VAT Shipping The Complete Guide

VAT Shipping-The Complete Guide

If you’re wondering what VAT shipping is all about, you will find all information you need right here.

So keep reading to learn more.

What VAT Means In Shipping

Shipping process

shipping process

VAT (Value Added Tax) refers to a type of tax levied on the sale of goods and services by taxing the value added to goods being shipped.

Note that VAT is always calculated based on the value of the goods.

Every time value is added to the product along the production stage, VAT is applied to it. This explains why VAT is charged severally from the manufacturing to the consumption stage.

So really, the process continues up to the final consumers of the product.

That is, once business owners charge and collect VAT from their customers and later pay it to the government by filing taxes.

Difference Between Import Tax And VAT In International Shipping

Import tax

Import tax

While VAT is a flat percentage rate applicable to all imported goods.

Import taxes have a standard percentage rate imposed by the government of any extra costs on imported goods crossing international borders.

Import duties are applied to goods once they cross international borders and the rate is determined by the type of goods being shipped.

On the other hand, VAT (Value Added Tax) is imposed on goods once they increase in value on the amount the value increased by.

Sales Tax Vs. VAT Shipping In The US

 Sales tax

sales tax

Sales tax in the US is a flat rate that is only applied once to a product when making the final sale to the customer.

As you might know, VAT is applicable at every stage of production until the product is sold.

I also want you to know that US sales taxes have several levels but some locations have one tax level.

Each location has its own rate and sometimes might be subjected to local, state, or federal taxes.

This means that it might be tricky if you have businesses in different areas or when shipping to several locations.

This is quite different as seen with other countries where VAT is applied from the national level.

Difference Between VAT And Goods & Services Tax In Other Countries

VAT applies in every step of productions as goods increase in value while goods and service tax (GST) is charged as a flat rate percentage of the total amount.

Business owners charge goods and service tax to customers and later pay it to the government in form of taxes.

How VAT Is Charged On Shipping

VAT is normally charged as a percentage of the total sale price.

However, the person being taxed is authorized to deduct taxes that have already been paid at the previous stage.

As such, instances of double taxation are avoided and tax is applied on every stage of manufacturing as well as distribution.

That said, the total VAT paid will be the sum of all the VAT charged under each stage of production.

Every VAT trader who is registered is assigned a number and is required to display the VAT charged on invoices given to their customers.

This not only helps customers be aware of the amount they can deduct but also the amount of tax paid on the final product.

In that line of reasoning, it is easy to understand why the VAT is paid in stages.

Factors That Determine VAT Liability When Shipping To Different Countries

Every country has its own policies regarding charging and collecting VAT.

You can reclaim VAT via certain techniques based on the rules in the country you are shipping to.

Some of the factors that will influence your VAT liability in foreign countries are not limited to;

  • What you are selling – Different countries will have different VAT liabilities on products. Often, several countries charge low VAT for essential commodities such as books.

Goods or services that help in realizing certain social and economic goals have lower VAT rates.

  • Who you are selling to – Businesses selling goods to consumers and those that sell to other businesses have different VAT liability.

For instance, a business that sells goods to other businesses can reclaim any applicable VAT through refunds.

On the flip side, this won’t be possible for those that sell to consumers.

  • Delivery method – In some countries, there is a difference between collection and delivery in regards to VAT.

A good example is the United Kingdom. For instance, when a customer who’s not the consumer of the goods or service picks up their purchases, the VAT may be zero-rated for such a transaction.

Countries That Charge VAT On Shipments

Most countries charge VAT on shipment apart from the United States.

Among countries in the OECD, the US is the only one that does not charge VAT.

VAT rates differ from one country to the other.

That said, several countries have their rates ranging from 1-2%.

While at it, other countries charge more than 20% a good example being Hungary.

In fact, Hungary is considered to top the list worldwide when it comes to charging a high VAT rate which stands at 27%.

It’s also important to know that the VAT rates can vary within countries.

Let’s take Ireland as an example. In as much as the standard VAT rate is 23%, certain purchases will attract reduced rates of 13.55 and 9%.

Some of these purchases are not limited to reading materials, energy, and selected services.

Apart from the US, there are some countries in central Africa that don’t charge VAT.

Saudi Arabia is also included in this list.

I also want you to know that some countries have established a VAT system but have a 0% VAT rate.

Examples of such countries include; the British Virgin Islands, Hong Kong, Cayman Islands, and Bahrain.

The European Union And VAT Shipping

Taxation in VAT

Taxation in the EU

 Before, a shipment whose value was 22 Euros or lower was not charged for VAT.

However, as of July 1st, 2021, some changes were made by the European Union regarding VAT policies.

Every shipment to the EU was required to pay VAT charges regardless of its value.

These changes would affect all businesses that sell to the EU without sparing those conducting online sales to EU consumers.

Below are some of the top changes;

  • Abolishment of the EUR 22 import VAT exemption
  • Some online marketplaces being responsible for collecting VAT.
  • Establishment of the Import One-Stop-Shop (IOSS)

The new policies also require;

  • An electronic interface displaying the amount of VAT charges to be paid by EU consumers.
  • A customs form outlining full and accurate data regardless of the value of the shipment.
  • Harmonization for each product contained in your shipment.

In as much as these changes could simplify procedures and reduce administrations, they could affect how business is conducted into the EU.

What’s more, as of January 1st, 2021, the UK revised its VAT rules.

This means that all goods being shipped into the UK will need to be charged VAT regardless of the price.

Keep in mind that before this, the only goods that were subjected to VAT charges were those exceeding 15 pounds.

How Countries Apply VAT On Shipments

Different countries have different rules on VAT charges.

In as much as the EU as a trade area charges VAT, specific member countries in the EU have their own rates.

Globally, most if not all countries charge VAT based on the value of goods and services.

Each country has a standard rate at which VAT is applied on certain goods.

Some goods are excluded from VAT charges and this will depend on a country’s policies.

Keep in mind that in as much as some countries have a VAT system in place, their VAT rate stands at 0%.

Such countries include; the Cayman Islands, Brutish Virgin Islands, Hong Kong, and Bahrain.

Exemptions On VAT Shipping

VAT exemptions refer to goods or services that are excluded from payment or deduction of VAT charges.

That said, below are some goods and services that are not subjected to VAT charges when shipping;

  • Healthcare
  • Banking and insurance
  • Education
  • Childcare
  • Letting or selling property that cannot be moved (property must be more than 2 years old)
  • Fundraising activities
  • Sports organizations as well as sports clubs
  • Services Offered by writers, composers, and journalists
  • Services offered by socio-cultural institutions.
  • Home care and care services
  • Postage stamps, printing, publications (magazines, books, and newspapers)
  • Food and drink, animal feed, plants, animals, and seeds
  • Transport, freight, travel, and vehicles

Claiming A Refund Or Deduction On VAT Shipping

If your business does not often supply goods or services to an EU country, you can claim a refund or deduction on VAT.

First, you will be required to submit an electronic refund claim to your local tax authorities after which they send it to the respective EU country you incurred VAT.

This comes after the authorities confirm your identity, VAT identification number as well as the validity of your claim.

The exciting part of this procedure is that if there are delays in making the refund, the tax authorities in the EU country will pay you interest.

Before claiming a refund it’s important that you confirm with your local tax authorities if you are eligible for a refund on VAT shipping.

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