US Export and EU Import

VAT is levied on all imports into the EU market which are going to be placed in "free circulation" (meaning that the goods can be freely sold to end consumers). Imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with foreign suppliers.

This is also true for shipments to the EU using an express carrier. As soon as the shipment arrives in the EU, the express carrier clears the goods with the customs. The customs determine the taxes and duties that are due based on the declared value and description of the goods and charges the express carrier for these taxes and duties. The express carrier pays the taxes and duties, and sends the exporter two invoices: one invoice for the transportation fees and one invoice for the taxes and duties.

More often than not, it is only at this moment that the exporter realizes that he has to pay an extra amount of money for taxes and duties that can be as much as 20% or 25% of the customs value of the shipped goods!

Now the crucial question: if "imports are taxed to keep the system fair for EU producers", why can exporters reclaim VAT on these imports?

The important thing to understand is that VAT can only be reclaimed if the goods are shipped and sold to businesses. VAT cannot be reclaimed if the goods are directly shipped and sold to end consumers.

The second paragraph on the "What is VAT?" page explains, "In the VAT system all businesses in the supply chain remit taxes on their sales, but they are also refunded the amount of VAT remitted by their suppliers". By exporting goods to a company in the EU, the exporter becomes part of the supply chain of that EU company and thereby becomes subject to VAT.

If the receiving company in the EU resells the goods to an end consumer, the EU company will remit the tax on the full amount of the sales to the tax authority. (This is the normal VAT mechanism.)

However, in the case of exports to the EU, the receiving company will not ask for a refund for the amount of VAT paid to their supplier ( i.e. the exporter). The reason is simple: the receiving company has paid no VAT because the sender already paid the full amount to the express carrier (who in turn remitted it to the tax authority at the moment of clearing the goods with the customs).

Therefore, both the EU Company and the exporter have paid the full amount of VAT; the VAT is paid twice to the tax authority. And this is why the exporter can reclaim this amount of VAT, provided the goods are sold to a business and not an end consumer.

Simply stated, there is a pile of money in Europe that belongs to the exporter, waiting for the exporter to reclaim it!

In this example we will demonstrate with real life numbers how it works.

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