Contributor: Bryan Beirne – Senior Manager, VAT, BDO
Value-Added Tax (VAT), particularly within the European Union (EU), got high billing in President Trump's 13th February 2025 memorandum on trade barriers he wants to tackle, suggesting that VAT should be considered in tariff calculations and listing it among the "unfair, discriminatory, or extraterritorial taxes" imposed on U.S. businesses, workers and consumers.
The United States is in a small minority of countries with what are known as single-stage sales taxes, which are just imposed once and generally paid by end consumers.
In comparison, VAT is a consumption tax applied at each stage of production and distribution of goods and services in the EU. The rates vary among EU Member States, typically ranging from 15% to 27%.
In the EU, the VAT system is designed to be neutral, meaning it should not affect the competitive position of businesses, whether domestic or foreign. VAT is charged equally on goods produced domestically and those imported.
President Trump has attributed part of the U.S. trade deficit to the absence of a VAT system in the United States. He argues that VAT acts as a hidden tariff, disadvantaging U.S. exports and favouring domestic products within the EU. This perspective stems from the fact that imported goods in the EU are subject to VAT, which might be perceived as an additional cost compared to domestic goods.
However, the latest OECD Guidelines on VAT/GST sets out that “The application of the destination principle in VAT achieves neutrality in international trade. Under the destination principle, exports are not subject to tax with refund of input taxes… and imports are taxed on the same basis and at the same rates as domestic supplies.”
As such, the claim that VAT functions as a tariff is factually incorrect. VAT applies uniformly to all goods, irrespective of origin, thus maintaining tax neutrality.
While the US administration’s concerns about VAT impacting trade are understandable, the characterisation of VAT as an unfair or discriminatory tariff is not substantiated by the principles of VAT itself. VAT’s uniform application within the EU and its neutrality in terms of trade suggest that it is not a valid ground for imposing general tariffs on EU goods. Addressing trade imbalances requires a comprehensive approach that goes beyond taxation policies.
Content published in Finance Dublin Irish Tax Monitor.