European Union value added tax

The European Union value added tax union is an essential part of the customs free Single market of the European union of simplified company administration. A common basis for VAT in all member states, make it possible to eliminate the physical customs border control by national borders inbetween the members states. The cross border VAT within the union is declared administratively with the other dometstic VAT report. The major advantage is that the goods are not getting stuck for VAT administration by the border to much simplier administration, saving coosts and transport is far quicker. It also is of a huge advantage of real small Freight forwarders not having to handle the VAT adminsitration and customs.

With no VAT union, despite customs free Single market, like between the EU and the EFTA-countries, the physical customs border control has to operate because import VAT are to be paid and declared by the border to the EU VAT union. Normally VAT declaration and pay are made by a Freight forwarder that debits for a quite complex administrative process and the customers need to prepay or have credit agreements for it. And in the end the import VAT is deductable in anyway for importing VAT registred companies, a huge expensive administrative exercise.

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax are agreed to syncronise the VAT ithin the EU VAT union.

The European Union value added tax (or EU VAT) is a tax on the consumption of goods and services within the European Union (EU). The EU's institutions do not collect the tax, but EU member states are each required to adopt a value added tax that complies with the EU VAT code. Some of the VAT collected by member states is used to fund the European Union as part of the system of "own resources". The nature of VAT is to tax consumption where it occurs.

VAT that is charged by a business and paid by its customers is known as "output VAT" (that is, VAT on its output supplies). VAT that is paid by a business to other businesses on the supplies that it receives is known as "input VAT" (that is, VAT on its input supplies). A business is generally able to recover input VAT to the extent that the input VAT is attributable to (that is, used to make) its taxable outputs. Input VAT is recovered by setting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government.

Different rates of VAT apply in different EU member states. The lowest standard rate of VAT throughout the EU is 15%, although member states can apply reduced rates of VAT to certain goods and services. Certain goods and services are required to be exempt from VAT (for example, postal services, medical care, lending, insurance, betting), and certain other goods and services to be exempt from VAT but subject to the ability of an EU member state to opt to charge VAT on those supplies (such as land and certain financial services). Input VAT that is attributable to exempt supplies is not recoverable.

Authority and scope of the tax

The European Community Treaty ("EC Treaty") authorised the Council of the European Union ("Council") and European Commission ("Commission") to make Regulations and issue Directives. Regulations are binding in their entirety and are directly applicable to all member states. Directives, meanwhile, are binding as to their required result allowing each member state to choose the method and form of implementing the Directive.

In addition to Directives and Regulations, the EC Treaty also authorised the Commission to render decisions on determining whether a member state has been in noncompliance with a Directive or Regulation. When a member state has infringed the EC Treaty then the Commission and the Council are authorised to begin a process of coercing compliance. First the Commission will issue a confidential letter of formal notice that requests information in the investigation of a possible infringement and this provides a two-month deadline for a resolution. If the two-month deadline passes, then the Commission will submit a press release announcing a reasoned opinion providing a series of reasons why an infringement is suspected. There is a further two-month deadline for the member state to end the infringement. If the member state fails to respond to the reasoned opinion then the Commission submits a press release that it has referred the controversy to the European Court of Justice ("ECJ").

The scope of the ECJ's authority is limited by the national sovereignty of each member state. It cannot annul national laws or force administrative compliance and instead enforces compliance by imposing penalties on the non-compliant member state.

The EU VAT system is imposed by a series of European Union directives, the most important of which is the Sixth VAT Directive. This Directive has been updated and replaced by another Directive since 1 January 2007. Important changes will occur when a subsequent Directive will address the issue on "the place of supply of services" and will be in force on 1 January 2010.

History

VAT was invented by a French economist in 1954 as taxe sur la valeur ajoutée (French: TVA). Maurice Lauré, joint director of the French tax authority, the Direction générale des impôts, was first to introduce VAT with effect from 10 April 1954 for large businesses, and it was extended over time to all business sectors.

In 1977, the Council of the European Communities sought to harmonise the national VAT systems of its member states by issuing the Sixth Directive to provide a uniform basis of assessment and replacing the Second Directive promulgated in 1967. In 2006, the Council sought to improve on the Sixth Directive by recasting it.

