Archive for U.S. VAT?

Trump and a Democrat want a retaliatory tariff against VAT

Here in the U.S., VAT remains a strange and scary beast. There is now a proposal in Congress for a bill that imposes a fee on imports from a country where VAT is “border adjusted”. Yes, crazy!

The idea is that U.S. companies that import goods in VAT countries (i.e. almost every other country in the world) are being charged with import VAT. This import VAT is creditable / recoverable for domestic importers, but not for U.S. importers. Therefore, U.S companies that imports goods elsewhere are significantly worse off than domestic traders. This is protectionism and must be retaliated against.

And thus the House Representative Bill Pascrell, Jr. (see is introducing legislation that would impose a “tax” on imports into the U.S. from countries with a VAT.

The proposal is nonsense, because no U.S. trader would substantially import goods in another country if he couldn’t get the VAT back. There are multiple alternatives to streamline this type of transaction in the company’s supply chain. For example:

  1. The U.S. company can sell to a local customer with the provision that the customer is the importer of record. This is the most common structure. The U.S. company would ideally transfer ownership of the goods to the customer before import, and the customer pays all the import taxes, fees etc. Typically the import VAT is recoverable for the customer.
  2. The U.S. company can appoint a local middleman, commissionaire or a distributor in-between the sales transaction. The middleman would be the importer of record.
  3. In some countries (like in the Netherlands) the U.S. company can even appoint a fiscal representative – a local rep that only reps for the import, and can reclaim the VAT on the U.S. company’s behalf.
  4. In the EU and in some other countries, the U.S. company can simply register for VAT. This would make sense if the U.S. company wants to retain control of the goods, for example when the goods are price-sensitive. If the U.S. company registers for VAT, he can potentially reclaim the import VAT.

Anyway, plenty of alternatives are available for a VAT and pain free import.

The interesting aspect of this nonsense is that the Congressman is a Democrat, but this “Border Tax Equity Act” is straight out of Republican presidential candidate Trump’s Economic Plan. Even better, there is a memo from a Trump adviser who says:

“[…] the VAT is imposed on all goods that are imported and consumed domestically so that a product exported by the US to a VAT country is subject to the VAT. This turns the VAT into an implicit tariff on US exporters over and above the US corporate income taxes they must pay. Thus, under the WTO system, American corporations suffer a “triple whammy”: foreign exports into the US market get VAT relief, US exports into foreign markets must pay the VAT, and US exporters get no relief on any US income taxes paid.”

(see the attached document “Scoring the Trump Economic Plan: Trade, Regulatory, & Energy Policy Impacts”, page 12/13).

I already spent enough time on this crap – enjoy yourself reading the documents below.

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Yet another “VAT in the U.S.” attempt

Another proposal for U.S. tax reform has been launched – this time it comes down to abolition of corporate income tax, simplification of personal income tax and a VAT (a “credit-invoice based consumption tax”) at a rate of 7% to somewhat make up for the revenue loss.

The Tax Foundation provided a detailed analysis of the plan and concludes:

“Rep. Jim Renacci’s tax plan would reform the individual income tax and replace the corporate income tax with a credit-invoice value-added tax. If enacted, his plan would reduce federal revenues by $845 billion over the next decade. The Renacci plan would significantly reduce marginal tax rates on capital and labor income, which would result in a substantial increase of the size of the U.S. economy in the long run. This would increase the revenue that the tax plan would ultimately collect, making the plan slightly revenue positive. Rep. Renacci’s plan would increase after-tax incomes for taxpayers at all income levels.”

See more here:

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Wrapping up the Puerto Rico VAT debacle

I have seen many botched implementations of VAT, or clueless last-minute VAT rate changes, but the non-VAT implementation in Puerto Rico underperforms the lowest of expectations.

Companies, particularly retailers, have spent ten of millions of dollars on IT and consultants support over the past 12-18 months to prepare their ERP systems and tax determination processes. Only to see Puerto Rico negate their plans to implement a VAT at the very last minute.

