There are many factors to consider when working overseas. For example, U.S. companies that do business overseas might find themselves confused about the differences in currency they encounter. Exchange rate fluctuations between your home country and the target market can impact the cost of your global IT deployments significantly. Foreign exchange risk is an unavoidable part of doing business internationally.
There’s another area of currency risk you should be aware of as you prepare for your next deployment, too: taxes. Specifically, pay attention to the value-added tax, or VAT. The VAT is a tax that’s added to the product whenever its value increases at each step of the supply chain. It’s a common tax in Europe, and many countries around the world use it — but the United States does not.
How Does VAT Work?
The VAT is paid by each step in the supply chain, rather than at the end like a typical sales tax. Assuming the tax rate is the same, the government of a country using VAT and that of a country using traditional sales tax would each receive the same amount of money. The only difference would be who is paying each part of that tax. For example, with VAT, the farmer, the baker, and the retailer would each pay a portion of the 10% tax on a loaf of bread.
Many companies use VAT because it makes it easier to allocate taxes to each production stage. Also, because it taxes the value added, rather than the sale, customers can be confident that products are not being double-taxed.
Some companies dislike VAT, though, because they argue it hurts people with lower incomes disproportionately. After all, a VAT is a flat tax. Everyone pays the same amount. This is different from the income tax in the United States where people with higher incomes have a higher tax bracket.
Many countries with VAT have some sort of discount or exemption for necessities, like groceries or clothing for children.
Why You Should Care About VAT
As a business participating in international business, you first need to determine if the country you’ll be working with uses a VAT system. Over 160 countries use VAT, so there’s a good chance that you’ll be working with one that does. The VAT rate varies by country, so you’ll want to be aware of what the rate is in your target market.
Some countries have different tax rates for goods and services. When you’re working, buying and selling in another country, you need to be up-to-date on their tax codes, rules and rates. As you add value to the project and products you’re working on, you could be subject to VAT.
Don’t Go at it Alone
You have enough to navigate and work through as you’re planning and beginning your global IT deployment. Find a global partner that has years of experience assisting companies with their international business and deployments.
Kinettix has teams of technicians in over 90 countries and has helped companies navigate VAT and tax regulations in countries like China and India. Before you start your next global IT deployment, take some of the foreign exchange risks off your shoulders and contact Kinettix. Our expertise doesn’t stop with VAT — we can also help with exchange rate fluctuations and other currency risks.