The European Union value added tax (or EU VAT) is the consumption tax system common to nations in the EU VAT area. The EU itself does not collect the tax, but EU member states are each required to adopt a value added tax that complies with the EU VAT system. Some of the VAT collected by member states is used to fund the European Union.
The EU VAT taxes the consumption of goods and services in the EU VAT area. The EU VAT system 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% or 0%, are applied in various states on various sorts of supply (for example, domestic fuel and power in the UK).
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.
The VAT Directive (prior to 1 January 2007 known as 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 is attributable to exempt supplies is not 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).
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The European Community Treaty ("EC Treaty") authorized the Council of the European Union ("Council") and European Commission ("Commission") to make Regulations and issue Directives.[1] Regulations are binding in their entirety and are directly applicable to all member states.[2] Directives, meanwhile, are binding as to their required result allowing each member state to choose the method and form of implementing the Directive.[3]
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.[4] When a member state has infringed the EC Treaty then the Commission nd the Council is authorized to begin a process of coercing compliance.[5] 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.[5] 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.[5] 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").[5]
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.[6] This Directive has been updated and replaced by another Directive[7] 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 1 January 2010.[8]
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 harmonize 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.[9] In 2006, the Council sought to improve on the Sixth Directive by recasting it.[10]
The Sixth Directive characterised the EU VAT as harmonisation of the member states' general tax on the consumption of goods and services.[11] The Sixth Directive defined a taxable transaction within the EU VAT scheme as a transaction involving the supply of goods,[12] the supply of services,[13] and the importation of goods.[14]
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.[15] 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.[16]
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.[17] 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.[18] 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.[19] 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.[20]
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.[20]
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.[21] Distance sales treatment allows the vendor to apply domestic place of supply rules for determining which member state collects the VAT.[21] 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.[22] 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 absent the lower threshold amount competition within the member state would be distorted.[21]
A supply of services is the supply of anything that is not a good.[23]
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.[24] 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.[24]
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.[24]
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.
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.[25] VAT is generally charged at the border, at the same time as customs duty and using the price determined by customs.[26] 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.[27] Alternatively, under a special scheme, non-EU businesses may register and account for VAT on only one EU member state.[27] 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.[27]
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.
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.[28] An example would be a book manufacturer in Ireland, who purchases paper including VAT at the 21% rate,[29] and sells books at the 0% rate;[30] 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. The EU commission want to abolish this and some other exemptions[31]. There are objections from sports federations since this would create cost and a lot of bureaucracy for voluntary staff[32].
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.[33] 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.[34]
In France, it is the most important source of state finance, accounting for approximately 45% of state revenues.
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.
| Jurisdiction | Rate (Standard) | Rate (Reduced) | Abbr. | Name |
|---|---|---|---|---|
| Austria | 20% | 12% or 10% | MwSt./USt. | Mehrwertsteuer/Umsatzsteuer |
| Belgium | 21% | 12% or 6% | BTW TVA MWSt |
Belasting over de toegevoegde waarde Taxe sur la Valeur Ajoutée Mehrwertsteuer |
| Bulgaria | 20% | 9%[35] | ДДС | Данък върху добавената стойност |
| Cyprus | 15% | 8% or 5%[35] | ΦΠΑ | Φόρος Προστιθέμενης Αξίας |
| Czech Republic | 20% | 10% | DPH | Daň z přidané hodnoty |
| Denmark | 25% | none | moms | Meromsætningsafgift |
| Estonia | 20% | 9% | km | käibemaks |
| Finland | 23% | 13% or 9%[36] | ALV Moms |
Arvonlisävero Mervärdesskatt |
| France [37] | 19.6% | 5.5% or 2.1% | TVA | Taxe sur la valeur ajoutée |
| Germany | 19% | 7% | MwSt./USt. | Mehrwertsteuer/Umsatzsteuer |
| Greece | 23% [2] | 13% or 6.5% (reduced by 30% to 13%, 6% and 3% on islands) [3] |
ΦΠΑ | Φόρος Προστιθέμενης Αξίας |
| Hungary | 27% | 18% or 5%[35] | ÁFA | általános forgalmi adó |
| Republic of Ireland | 23%[38] | 13.5%, 9%, 5.2% 4.8% or 0% | VAT CBL |
Value Added Tax (English) Cáin Bhreisluacha (Irish) |
| Italy | 21% | 10% or 4% | IVA | Imposta sul Valore Aggiunto |
| Latvia | 22% | 12% | PVN | Pievienotās vērtības nodoklis |
| Lithuania | 21% | 9% or 5% | PVM | Pridėtinės vertės mokestis |
| Luxembourg | 15% | 12%, 9%, 6%, or 3% | TVA | Taxe sur la Valeur Ajoutée |
| Malta | 18% | 7%, 5% or 0%[35] | VAT | Taxxa tal-Valur Miżjud |
| Netherlands | 19% | 6% | BTW | Belasting over de toegevoegde waarde |
| Poland | 23% | 8%, 5%[35] | PTU/VAT | Podatek od towarów i usług |
| Portugal | 23% | 13% or 6% | IVA | Imposto sobre o Valor Acrescentado |
| Madeira, Azores | 16% | 8% or 4% | IVA | Imposto sobre o Valor Acrescentado |
| Romania | 24% | 9% or 5%[35] | TVA | Taxa pe valoarea adăugată |
| Slovakia | 20% | 10% | DPH | Daň z pridanej hodnoty |
| Slovenia | 20% | 8.5% | DDV | Davek na dodano vrednost |
| Spain | 18%[39] | 8% or 4%[39] | IVA | Impuesto sobre el valor añadido |
| Canary Islands | 5% (is outside the European Union VAT area) | 0% or 2% | IGIC | Impuesto General Indirecto Canario |
| Sweden | 25% | 12% or 6% | Moms | Mervärdesskatt |
| United Kingdom | 20% | 5% or 0% | VAT | Value Added Tax |
| Gibraltar | 0% (is outside the European Union VAT area) |