Manufacturing Today - July 2017 - 13

MATTHEW WALSH | COLUMN BY

in the United States. Both VAT and
sales taxes are a tax on the sale of an
item or taxable service. In both systems, the cost burden is ultimately
placed on the final consumer. However, the two systems do operate differently. In a sales tax system, tax is only
charged at the time of the sale and to
the final consumer. In a VAT system,
the tax is imposed and remitted along
each stage of the supply chain, for the
"value added" along with each stage.
Here's an example:

Country A has a 10 percent
VAT Rate:

At the sale in each stage from Lumber
Company to Wholesaler to Manufacturer to Retailer; the buyer would
provide what is called a resale certificate, which indicates they are not the
final consumer and would pay no tax.
However, when you, the final consumer, buy the chair from Retailer for
$400, you are charged $40 in sales tax
- exactly the same as in the VAT system - which Retailer remits to Country B's tax authority.
In a VAT system when the good
is exported, the manufacturer does

not collect VAT from the U.S. retailer, because export transactions are
not subject to VAT. It does still get
to claim input tax credits and receive
what it had paid in input taxes. When
that chair is ultimately sold to you in
the United States, you still pay the
$40 sales tax.
If a manufacturer in the United
States sells into the VAT system,
then the $30 VAT is collected on the
sale to the retailer, but when it is
sold in that country, the consumer
will still pay $40 in VAT to the retailer. The retailer reclaims the $30
in input VAT, but ultimately it is the

13

I N T E R N AT I O N A L T R A D E

JULY 2017 manufacturing-today.com

E MPLOYEES

B UY AMERICAN

Lumber Company cuts down a tree
and sells it to Wholesaler for $110
($100 tree cost + $10 VAT cost). Lumber Company remits $10 to the country tax authority.
Wholesaler processes the tree and
sells it to Manufacturer for $220
($200 tree cost + $20 for VAT cost).
Wholesaler shows on its tax return
that it collected $20 in VAT from
Manufacturer, and is allowed to recoup the $10 paid to Lumber Company, as that was Wholesaler's input
tax. Wholesaler pays $10 to the tax
authority and retains the other $10,
the input tax credit.
Manufacturer builds a chair from
the lumber and then sells it to Retailer for $330 ($300 chair cost + $30 VAT
cost). When filing its tax return, Manufacturer shows $30 in VAT collected,
but claims an input credit for the $20
he paid to Wholesaler. Manufacturer
pays $10 to the tax authority.
Retailer sells that chair to you and
charges you $440 ($400 chair cost
+ $40 VAT cost). Now, Retailer can
claim the $30 input tax credit when
he files his tax return. The tax authority has collected $40, but it has
done so incrementally at each stage
in the supply chain.

Country B has a 10 percent
Sales Tax Rate:


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Table of Contents for the Digital Edition of Manufacturing Today - July 2017

Table of Contents
Manufacturing Today - July 2017 - Cover1
Manufacturing Today - July 2017 - Cover2
Manufacturing Today - July 2017 - 1
Manufacturing Today - July 2017 - Table of Contents
Manufacturing Today - July 2017 - 3
Manufacturing Today - July 2017 - 4
Manufacturing Today - July 2017 - 5
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Manufacturing Today - July 2017 - Cover3
Manufacturing Today - July 2017 - Cover4
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