INTRODUCTION TO INTERNATIONAL TRADE

For most countries with VATs, international trade is a significant component of their economies. A country with a VAT must define the jurisdictional reach of the tax; that is, the tax may be imposed on production within the country (an origin principle VAT), on domestic consumption (a destination principle VAT), or some combination of the two. Almost every country with a VAT relies on the destination principle to define the jurisdictional limits of the tax. Under a pure destination principle, imports are taxed and exports are completely free of tax (zero rated). With this system, it is important to identify the value of goods and services that are exported (and when they are exported) and identify the value of taxable imports and determine when they are taxable.

This chapter discusses the place of supply rules in the context of international trade, including the troublesome issues on cross-border transactions relating to the place where services are rendered.

The location or place of an international sale of services has become more significant with the advent of electronic commerce. A significant problem with electronic commerce is to determine if the sale is of goods or services. For example, if computer software, music, and videos are transmitted by electronic signals rather than in compact disks or other physical form, is the transaction a sale of goods or a sale of services?