BookRix

Little Falls, NY

“…U.S. products sold in Europe have to pay VAT — for example, they must pay a
19 percent tax if sold in Germany…”

…which is not a sales tax, it is on the “value added” only.

For example, if the sales price is $20,000 and the cost of materials purchased
is $15,000, the value added is $5,000 and the tax is $5,000 time 19% = $950
(not $20,000 times 19% = $3,800)

Furthermore, the American producer can deduct the VAT from US income taxes
due. Suppose labor, depreciation, etc. are an additional $1,000, then profit
before taxes would be $20,000 - $15,000 - $1,000 = $4,000. US income taxes
(which can be deferred indefinitely) at the old 35% rate would be $4,000 times
35% = $1,400. The taxes paid abroad can be deducted so that the US tax
liability would be $1,400 - $950 = $450.

In either case, the net profit to the American manufacturer is the same:…

Europe: $20,000 - $15,000 - $950 - $1,000 - $450 = $2,600.
US: $20,000 - $15,000 - $1,000 - $1,400 = $2,600

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