VAT "Value Added Tax" is designed to avoid exactly that issue. Imagine a product which requires two processes, A and B. Raw materials cost 1 After process

VAT "Value Added Tax" is designed to avoid exactly that issue. Imagine a product which requires two processes, A and B. Raw materials cost 1 After process A is done, the value of the intermediate output is now 11 After process B is done, the value of the finished product is now 21 If you are vertically integrated: you do A and B, so you collect VAT on (sale price less cost of inputs) = 21 - 1 = 20 Whereas if non-integrated firm One does process A A will collect VAT on (sale price less cost of cost of inputs) = 11 - 1 = 10 And non-integrated firm Two does process B B will collect VAT on (sale price less cost of inputs) = 21 - 11 = 10 So the VAT is calculated on 20 "value added" in both cases meaning that vertical integration gains you nothing at all. Big companies can and do manipulate transfer pricing to minimize VAT payments but this is "playing with taxes" rather than a problem with the concept of VAT.