Why Trump has brought VAT into the trade dispute

Donald Trump, the U.S. president, says that value-added tax is largely responsible for the near trillion dollar deficit in trade between the United States and the rest of world. Over 170 countries, including the top U.S. trading partners in Europe, charge VAT. They claim that it has no effect.

Who can you trust?

In his February 13 memo on trade barriers, Trump gave the VAT a prominent place, listing it as one of "unfair, unfair, discriminatory or extraterritorial" taxes imposed on U.S. workers, consumers and businesses.

The White House told reporters that the most harmful thing about VAT is the fact that it is added to imports from the United States, but European producers receive VAT refunds for exports to the United States.

The official went on to say that "there's a good reason why Germany sells eight times as many cars as we do, and it is not American quality or craftsmanship."

Trade experts have argued that VAT can be used to deter trade.

The United States is one of only 19 countries with a single-stage tax, which is a sales tax that's only imposed once, and paid by the end consumer. Other countries include Cuba, Malaysian, North Korea and Somalia.

As the name suggests, VAT is levied at every stage of the supply chains such as from the manufacturer to the retailer to the consumer.

It is also due for imports into the EU, unlike the United States where the sales tax is only charged on the last transaction. It could discourage importers of U.S. products who are stuck with a large VAT bill when their goods arrive.

Mairead Warren de Burca is the managing director of Alvarez & Marsal Tax, a London-based tax firm. She says that many European countries permit importers to defer payment of import VAT, while Britain and Ireland, Belgium, and The Netherlands do not require import VAT. This means cash flow will be unaffected.

She said that import VAT can be recovered or offset with VAT collected further down the supply chains. In the end, VAT is collected at the final transaction. This is similar to the sales tax system in the United States.

DOUBLE-WHAMMY?

The White House's "double-whammy" argument also targets VAT exemptions for EU exports. According to the EU, this is because it's a tax that is based on where you consume.

Washington, however, has not bought into this argument. Since 1971 they have been trying to set up systems that provide tax breaks to U.S. Exporters.

The EU challenged them all, culminating with an eight-year dispute at the World Trade Organization that found these tax breaks to be illegal export subsidies. These U.S. laws were repealed.

Zach Meyers is the director of research for the Centre on Regulation in Europe. He says that the differences in consumption tax between the EU and the United States, from zero to Seattle’s 10,35%, are a problem.

He said that if the U.S. taxed consumption more heavily, they could lower taxes on production such as labour or corporate profit.

This can reduce the tax burden on export-oriented industries. "The U.S. does not enjoy the same benefit."

Trump has asked officials to conduct research on the subject. Warren de Burca, Alvarez & Marsal’s Warren de Burca, acknowledged that VAT is not an easy concept to understand.

She said, "But the Americans are very intelligent." I hope they'll take my advice and look at these systems in order to determine that VAT isn't an impediment for trade. "Tariffs are, but VAT is not."

Some see this as Trump's deliberate tactic to justify higher trade tariffs in a larger EU-U.S. standoff. This could eventually spread to other areas such as business taxation, and to fines that the EU may levy against American Big Tech.

Trump wants to equalize the differences in tariffs such as the US import duty of 2.5% on cars compared to the EU's rate of 10%. He also wants to factor in the VAT and other costs for U.S. companies.

It may be difficult for EU producers to accept a reciprocal import duty of 10% into the United States. If VAT is added, this could amount to a crippling tariff of around 30%.

Niclas Poitiers is a research fellow at the Bruegel think-tank in Brussels. He said that the EU may consider reducing the import duty on cars, as stated by the EU Trade chief on Wednesday, but he said that overhauling the tax system to eliminate the VAT was a non-starter.

Poitiers stated, "I believe this is more of a negotiation ploy (by the White House), rather than their being serious about the actual issue." "I don’t think they’re interested in global tax collaboration." (Reporting and editing by Mark John, Topra Chopra, Toby Chopra; Additional reporting by David Lawder from Washington).

(source: Reuters)