Sixth Directive

The Sixth Directive characterised the EU VAT as harmonisation of the member states' general tax on the consumption of goods and services. The Sixth Directive defined a taxable transaction within the EU VAT scheme as a transaction involving the supply of goods, the supply of services, and the importation of goods.

Recast Sixth Directive

The recast of the Sixth Directive retained all of the legal provisions of the Sixth Directive but also incorporated VAT provisions found in other Directives whilst rearranging the order of the text to make it more readable. In addition, the Recast Directive codified certain other instruments including a Commission decision of 2000 relating to funding of the EU budget from with a percentage of the VAT amounts collected by each Member State.

Supply of goods

As a consumption tax, the general rule is that the VAT is ultimately collected where the goods are purchased by the consumer. The supply of goods (the exchange of goods for consideration) is a taxable transaction, that is, VAT at the appropriate rate is added to the purchase price. If the purchaser is a business (a taxable person) that is not the final consumer, it may reclaim as a credit the VAT paid on the purchase. When the business resells the goods, VAT is added to the resale price. The taxable person then pays to the government the VAT on the resale, less a credit for the VAT on the purchase, and in effect thus pays to the government tax on the value added. The supply of goods follows a chain of businesses until it reaches the final consumer. The final consumer does not receive a credit for the VAT paid so that the final consumer bears the cost of the VAT.

Domestic supply

A domestic supply of goods is a taxable transaction where goods are received in exchange for consideration within one member state. Thus, one member state then charges VAT on the goods and allows a corresponding credit upon resale.

Intra-Community acquisition

An intra-Community acquisition of goods is a taxable transaction for consideration crossing two or more member states and the goods are not sold to the final consumer but rather between merchants. The place of supply is determined to be the destination member state, and VAT is charged at the rate applicable in the destination member state.

The mechanism for achieving this result is as follows. The exporting member state zero-rates the VAT. This means that the member state of the exporting merchant does not collect VAT on the sale, but still gives the exporting merchant a credit for the VAT paid on the purchase by the exporter (in practice this often means a cash refund). The importing member state "reverse charges" the VAT. This means that the importer is required to pay VAT to the importing member state at its rate. In many cases a credit is immediately given for this as input VAT. The importer then charges VAT on resale in the normal way.

Distance sales

When a vendor in one member state sells goods directly to individuals and VAT-exempt organisations in another member state and the aggregate value of goods sold to consumers in that member state is below €100,000 (or the equivalent, e.g. in the UK as of 2010 it is £70,000) in any 12 consecutive months, then such a sale of goods may qualify for a distance sales treatment. Distance sales treatment allows the vendor to apply domestic place of supply rules for determining which member state collects the VAT. This means that VAT is charged at the rate applicable in the exporting member state. However, there are some additional restrictions to be met. For instance, supply of new motor vehicles like cars, trucks and boats does not qualify. As well, a compulsory VAT registration is required for a supplier of excisable goods to the UK (like tobacco and alcohol).

If sales to final consumers in a member state exceed €100,000, the exporting vendor is required to charge VAT at the rate applicable in the importing member state. If a supplier provides a distant sales service to several EU member states, a separate accounting of sold goods in regards to VAT calculation is required. The supplier then must seek a VAT registration (and charge applicable rate) in each such country where the volume of sales in any 12 consecutive months exceeds local threshold.

A special threshold amount of €35,000 is allowed if the importing member state may prove that without the lower threshold amount competition within the member state would be distorted.

Supply of services

A supply of services is the supply of anything that is not a good.

The general rule for determining the place of supply is the place where the supplier of the services is established (or "belongs"), such as a fixed establishment where the service is supplied, the supplier's permanent address, or where the supplier usually resides. VAT is then charged at the rate applicable in the member state where the place of supply of the services is located and is collected by that member state.

