Value added tax
The Value Added Tax, (VAT) - is a form of consumption tax. In the European Union VAT is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the Community. Thus, goods which are sold for export or services which are sold to customers abroad are normally not subject to VAT. Conversely imports are taxed to keep the system fair for EU producers so that they can compete on equal terms on the European market with suppliers situated outside the Union.
Value added tax is:
- a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.
- a consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.
- charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
The VAT due on any sale is a percentage of the sale price but from this the taxable person is entitled to deduct all the tax already paid at the preceding stage. Therefore, double taxation is avoided and tax is paid only on the value added at each stage of production and distribution. In this way, as the final price of the product is equal to the sum of the values added at each preceding stage, the final VAT paid is made up of the sum of the VAT paid at each stage.
Given that EU law only requires that the standard VAT rate must be at least 15% and the reduced rate at least 5% (only for supplies of goods and services referred to in an exhaustive list), actual rates applied vary between Member UE and between certain types of products. In addition, certain Member UE have retained separate rules in specific areas.
For the purpose of exports between the Community and non-member countries, no VAT is charged on the transaction and the VAT already paid on the inputs of the good for export is deducted - this is an exemption with the right to deduct the input VAT, sometimes called 'zero-rating'. There is thus no residual VAT contained in the export price. However, as far as imports are concerned, VAT must be paid at the moment the goods are imported so they are immediately placed on the same footing as equivalent goods produced in the Community. Taxable people registered for VAT will be allowed to deduct this VAT in their next VAT return.
At the time when the European Community was created, the original six Member States were using different forms of indirect taxation, most of which were cascade taxes. These were multi-stage taxes which were each levied on the actual value of output at each stage of the productive process, making it impossible to determine the real amount of tax actually included in the final price of a particular product. As a consequence, there was always a risk that Member States would deliberately or accidentally subsidise their exports by overestimating the taxes refundable on exportation. It was evident that if there was ever going to be an efficient, single market in Europe, a neutral and transparent turnover tax system was required which ensured tax neutrality and allowed the exact amount of tax to be rebated at the point of export. VAT allows for the certainty that exports there are completely and transparently tax-free.
- Forder James, Menon Anand, The European Union and national macroeconomic policy, London, 1998.
- McGuire Steven, The European Union and the United States: competition and convergence in the global arena, Palgrave Macmillan, New York, 2008.
Author: Aneta Radzewicz