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SCRC Article Library: Taxes: Tariff and Tax in International Trade

Taxes: Tariff and Tax in International Trade

Published on: Jan, 15, 2011

by: Winston Cockburn, MBA ‘05 Michael Johnston , MBA ‘05 Steven Edwards, Co-Director SCRC North Carolina State University

Taxes

Ad Valorem (1)

Any tax imposed on the basis of the monetary value of the taxed item. Literally the term means “according to value.” Traditionally, most customs and excises had “specific” rates; the tax base was defined in terms of physical units such as gallons, pounds, or individual items.

Ad valorem rates, which have come into increased use, have the important advantage of adjusting the tax burden according to the price paid for the taxed items. They thus avoid the serious discrimination of specific rates against the low-priced varieties of the commodities.

The primary difficulty with the ad valorem taxation, especially in the case of tariffs, is in establishing a satisfactory value figure. Typical valuation is on a CIF (Cost, Insurance, Freight) basis or alternatively on an FOB (Free on Board) cost basis.
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Value-added (2)

A government levy on the amount that a business firm adds to the price of a commodity during production and distribution of a good. Three major types of value-added tax have been identified, depending on the deductions allowed, but only one—called the “consumption” type—is widely used today.

Calculation of the value-added tax of the consumption type can be made in any of three different ways, but virtually every country imposing the tax uses the “invoice,” or “credit,” method of computation. Using this method, each seller (the party responsible for collecting the tax and paying it to the government) first calculates the sum of all the taxes that he has collected on goods sold; he then totals the sum of all the taxes that he has paid on goods purchased. His net tax liability is the difference between the tax collected and the tax paid.

It is generally assumed that the burden of the value-added tax, like that of other sales taxes, falls upon the final consumer. Although the tax is collected at each stage of the production-distribution chain, the fact that sellers receive a credit for their tax payments causes the tax, in effect, to be passed on to the final consumer, who receives no credit. The tax can be regressive (i.e., the percentage of income paid in tax rises as income falls), but most countries have at least partly avoided this effect by applying a lower rate to necessities than to luxury items.

In 1954 France was the first country to adopt the value-added tax on a large scale. It served as an improvement on the earlier turnover tax, by which a product was taxed repeatedly at every stage of production and distribution, without relief for taxes paid at previous stages. Although easier to administer, such a tax discriminated heavily against industries and sectors in which products were bought and sold several times, encouraging an undesirable concentration of economic power.

In 1968 West Germany adopted the value-added tax, and since then most other western European nations have followed suit, largely as the result of a desire to harmonize tax systems. All members of the European Union are required to implement value-added taxes that conform to a model prescribed by the union. Many countries in South America, Asia, and Africa have also adopted the tax.
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Supplemental Taxes

GST / HST / PST are charged by certain government entities on good and services imported, purchased or transacted within the country. Below is a sample of the application of such taxes, as conducted in Canada. The text contains hyperlinks to allow the reader to investigate in more detail.
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Summary

Most goods and services sold or provided in Canada are taxable at the rate of 7% (GST) or 15% (HST). The HST applies in the provinces of New Brunswick, Nova Scotia and Newfoundland and Labrador. Certain items, such as sales of basic groceries and prescription drugs, are also taxable at a rate of 0%. These are referred to as zero-rated goods and services. A limited number of goods and services are exempt from the GST/HST.

The GST/HST applies to most transactions throughout the production and marketing process. Business and organizations required to, or who voluntarily choose to, register for the GST/HST are referred to as registrants. Businesses must register to obtain a Business Number with a GST/HST account. Registrants can claim a credit to recover the GST/HST that is paid or payable on purchases used to provide taxable goods and services. This credit is called an input tax credit and can be claimed for the GST/HST paid or payable for goods or services acquired or imported for use, consumption or supply in their commercial (taxable) activities.

GST/HST registrants who provide taxable goods or services have to charge and collect the GST or HST on their sales. If the GST/HST collected is greater than the GST/HST paid or payable, the difference is sent to the CRA. (Registrants in Quebec send their payment to the ministère du Revenu du Québec). If the GST/HST collected is less than the GST/HST paid or payable, a refund can be claimed.

Provincial GST/HST/PST Rates (3)

Province

GST/HST Rate (%)

PST Rate (%)

Combined Rate (%)

Alberta

7

not applicable

7

British Columbia

7

7

14

Manitoba

7

7

14

New Brunswick

15

not applicable

15

Newfoundland & Labrador

15

not applicable

15

Northwest Territories

7

not applicable

7

Nova Scotia

15

not applicable

15

Nunavut

7

not applicable

7

Ontario

7

8

15

Prince Edward Island

7

10 *

17.7 *

Quebec

7

7.5 *

15.025 *

Saskatchewan

7

7

14

Yukon Territory

7

not applicable

7

* In Quebec and Prince Edward Island only, the GST is included in the provincial sales tax base. You are also charged PST on GST, hence the higher than expected combined rate.

Quebec
in Quebec, the GST/HST is administered by the ministère du Revenu du Québec (MRQ). Contact the MRQ by calling, toll-free, 1-800-567-4692 or by visiting their Web site http://www.revenu.gouv.qc.ca/eng/ministere/index.asp
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Internet Publications:

GST/HST Guides http://www.cra-arc.gc.ca/tax/business/topics/gst/calc_guide-184-e.html

GST/HST Forms http://www.cra-arc.gc.ca/formspubs/menu-e.html

GST/HST News http://www.cra-arc.gc.ca/tax/business/gsthst/news/menu-e.html

References:

(1) “ad valorem tax.” Encyclopædia Britannica from Encyclopædia Britannica Premium Service.
http://www.britannica.com/eb/article?tocId=9003627

(2) “value-added tax.” Encyclopædia Britannica from Encyclopædia Britannica Premium Service.
http://www.britannica.com/eb/article?tocId=9074747

(3) http://www.revenu.gouv.qc.ca/eng/ministere/index.asp

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