Written by Stefan Martinovic for Gaebler Ventures
If you are doing business internationally, it's important to understand the nuances of value-added taxes (VAT). We discuss VAT benefits that you should know about.
International trade can be one of the most challenging yet rewarding endeavors that a business can undertake.
In addition to access to a wider and more diverse client base, government regulations and tax laws can make it even more profitable for American businesses to become profitable international enterprises.
If you have ever traveled to the United Kingdom or the European Union, you are probably aware of the existence of a value-added tax, or VAT.
A VAT is a government tax that is built into the price of goods and services, and is generally considerably higher than sales tax in the US, about 10% higher in most cases. As a result, prices in Europe and the UK may appear to be very much inflated when compared to prices in the US.
However, individuals and business entities that are considered alien to the country in which the VAT is being charged are usually eligible for a refund. Consider this example:
A pair of shoes costs $85 in the United States, plus sales tax. The same pair of shoes might sell in England for £50, or about $100. If you as an American citizen were to purchase the shoes in England and then return to the United States with them, you would be eligible for a VAT refund. If the VAT rate in England was 20%, you would have ended up paying a total of £40 for the shoes, or about $80. This would give you a total savings of over $5 per pair.
The same principle applies in business. If you were to order materials from a foreign supplier, you would be eligible for a tax refund on the goods purchased. Many large corporations prefer to do business abroad in many instances, and engage in joint ventures and partnerships with international firms in order to reap the benefits of low local supply costs and VAT benefits.
There are certainly other factors to consider when choosing to do business abroad. Stability of local currency, shipping costs, and local supply costs all influence whether it would be cost-effective to conduct business overseas or not.
However, in many instances, this may work to a business owner's advantage, as the supply of a vital material may be considerably less abroad than it might cost domestically. Savvy supply chain management, coupled with an effective VAT strategy can serve as an invaluable combination and for many sectors of industry may boost profits considerably.
Careful attention must be paid to local regulations, but there are many financial services firms, both foreign and domestic, that specialize in the processing of corporate VAT refund claims. Passing the responsibility off to an outsider may cost a bit extra, but for newcomers to international trade, the security could prove well worth the added premium.
Stefan Martinovic has an extensive body of work across the financial services, manufacturing, and retail industries. He is currently pursuing an MBA in Management and Entrepreneurship at The College of William & Mary.
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