European Union Value Added Tax Totally Explained

Everything about The European Union Value Added Tax totally explained

The European Union Value Added Tax ("EU VAT") is a value added tax ("VAT") encompassing member states in the European Union Value Added Tax Area. Joining in this is compulsory for member states of the European Union. As a consumption tax, the EU VAT taxes the consumption of goods and services in the EU VAT area. The EU VAT's key issue asks where the supply and consumption occurs thereby determining which member state will collect the VAT and what VAT rate will be charged.
   Different rates of VAT apply in different EU member states. The minimum standard rate of VAT throughout the EU is 15%, although reduced rates of VAT, as low as 5%, are applied in various states on various sorts of supply (for example, domestic fuel and power in the UK). The maximum rate in the EU is 25%.
   VAT that's charged by a business and paid by its customers is known as "output VAT" (that is, VAT on its output supplies). VAT that's 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's an excess, by claiming a repayment from the government.
   The Sixth VAT Directive requires certain goods and services 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's attributable to exempt supplies isn't recoverable, although a business can increase its prices so the customer effectively bears the cost of the 'sticking' VAT (the effective rate will be lower than the headline rate and depend on the balance between previously taxed input and labour at the exempt stage).

Authority & Scope of the EU VAT

The European Community Treaty ("EC Treaty") authorized 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 authorized 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 nd the Council is authorized 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 press release announcing a reasoned opinion providing a series of reasons why an infringement is suspected and provides for another 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 submit 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 can't 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 Dircective since the 1st of 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 1st January 2010.

History

VAT was invented by a French economist in 1954 as taxe sur la valeur ajoutée (in French). 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 harmonize the national VAT systems of its member states by issuing the 6th Directive to provide a uniform basis of assessment and replacing the 2nd Directive promulgated in 1967. In 2006, the Council sought to improve on the 6th Directive by recasting it.

6th Directive

The 6th Directive characterized the EU VAT as harmonization of the member states' general tax on the consumption of goods and services. The 6th 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 6th Directive

The recast of the 6th Directive retained many of the same basic principles of the 6th Directive but rearranged their order. The Recast 6th Directive also sought to provide simplifications to the rules and further maintain competitive neutrality between the member states. In addition, the Recast 6th Directive codified a Commission decision rendered in 2000 that provided for funding of the EU with a cut in 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 is a taxable transaction where goods are exchanged for consideration between businesses that are not the final consumer. These businesses are taxable persons who pay VAT on the value they added to the goods and then they receive a corresponding deduction when they resell the goods. The final consumer doesn't receive a deduction thereby causing the final consumer to bear the cost of the VAT. The supply of goods follows a chain of businesses until it reaches the final consumer. To determine who may receive a deduction, which member state may charge the VAT, and what VAT rate shall be charged the EU VAT has divided the supply of goods between domestic supply of goods and intra-community acquisitions.

Domestic supply

A domestic supply of goods is a taxable transaction where goods are received in exchange for consideration within one member state. This one member state then charges VAT on the goods and allows a corresponding deduction 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 with its corresponding VAT rate charged thusly. Between the member states, the exporting member state zero-rates the VAT and the importing member state reverse charges the VAT. This means that the member state of the exporting merchant doesn't collect the VAT and instead gives the exporting merchant a deduction for the VAT it collected from it. Meanwhile, the member state where the goods were imported from the other member state reverse charges the VAT, which means it applies its own VAT rate and the collects the VAT.

Distance sales

When a vendor in one member state sells goods to the final consumer in another member state and the aggregate value of goods sold to consumers in that member state is below 100,000€, then such a sale of goods qualifies for 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 is different from an intra-community acquisition because distance sales involve a vendor/merchant selling goods to the final consumer while intra-community acquisitions involve sales between merchants and doesn't include the final consumer.
A special threshold amount of 35,000€ is allowed if the member state may prove that absent the lower threshold amount competition within the member state would be distorted.

