A value Added tax--or VAT--is a form of consumption tax. It is levied on the difference between the price of a commodity before taxes, and the cost of producing the commodity. The U.S. does not charge a VAT--as of September 2010--although some financial advisers have called for one. VAT, however, is added to import duties in the U.S. The European Union is updating VAT with regulations in effect as of January 2010 called the VAT Package. According to Deloitte Belgium Tax Quarterly, the VAT Package will have a profound affect on all businesses and services in Europe.
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CIF--cost, insurance, freight--and FOB--free on board--are two methods generally used to calculate duty rates. According to USAExportImport.com, the CIF method is used by most countries. VAT is generally applied on the CIF or FOB-plus-duty value.
CIF: Cost, Insurance, Freight
USA Export Import offers examples of CIF and FOB duty calculations. The most common method of calculating duty on imports is by adding together cost plus insurance plus freight. This is a pricing term, or formula that indicates that the cost of goods, insurance and freight are part of the quoted price. To calculate duty you must also add VAT into the equation. If the CIF equals £650, and the duty rate is 7 per cent, the duty charge will be £45. Now the CIF plus duty charge equals £695. Using 18 per cent for the VAT rate, the amount based on £695 equals £125.1. Add together CIF ($1,000) plus duty charge ($70) plus VAT ($192.60) to get a grand total of £820.6. VAT is calculated based on the CIF plus duty charge.
FOB: Free on Board
A formula less commonly used is FOB. According to USA Export Import, this pricing term indicates that the cost of goods--including manufacturer insurance costs and transportation from the manufacturer to the port of departure, and costs of loading the vessel--are included in the price quote. FOB only applies to inland waterway transport of shipments via sea. Shipping and insurance are not included in calculations for international shipping. For example, multiply FOB value ($932) by the duty rate (7 per cent). This comes to £42.4. Add the FOB ($932) to the duty rate ($65.24). The sum is (£648.2). Using 18 per cent for the VAT, multiply $997.24 by .18 to get the amount of the VAT, £116.6. Add the FOB ($932) plus duty ($65.24) plus VAT ($179.50) for a grand total of £764.8. VAT is calculated based on the FOB plus duty charge.
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