Gosh, the last clarification provided by the PR Treasury – without any indication that VAT may not happen – dates from May 25 – 6 days before the non-event.

Anyway, below is a final update. Nothing new in here, other than implementation of the SURI tax filing system has not been cancelled. Yet.

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No VAT for Puerto Rico any time soon

The Puerto Rico Senate has overridden the veto of the Governor – there will be no introduction of VAT in Puerto Rico on June 1. The current Sales and Use Tax as well as the Business Tax will continue after June 1.

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VAT unlikely in Puerto Rico – now what?

Puerto Rico is on the brink of NOT introducing a VAT on June 1. The PR parliament has overwhelmingly voted in favor of a proposal to abolish the plans to introduce a VAT, and to stick to the existing Sales and Use Tax system.

However, the governor may veto this proposal.

Our friend Carlos Serrano ( writes:

“At this time, certainty on the tax consequences of commercial transactions for June 1, 2016 and thereafter is unattainable. The bill, as approved, will hopefully make its way quickly to La Fortaleza to either become law or be vetoed and in the eventuality of the latter, the outcome will continue to be uncertain until a potentially unprecedented vote at both the House and Senate. If anything can be assured, it is that there will not be a dull moment in the long running saga of Puerto Rico’s attempt at a comprehensive tax reform.”

See Carlos’ entire message here:

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Things people say about a VAT in the U.S.

I thought that this was an interesting set of comments. Some writers are clearly well-educated about how a VAT works and its impact on the economy.

Enjoy at:

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A VAT, Ted, but not as we know it.

Unprecedented, amazing times here in the U.S., where the election circus gets crazier by the day. One of the Republican presidential candidates, Ted Cruz, who currently runs as a solid second, has proposed to replace most taxes with a “Flat Business Tax”. And due to Mr. Cruz’ increased profile, the Flat Business Tax gets a fair share of media coverage.

I looked forward to hearing from the Tax Policy Center, which is a think-tank of tax experts and not immediately connected to any of the political parties. Len Burman is one of their experts, and Len wrote a brief article about the Flat Business Tax and calls it a subtraction method VAT. It’s a quick read – have a look at it here: He writes:

“Cruz’s VAT is different from the European version in the way it’s administered and in scope.

Most countries use a credit-invoice VAT where firms are responsible for tax on the entire sale price, but claim a credit for taxes already paid by their suppliers. If all their suppliers remit the VAT, then the credits completely offset the tax owed on purchased inputs. And the ultimate tax liability is the same as under the subtraction-method. The credit method is considered an improvement since it is self-enforcing: Purchasers will demand tax invoices from their suppliers so they can claim the credits.”

With this explanation, my point is still that Cruz’ Flat Business Tax is not a VAT as we know it – see my earlier comments here: and here Some form of the subtraction-method VAT has only been tested in France for a couple of years – I think from 1948 to 1954 – to be ditched swiftly in favor to the VAT that by now the rest of the world has embraced. And the current consumption tax in Japan looks somewhat like a subtraction-method VAT, but only from a distance.

What seems to be underestimated is the economic angle: a subtraction-method VAT is not at all a tax on individuals – subtraction method VAT is a tax on businesses, like Cruz correctly points out. It is just another calculation method to tax business profit.

And credit invoice VAT is not at all a tax on businesses (because only businesses can credit) – it is ultimately a tax on the end purchaser, the individual who does not have a right to credit the invoiced tax.

Therefore, subtraction-method VAT and credit-invoice VAT are profoundly different taxes, with significant differences throughout the supply chain and in the final tax burden.

Interestingly, the U.S. General Accounting Office produced a report in 1989 that discussed various forms of VAT – I linked the pdf below. They basically say that subtraction-VAT is simpler, but credit-invoice VAT is more flexible.

Still, it’s very unlikely that the U.S. will introduce any federal indirect tax under the next few presidents – whether we call it a VAT or not. In the meantime, look out for more critiques on the Cruz tax plans, like here:

The most recent analysis of Ted Cruz’ entire tax plan is here:

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The 1989 report of the U.S. General Accounting Office:

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