This general rule for the place of supply of services (the place where the supplier is established) is subject to several exceptions. Most of the exceptions switch the place of supply to the place where the services are received. Such exceptions include the:

• supply of transportation services,
• supply of cultural services,
• supply of artistic services,
• supply of sporting services,
• supply of scientific services,
• supply of educational services,
• supply of ancillary transport services,
• supply of services related to transfer pricing services,

and many miscellaneous services including

• supply of legal services,
• supply of banking and financial services,
• supply of telecommunications,
• supply of broadcasting,
• electronically supplied services,
• supply of services from engineers and accountants,
• supply of advertising services, and
• supply of intellectual property services.

The place of supply of services related to real estate is where the real estate is located.

There are special rules for determining the place of supply of services delivered electronically.

The mechanism for collecting VAT when the place of supply is not in the same member state as the supplier is similar to that used for Intra-Community Acquisitions of goods, i.e. zero-rating by the supplier and reverse charge by the recipient of the services (if a taxable person). But if the recipient of the services is not a taxable person (i.e. a final consumer), the supplier must generally charge VAT at the rate applicable in its own member state.

If the place of supply is outside the EU, no VAT is charged.

Importation of goods

Goods imported from non-member states are subject to VAT at the rate applicable in the member state into which the goods are imported, regardless of whether the goods are received for consideration and regardless of who imports the goods. VAT is generally charged at the border, at the same time as customs duty and using the price determined by customs. However as a result of the action of an EU administrative VAT relief an exception called Low Value Consignment Relief is allowed on shipments of a low value.

VAT paid on importation is treated as input VAT in the same way as VAT on domestic purchases.

Following changes introduced on 1 July 2003, non-EU businesses providing digital electronic commerce and entertainment products and services to EU countries are also required to register with the tax authorities in the relevant EU member state, and to collect VAT on their sales at the appropriate rate, according to the location of the purchaser. Alternatively, under a special scheme, non-EU businesses may register and account for VAT on only one EU member state. This produces distortions as the rate of VAT is that of the member state of registration, not where the customer is located, and an alternative approach is therefore under negotiation, whereby VAT is charged at the rate of the member state where the purchaser is located.

Legacy derogations

Some goods and services are "zero-rated". The zero-rate is a positive rate of tax calculated at 0%. Supplies subject to the zero-rate are still "taxable supplies", that is, they have VAT charged on them. In the UK, examples include most food, books, medications, and certain kinds of transport. The zero-rate is not featured in the EU Sixth Directive as it was intended that the minimum VAT rate throughout Europe would be 5%. However, zero-rating remains in some Member States, most notably the UK and Ireland, as a legacy of pre-EU legislation. These Member States have been granted a derogation to continue existing zero-rating but cannot add new goods or services.

The UK also applies the lower rate on some products depending on how the supply is being made; for example, milk products bought from a retailer are subject to VAT at 0% rate, but milk drinks bought to be drunk in a restaurant are subject to VAT at the standard 20% rate.

Exemption from VAT

There is a distinction between goods and services that are exempt from VAT and those that are subject to 0% VAT. The seller of exempt goods is not entitled to reclaim VAT on business purchases, whereas the seller of goods and services rated at 0% is entitled. An example would be a book manufacturer in Ireland, who purchases paper including VAT at the 21% rate, and sells books at the 0% rate; the manufacturer would be entitled to reclaim the VAT paid on the paper as the business is making taxable supplies. In countries like Sweden and Finland non-profit organisations such as sports clubs are exempt from all VAT, and has to pay full VAT for purchases without reclaim. The EU commission want to abolish this and some other exemptions. There are objections from sports federations since this would create cost and a lot of bureaucracy for voluntary staff.

Eighth and Thirteenth Directives

Businesses can be required to register for VAT in EU member states, other than the one in which they are based if they supply goods via mail order to those states over a certain threshold. Businesses that are established in one member state but receive supplies in another member state may be able to reclaim VAT charged in the second state. To do so, businesses have a value added tax identification number. A similar directive, the Thirteenth VAT Directive, also allows businesses established outside the EU to recover VAT in certain circumstances.

Impact

In France, it is the most important source of state finance, accounting for approximately 45% of state revenues.

