Taxation and Customs Union

Updated on May 23, 2022

What is VAT?

In the European Union, a tax on the value added to products and services, known as the VAT, is levied on a wide range of commodities and services. All goods and services bought and sold in the EU for use or consumption are covered by this rule. As a result, goods and services sold to customers in other countries are usually exempt from VAT. Imports, on the other hand, are taxed in order to maintain a level playing field for EU producers on the European market, where they compete against providers from outside the Union.

Value added tax is

all commercial activities involving the manufacture and distribution of products and services are taxed under this basic rule However, if this person’s yearly revenue is below a specific threshold (the threshold varies by Member State), they are exempt from charging VAT on their sales.
Consumption taxes are levied because the final consumer bears the brunt of the burden. It does not impose any fees on commercial enterprises.
This implies the tax burden can be clearly seen at every step of the production and distribution chain.
Taxpayers (i.e., VAT-registered firms) subtract the amount of tax they have paid to other taxable individuals on purchases for their business activities from the VAT they have collected. This approach assures that the tax is neutral, regardless of the number of transactions that take place in the transaction.
payed to the revenue authorities by the “taxable person” (the seller), although it is actually a cost that is passed on from buyer to seller. As a result, it is a “hidden” tax.

Why do all EU countries use VAT?

It was at this time when six of the EU’s founding members were using a variety of indirect taxes, most of them cascade taxes. Each stage of the production process was taxed separately, making it hard to know exactly how much tax was included in a given product’s final price due to these multi-stage taxes. As a result, EU countries were constantly at risk of subsidising their exports by an overestimation of taxes refundable on exporting, whether on purpose or by accident.
Europe needed a neutral and transparent turnover tax system that guaranteed tax neutrality as well as permitted the exact amount of taxes to be refunded at the point of export in order to create an efficient, single market. Tax-free exports can be guaranteed by VAT as explained in VAT on imported and exported goods.

How is it charged?

A taxable person is entitled to deduct all taxes already paid from the sale price when calculating the amount of VAT that must be paid on a transaction. As a result, tax is paid solely on the value created at each stage of production and distribution, avoiding the double taxation that would otherwise occur. Since each stage adds up to the ultimate price, each stage also adds up to each stage’s VAT, hence the total VAT paid equals the sum of the total VAT paid at each stage.

VAT traders are granted a unique identifier and are required to disclose the amount of VAT they charge their clients on their invoices. A registered trader can deduct the amount of tax paid by the customer, and the ultimate consumer can see how much tax he has paid. To a certain extent, the system is self-policing in this manner, ensuring that the correct amount of VAT is paid.

Example

Stage 1

 

A smelter purchases iron ore from a mine. If the sale is worth €1000, the mine will charge its consumers €1200 if VAT is 20%. If it had purchased €240 worth of tools, including €40 VAT in the same accounting period, it would have to pay €160 (€200 minus €40) to the government. Additionally, the treasury obtains the €40, and now receives €160, which is the right amount of tax payable on the sale of iron ore.

Supply: 1000 Euros VAT on supply: 200 Euros VAT on purchases: 40 Euros VAT to be paid net: 160 Euros

Stage 2

On top of that, smelters have paid €200 VAT to the mine and perhaps another €20 VAT on items like furniture, stationery, and so on. Smelters charge €2400, including €400 in value-added tax, for every tonne of steel they produce and sell. After deducting the €220 he paid for his inputs, the smelter sends an additional €180 to the government. €180 from the smelter, plus €160 from the mine and an additional $40 in tool and stationery fees from the mine’s tool provider, and €20 from the smelter’s furnishing/stationary supplier.

Euros two thousand
VAT: €400 for the supply
Amount paid in sales tax: €220
Net VAT to be paid: €180 €180 (paid by the smelter) + €160 (paid by the mine) + €40 (paid by the supplier to the mine) + €20 (paid by the supplier to the smelter) = €400 or the proper amount of VAT on a sale of €2000..

VAT rates

In accordance with EU law, the standard VAT rate must be at least 15% and the reduced VAT rate must be at least 5%. (only for supplies of goods and services referred to in an exhaustive list).

The rates that are actually used vary from one EU country to the next, as well as between different sorts of items. Certain EU countries have also maintained different prices for specific products.

A country’s VAT authority is the best resource for current VAT rates for a specific product in an EU jurisdiction. The EU information sheet gives a rundown of the various rates in use among the EU member states.

More information on the VAT rate

What is the Commission’s role in application of the EU VAT system?

It is the Commission’s job to ensure that the VAT Directive is applied correctly. It is the duty of each Member State to implement and enforce these provisions in accordance with national law. The Commission, as “Guardian of the Treaties,” is responsible for ensuring that EU law is reflected in national legislation and practise.

How do the EU countries apply VAT?

The VAT Directive’s common rules are adopted by EU countries in their own laws. As a result, each EU country’s administrative and practical methods differ.

More information about national VAT regulations can be found here.

Can the Commission intervene in specific cases of application of VAT Directive?

The European Commission lacks the authority to intervene in the individual situations of individual taxpayers or to express an opinion based on factual findings.

There is a possibility that the Commission will take action against a Member State. To the exclusion of a specific taxpayer, only the Commission and the Member State are deemed parties to this proceeding. The outcome of such a technique does not have a direct effect on specific instances.

Because of this, the only way to seek restitution in specific circumstances is to use the national channels of redress – administrative or judicial. Submitting your case to SOLVIT is also an option.