The European Union Value Added Tax ("EU VAT") is the system of value added tax ("VAT") adopted by member states in the European Union Value Added Tax Area. The European Union itself does not collect the tax, but member states of the European Union are required to adopt VAT that which comply with the EU VAT system. Some of the VAT collected by member states is used to fund 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 what 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% or 0%, 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 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.
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.
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.
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.
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, 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. The place of supply of services related to real estate is where the real estate is located.
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.
VAT paid on importation is treated as input VAT in the same way as VAT on domestic purchases.