VAT fraud

Main article: Missing trader fraud

One type of VAT fraud is missing trader fraud (also called "Missing Trader Intra-Community", "MTIC", or "carousel fraud") is the theft of VAT from a government by exploiting the way VAT is treated within multi-jurisdictional trading. The fraud exploits the fact that the movement of goods between member states is zero-rated. The fraudster charges VAT on the sale of goods, and then instead of paying this over to the government's collection authority, simply absconds, taking the VAT with him.

VAT rates

Jurisdiction	Rate (Standard)	Rate (Reduced)	Abbr.	Name
Austria	20%	12% or 10%	MwSt. / USt.	German: Mehrwertsteuer / Umsatzsteuer
Belgium	21%	12% or 6%	BTW TVA MWSt	Dutch: Belasting over de toegevoegde waarde French: Taxe sur la Valeur Ajoutée German: Mehrwertsteuer
Bulgaria	20%	9%	ДДС	[Данък върху добавената стойност (Danăk vărhu dobavenata stojnost)] Error: {{Lang-xx}}: text has italic markup (help)
Cyprus	18% (19% in Jan 2014 [2])	8% or 5%	ΦΠΑ	[Φόρος Προστιθέμενης Αξίας (Fóros Prastithémenes Axías)] Error: {{Lang-xx}}: text has italic markup (help)
Czech Republic	21%	15%	DPH	Czech: Daň z přidané hodnoty
Croatia	25%	10%	PDV	Croatian: Porez na dodanu vrijednost
Denmark	25%	none	moms	Danish: Meromsætningsafgift
Estonia	20%	9%	km	Estonian: käibemaks
Finland	24%	14% or 10%	ALV Moms	Finnish: Arvonlisävero Swedish: Mervärdesskatt
France	19.6% (Planned rise to 20% from 1 Jan 2014) [3]	7%, 5.5% or 2.1%	TVA	French: Taxe sur la valeur ajoutée
Germany	19%	7%	MwSt. / USt.	German: Mehrwertsteuer / Umsatzsteuer
Greece	23%	13% or 6.5%	ΦΠΑ	[Φόρος Προστιθέμενης Αξίας (Fóros Prastithémenes Axías)] Error: {{Lang-xx}}: text has italic markup (help)
Hungary	27%	18% or 5%	ÁFA	Hungarian: általános forgalmi adó
Ireland	23%	13.5%, 9%, 5.2% 4.8% or 0%	VAT CBL	Value Added Tax Irish: Cáin Bhreisluacha
Italy	22%	10% or 4%	IVA	Italian: Imposta sul Valore Aggiunto
Latvia	21%	12%	PVN	Latvian: Pievienotās vērtības nodoklis
Lithuania	21%	9% or 5%	PVM	Lithuanian: Pridėtinės vertės mokestis
Luxembourg	15%	12%, 9%, 6%, or 3%	TVA	French: Taxe sur la Valeur Ajoutée
Malta	18%	7%, 5% or 0%	VAT	Maltese: Taxxa fuq il-Valur Miżjud
Netherlands	21%	6%	BTW	Dutch: Belasting toegevoegde waarde
Poland	23%	8%, 5%	PTU / VAT	Polish: Podatek od towarów i usług
Portugal	23%	13% or 6%	IVA	Portuguese: Imposto sobre o Valor Acrescentado
Madeira Azores	22%	12% or 5%	IVA	Portuguese: Imposto sobre o Valor Acrescentado
Romania	24%	9% or 5%	TVA	Romanian: Taxa pe valoarea adăugată
Slovakia	20%	10%	DPH	Slovak: Daň z pridanej hodnoty
Slovenia	22%	9.5%	DDV	Slovene: Davek na dodano vrednost
Spain	21%	10% or 4%	IVA	Spanish: Impuesto sobre el valor añadido
Canary Islands	7% (is outside the European Union VAT area)	0% or 2%	IGIC	Spanish: Impuesto General Indirecto Canario
Sweden	25%	12% or 6%	Moms	Swedish: Mervärdesskatt
United Kingdom Isle of Man	20%	5% and 0%	VAT TAW	English: Value Added Tax Welsh: Treth ar Werth
Gibraltar	not applicable (is outside the European Union VAT area)

EU VAT area

The EU VAT area is a territory consisting of territory of all member states of the European Union and certain other countries which follow the European Union's (EU) rules on value added tax (VAT). The principle is also valid for some special taxes on products like alcohol and tobacco.

