What is VAT?

VAT is a consumption tax, levied on the added value of goods and services. It is applicable to nearly all goods and services traded for consumption within the EU. While exports and international services are generally exempt, imports are taxed to maintain fairness and competitiveness for EU-based producers.

Characteristics of VAT:

• Universality: VAT is integral to all commercial activities, encompassing the production, distribution of goods, and provision of services.
• Consumer-centric: The final consumer bears the tax, ensuring that businesses are not charged.
• Transparency: Charged as a percentage of the price, VAT is visible at every transaction stage.
• Fractional Collection: VAT is collected partially through a system where VAT-registered businesses deduct the tax paid on their purchases from the VAT collected on sales.
• Indirect Taxation: Although sellers remit VAT to the revenue authorities, it is the buyers who pay VAT as part of the purchase price.

Why VAT in the EU?

The inception of VAT in the EU was a strategic move to replace various indirect taxation forms, primarily cascade taxes, used by the original six EU member states. The adoption of a transparent and neutral VAT system was pivotal for establishing an efficient single market, ensuring tax neutrality, and enabling precise tax rebates at export points.

How is VAT Charged?

VAT is applied as a percentage of the sale price, with businesses entitled to deduct the tax paid at preceding stages, thus avoiding double taxation. The system is somewhat self-policing, with registered VAT traders assigned a unique number and required to display the VAT charged on invoices.

Practical Example:

Consider a mine selling iron ore to a smelter. The mine charges €1200, including 20% VAT, on a sale worth €1000. After deducting VAT paid on purchases, the mine remits €160 to the treasury. As the smelter sells steel worth €2000 (€2400 with VAT), it deducts the VAT paid on inputs and pays €180 to the treasury. The cumulative VAT paid to the treasury equals the correct VAT amount on the smelter’s sale.

VAT Rates Across the EU:

EU law stipulates a minimum standard VAT rate of 15% and a reduced rate of at least 5% for specific goods and services. However, actual rates differ among EU countries and products. For the most accurate and current VAT rates for specific products in a particular EU country, refer to that country’s VAT authority.