Supply of Services

The EU VAT determines that a supply of services is anything that isn't a good.
The general rule for determining the place of supply to be where where the supplier of the services is established such as a fixed establishment where the service is supplied, the supplier's place of permanent address, or where the supplier usually resides. The VAT rate is then charged at the place of supply of the services and is then collected by that member state.
This general rule for the place of supply of services where the supplier is established is subject to several exceptions that nearly swallow the rule and render the place of the supply of services to where the consumer of the services are located. Such exceptions include services related to real estate, the supply of transportation services, the supply of cultural services, supply of artistic services, the supply of sporting services, the supply of scientific services, the supply of educational services, the supply of ancillary transport services, services related to transfer pricing services, and many miscellaneous services including legal services, banking and financial services, telecommunications, broadcasting, electronically supplied services, services from engineers and accountants, advertising services, and intellectual property services.

Importation of Goods

The member state charges its own VAT rate on goods imported from non-member states regardless if the goods are not 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.
Following changes introduced on July 1, 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", for example they've VAT charged on them. In the UK, examples include most food, books, drugs, and certain kinds of transport. The zero-rate isn't 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, as a legacy of pre-EU legislation. These Member States have been granted a derogation to continue existing zero-rating but can't add new goods or services. The UK also exempts or lowers the rate on some products depending on situation; for example milk products are exempt from VAT, but if you go into a restaurant and drink a milk drink it's VAT-able. Some products such as feminine hygiene products and baby products (nappies etc) are charged at 5% VAT along with domestic fuel.

8th and 13th Directives

Businesses can be required to register for VAT in EU member states, other than the one in which they're based, if they supply goods via mail order to those states, over a certain threshold. Businesses that are established in one member state but which 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's the most important source of state finance, accounting for approximately 45% of state revenues.

VAT 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

Country	Rate		Abbr.	Name
Country	Standard	Reduced	Abbr.	Name
	20%	12% or 10%	USt.	Umsatzsteuer
	21%	12% or 6%	BTW TVA MWSt	Belasting over de toegevoegde waarde Taxe sur la Valeur Ajoutée Mehrwertsteuer
	20%	0% or 7%	ДДС	Данък върху добавената стойност
	15%	5%	ΦΠΑ	Φόρος Προστιθέμενης Αξίας
	19%	9%	DPH	Daň z přidané hodnoty
	25%	none	moms	Merværdiafgift
	18%	5%	km	käibemaks
	22%	17% or 8%	ALV Moms	Arvonlisävero Mervärdesskatt
	19.6%	5.5% or 2.1%	TVA	Taxe sur la valeur ajoutée
	19%	7%	MwSt./USt.	Mehrwertsteuer/Umsatzsteuer
	19%	9% or 4.5% (reduced by 30% to 13%, 6% and 3% on islands)	ΦΠΑ	Φόρος Προστιθέμενης Αξίας
	20%	5%	ÁFA	általános forgalmi adó
	21%	13.5%, 4.8% or 0%	VAT CBL	Value Added Tax (English) Cáin Bhreisluacha (Irish Gaelic)
	20%	10%, 6%, or 4%	IVA	Imposta sul Valore Aggiunto
	18%	5%	PVN	Pievienotās vērtības nodoklis
	18%	9% or 5%	PVM	Pridėtinės vertės mokestis
	15%	12%, 9%, 6%, or 3%	TVA	Taxe sur la Valeur Ajoutée
	18%	5%	VAT	Taxxa tal-Valur Miżjud
	19%	6% or 0%	BTW	Belasting toegevoegde waarde
	22%	7%, 3% or 0%	PTU/VAT	Podatek od towarów i usług
	21%	12% or 5%	IVA	Imposto sobre o Valor Acrescentado
Madeira and Azores	15%	8% or 4%	IVA	Imposto sobre o Valor Acrescentado
	19%	9%	TVA	Taxa pe valoarea adăugată
	19%	10%	DPH	Daň z pridanej hodnoty
	20%	8.5%	DDV	Davek na dodano vrednost
	16%	7% or 4%	IVA	Impuesto sobre el valor añadido
Canary Islands	5%	0% or 2%	IGIC	Impuesto General Indirecto Canario
	25%	12% or 6%	Moms	Mervärdesskatt
	17.5%	5% or 0%	VAT	Value Added Tax
Jersey	3% (From May 1st 2008)	3%	GST	Goods & Services Tax

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