Goods are only considered as imported or exported if they enter or leave the area. The VAT percentage does, however, differ from country to country within the area, which is a complicating factor, especially when, for example, an Internet-based reseller in one EU country sells to an EU customer in a different EU country.

When goods or services are sold to a company across a border within the area, either the buyer pays the sales country's VAT to the seller, or it is possible to register the transaction as an inter-company sale with no VAT being collected. If VAT has been paid the buyer cannot include it in their VAT accounts like VAT paid locally.

When goods or services are sold (and sent) to a private person across a border within the area, the buyer usually pays the sales country's VAT to the seller, and does not pay any VAT in the buyer's country. But if the seller's annual sales of goods to the buyer's country exceed a threshold (which varies by country), the seller must instead charge VAT in the buyer's country. These are known as the distance selling rules. When a private person visits another EU country and buys goods, the seller does not have to take special action, just claim the local VAT, and the buyer can bring it home for personal use or gifts without limits.

EU sellers may validate the VAT number of a buyer residing within the EU Value Added Tax Area using VIES.

Included areas

• All EU countries except most non-European areas (see below)
• Akrotiri and Dhekelia (included with Cyprus)
• Azores & Madeira (included with Portugal)
• Isle of Man (included with the United Kingdom)
• Monaco (included with France & charges the same rate of 19.6%)

Excluded areas

• not included in Denmark:
  • Faroe Islands ¹
  • Greenland ¹

• not included in Finland:
  • Åland²

• not included in France:
  • Overseas departments, such as Réunion and Guadeloupe ²
  • Overseas collectivities ¹

• not included in Germany:
  • Büsingen am Hochrhein ²
  • Heligoland ²

• not included in Greece:
  • Mount Athos ²

• not included in Italy: some parts bordering to Switzerland
  • Campione d'Italia ²
  • Livigno ²
  • The Italian waters of Lake Lugano ²

• not included in Netherlands:
  • Aruba ¹
  • Curaçao ¹
  • Sint Maarten ¹
  • The Caribbean Netherlands ¹

• not included in Spain:
  • Canary Islands ²
  • Ceuta ²
  • Melilla ²

• not included in United Kingdom:
  • Gibraltar ³
  • Channel Islands ²
  • British Overseas Territories ¹

Reasons:

1. Not part of the EU as overseas countries and territories.
2. Areas excluded from VAT area by Article 6 of Council Directive 2006/112/EC of 28 November 2006 (as amended) on the common system of value added tax (OJ L 347, 11.12.2006, p. 1).
3. Excluded by Article 28 of the Act concerning the conditions of Accession and the Adjustments to the Treaties (22 January 1972).

See also

• Special member state territories and the European Union
• VAT identification number

See also

• Sales tax
• VAT-free imports from the Channel Islands
• European Customs Information Portal (ECIP)
• VAT Information Exchange System (VIES)

External links

• 6th Council Directive 77/388/EEC of 17 May 1977 on the harmonization of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (not in force: repealed by directive 2006/112/EC)
• 8th Council Directive 79/1072/EEC of 6 December 1979 on the harmonization of the laws of the Member States relating to turnover taxes – Arrangements for the refund of value added tax to taxable persons not established in the territory of the country (not in force: repealed by directive 2008/9/EC)
• 13th Council Directive 86/560/EEC of 17 November 1986 on the harmonization of the laws of the Member States relating to turnover taxes – Arrangements for the refund of value added tax to taxable persons not established in Community territory
• Council Regulation (EC) No 1798/2003 of 7 October 2003 on administrative cooperation in the field of value added tax
• Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax
• Council Directive 2008/9/EC of 12 February 2008 laying down detailed rules for the refund of value added tax, provided for in Directive 2006/112/EC, to taxable persons not established in the Member State of refund but established in another Member State
• VAT refunds
• eLearning courses on VAT
• Online tax database VIES
• "VAT Rates Applied in the Member States of the European Union" (PDF). European Commission. 1 July 2012.