Taxes or Bond/LUT for Exports: Pick one?


Exporters often face a tough choice when deciding how to send their products to other countries. They can either send their goods without paying any taxes or send them while paying taxes. Both options are allowed by the law, but which one is better financially?

Here’s the deal: Imagine you have a choice when you send your stuff abroad:

  1. You can send your items without paying any taxes upfront. You’ll get a refund later on for the taxes you paid when you bought the materials and services you used to make those items.
  2. You can send your items and pay taxes on them when you send them. But you can also get a refund for the taxes you paid on the materials, services, and equipment you used to make those items.

Let’s make this clear with an example: Picture a person named Mr. Smith. He lives in a place called Springfield, and he’s in the business of selling fancy Home Décor stuff to people in another country, let’s say Germany.

Now, Mr. Smith has already spent money on the things he needed to make his Home Décor items. Here’s the breakdown:

  • He spent $1,500,000 on the stuff he used to make his items (like wood, paint, and other materials).
  • He also used some services for advertising, which cost him $300,000.
  • To make things, he needed some big machines, which set him back $600,000.
  • In total, he has spent $2,400,000 on all this stuff.

Now, Mr. Smith gets an order from Germany for his Home Décor items, and it’s worth $2 million. The tax rate for this type of thing is 15%. So, Mr. Smith has two options:

Option 1: He can send his items without paying any taxes when he sends them. Later on, he can get a refund for the taxes he paid when he bought materials and services.

Option 2: He can send his items and pay taxes on them when he sends them, but he can also get a refund for the taxes he paid on the materials, services, and equipment he used to make those items.

In the first option, he won’t spend any money on taxes when he sends his stuff, and he’ll get a refund of $1,350,000 later on. So, he’ll have $1,350,000 more in his pocket.

In the second option, he’ll need to pay $300,000 in taxes when he sends his items. But he can later get this money back as a refund. So, he’ll still have an extra $300,000.

So, when Mr. Smith picks the second option, he’ll have an additional $300,000 compared to the first option. This is because he can get a refund for the taxes he paid on the big machines he used to make his items.

In conclusion, picking the second option and paying taxes when exporting can be a good idea, especially if you spend a lot of money on equipment. In Mr. Smith’s case, he’s $300,000 better off by choosing the second option because he can get a refund on the taxes he paid for his equipment. So, businesses should think carefully about both options to see which one is better for them financially.

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