You’ve done it. You’ve found your product. Found suppliers. Got a sample. Picked a manufacturer. Placed your order, and arranged shipping. Your products are en route to an FBA shipping center in (GERMANY, ENGLAND, FRANCE, OTHER)… but wait.
Now someone wants an IMPORT DUTY (VAT) from you.
Let’s say you bought 1000 sofas from China for $10 each. I’m not sure why you want 1,000 sofas. I’m not sure why they only cost $10. Both of those things sound like absolute nonsense, but I’m not here to judge you, your buying habits, or your excessive need for cheap sofas. I’m here to help you understand VAT.
When FedEx delivers these Sofas (sure) from China into the EU, you’re going to have to pay an IMPORT DUTY based on the price of the Sofas.
Your IMPORT DUTY(VAT) rate will vary based on the country, and the product, but for sake of simplicity we’ll say it’s 20%.
The price you pay, upon importing those Sofas is $2,000. (10% times 1000 sofas times $10/sofa).
“But …why? Why?”
Because if you’re going to conduct business out of the country, the government wants/needs to collect taxes from you, both to stop the death flotillas, but also to give local businesses (who paid taxes) a shot and also so that the economy doesn’t hemorrhage money.
“But…why am I paying a tax, on something I’m going to sell? I thought the WHOLE POINT of a VAT, Value Added Tax, is that I get taxed when I add value. Not just when I show up with all my glorious sofas!”
The thing is… t’s basically your word against the government’s that you’re going to sell those sofas. What if you don’t? What if you just give them out? Or what if you stack them? Or what if you use a new sofa every week, throw away the old ones, and then have essentially bought yourself (1000/52) 19 years worth of sofas? You have to be taxed on that sort of wasteful stupidity.
Or you have to sell them.
Then when you sell them for $20, you tack on the country’s 20% VAT ($20 sales price, $4 VAT, total price $24) and at this point you have sold 1000 sofas for $20 and charged ($4 VAT times 1000 sofas) $4,000 in VAT.
YOU: Hey government. I really sold those Sofas. Look here’s the receipts.
GOVERNMENT: My bad bro. We thought you were a stacker. Here’s your $2,000 back.
YOU: Oh. Thanks!
And that is the basics of how VAT works for importers. You pay a VAT on import, and then tack on a VAT when you sell, and get reimbursed for that initial VAT import duty.
Now, there’s one last wrinkle of complexity, and that has to do with how much stuff you have to sell before the government swoops in to take a bite, and where your goods are stored and how that affects your VAT liability, but lets save that for the 4th and final post.