Does a VAT Beat a Corporate FIT

Posted by Wayne: Shouldn't our tax policy be constructed to give our corporations whatever advantage it can vis a vis foreign corporations? So here is another corporate tax question. I'll strip it bare to get at the basic idea: Suppose country A gets a lot of their income from a high vat tax ("a glorified sales tax") and has no corporate tax and country B has no vat tax and a high corporate tax. When a corp in A ships stuff to B, then it has no corporate tax at home and no vat tax in B. When a corp in B ships stuff to A, then it has to pay a corporate tax at home and a vat tax in B.

Reply: To Wayne’s first question: yes, we should. In Wayne’s set up, there is a huge disparity in the tax costs between country A and Country B. However, it may not be as clear cut as his stripped down bare example might suggest. In his example the country that charges the VAT levies no income tax and I have never dealt with a country that had a VAT only. There may be some but I'm not aware of them. Countries that have a VAT usually have a corporate income tax also.  Here is a link that lists tax rates, including corporate rates and VAT rates, by country. It seems to be missing Uz beki beki beki stan.

http://en.wikipedia.org/wiki/List_of_countries_by_tax_rates

So, in reality, if a country that has a VAT sells products in the USA, it most likely would be subject to its county’s own income tax + U.S. income tax on income earned in the U.S. (for which it may get a credit against its country’s income tax. Every country's tax system is different, and in The USA the foreign tax credit rules are about as complicated as any other rules, quite often limiting the amount of the foreign tax that can be used as a credit in the year paid).

(Continued in next post)