
Every business involved with importing into a country that levies VAT should consider the following to ensure they have an effective position that minimises costs.
Businesses should bear in mind that every supply chain and scenario will be unique and the process to resolve VAT matters will also differ. Sometimes companies will need to register, and sometimes it will be possible to claim import VAT back via a direct claim to a tax authority.
It will be important to understand supply chain routes and product details thoroughly and to consider obtaining professional advice before embarking on a change or on a new movement of goods.
For more information on anything discussed in this article, please contact Rob Janering, Gregory Buteyn or your usual Crowe contact.
