US president Trump promises ‘reciprocal tariffs’ to VAT

The British Chamber of Commerce issued the warning after US president Donald Trump issued a presidential memorandum calling on US authorities to investigate the harm to the US of “any non-reciprocal trade arrangements adopted by any trading partners” and propose “remedies in pursuit of reciprocal trade relations with each trading partner”.

Under what president Trump is describing as his ‘fair and reciprocal plan’ on trade, the US will “counter non-reciprocal trading arrangements with trading partners by determining the equivalent of a reciprocal tariff with respect to each foreign trading partner”. This includes where US trading partners impose “unfair, discriminatory, or extraterritorial taxes” on US businesses, workers, and consumers – “including a value-added tax”.

The measures are designed to help the US address its trade deficit, which the Trump administration says threatens the US’ economic and national security.

William Bain, head of trade policy at the British Chamber of Commerce said the Trump administration’s proposals “will create more cost and uncertainty for investors, businesses and consumers across the world”.

“Plans to factor in countries’ VAT regimes could lead to especially complex and costly tariff scenarios which upend established trade norms,” Bain said, calling on the UK government to “adopt a flexible and agile response”, to avoid triggering a trade war, and to seek to negotiate “alternative arrangements”.

“If they do not, then sectors such as automotives, pharmaceuticals, and food and drink could be significantly hit as higher tariffs inevitably feed through into globally higher prices for consumers,” Bain said.

International trade expert Totis Kotsonis of Pinsent Masons said the US administration's assertion that the VAT amounts to a tariff that can be the subject of retaliatory measures is problematic for a few reasons. 

“First, VAT is a consumer tax and, in any event, it is in line with World Trade Organization (WTO) rules, in that it applies indiscriminatory to products irrespective of whether these are imported or locally produced. Second, the idea that the US may apply different tariffs to the same product depending on its provenance, breaches the WTO's ‘most favoured nation’ principle, which requires members to offer the same tariff to all WTO members, other than in specific circumstances such as where a bilateral or plurilateral comprehensive trade agreement is in place or where trade-defence measures are justified under WTO rules – which won't be the case here.”

“There's an additional concern in that, if the US proceeds with its threat to raise tariffs on this basis, the EU is likely to retaliate one way or another. Depending on the exact measures that the US takes, the EU could seek to rely on its Anti-Coercion Instrument (ACI) to impose targeted retaliatory measures that hurt for example, US strategic industries and swing states,” he said.

The European Commission issued a statement on 14 February in response to the presidential memorandum stating that the proposed “reciprocal” trade policy would be a step in the wrong direction but that the EU remains committed to an open and predictable global trading system that benefits all partners.

Dublin-based tax expert Robert Dever of Pinsent Masons said: “The Commission has been quick to highlight that the EU maintains some of the lowest tariffs in the world and that by imposing tariffs the US is taxing its own citizens, raising costs for business, stifling growth and fuelling inflation. It has also made clear that it will react firmly and immediately against what it sees as unjustifiable barriers to free and fair trade.”

In the UK, VAT is payable on the supply of most goods and services by a taxable person – a person who is registered, or should be registered, for VAT purposes. In the UK, the standard rate of VAT is 20%. Certain supplies are exempt from VAT, the most important of which relate to finance, insurance, education, health and some supplies of land. Similar rules apply in EU member states.

A business which has made taxable supplies in excess of £90,000 in the last 12 months, or anticipates making taxable supplies in excess of £90,000 in the next 30 days, is required to register for VAT and account to HMRC for it. A business which is registered for VAT must charge VAT on taxable supplies made by it ('output tax') but can recover the VAT charged on supplies made to it ('input tax') to the extent that the VAT was incurred for the purposes of making taxable supplies.

To date, VAT has generally not been considered a tariff since it is often applied on a customer basis. That means that all sales to UK customers should equally be subject to VAT either by way of UK VAT being charged directly on domestic sales or, in the case of imported goods, as import VAT.

Where a UK or EU company sells internationally, the supply is zero-rated for VAT purposes, meaning there is no output VAT and full recovery of input VAT. Where it sells to a US customer, this is increasingly captured by a US sales tax in the respective state. Some countries require the customer to account for VAT if the supplier does not.

London-based tax expert Bryn Reynolds of Pinsent Masons said: “As value added taxes have increased in global popularity, the US has remained an outlier in not introducing such a system due to its patchwork of state, county, municipal, and other local sales taxes. Typically, the combined rates of these taxes are significantly less than the rate of VAT or other goods and services taxes in most countries.”

Reynolds said that the EU and UK’s moves to impose tax on the import of certain products based on their ‘carbon price’ is an example of how policymakers in Europe are using the tax system to address what they see as unfair competition risk.

“The EU’s Carbon Border Adjustment Mechanism (CBAM) and the proposed UK CBAM both also seek to tackle what they consider potentially unfair competition on the basis of lower carbon pricing,” Reynolds said. “These measures are highly focused at specific sectors in order to both advance ‘net zero’ targets and to ensure that EU and UK companies are not disadvantaged in domestic sales due to the introduction of net zero policies and carbon pricing.”

Kotsonis said businesses now find themselves operating in a period of highted tensions in international trade.

“With the WTO’s Appellate Body non-functioning as a result of the US continued opposition to the appointment of new members, as well as the fact that the US has not signed up to the EU-sponsored Multiparty Interim Appeal Arbitration Arrangement, which is meant to resolve WTO disputes whilst the Appellate Body dispute continues, tensions are only likely to increase further unless cooler heads prevail,” Kotsonis said.