Taxation and Customs Union

Updated on July 20, 2022

What is VAT?

Value-added taxation (VAT) is a method used by the European Union to collect revenue from consumers by taxing the amount of money spent on the final product or service. All goods and services bought and sold in the EU for use or consumption are covered by this rule.

Since exports are exempt from VAT, neither goods nor services sold to international clients are.

Imports, on the other hand, are taxed to ensure that EU producers can compete on an equal footing with foreign providers on the European market.

Value-added tax is

a tax on the manufacture, distribution, and providing of goods and services that is generally applicable to all commercial activities.

According to EU regulations, if a business’s yearly turnover falls below a certain threshold (the threshold), the business does not have to charge VAT on sales.
It’s called a consumption tax since it’s paid for by the person who buys the product in the end. To put it another way: It’s not a corporate tax.
This implies the tax burden can be clearly seen at every step of the production and distribution chain.
Partial payments are made by taxable people (i.e. VAT-registered firms) by deducting the VAT they have paid to other taxable persons on purchases they have made for their business activities from the VAT they have collected. In order to keep the tax neutral regardless of how many transactions are involved, this approach was devised.
paid to the tax authorities by the “taxable person,” i.e., the person who sells the products, but it is essentially a payment made by the buyer to the seller. As a result, it is a “hidden” tax.

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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.

As a result of these multi-stage taxes, it was hard to identify how much tax was actually included in the final price of a given product because each stage of the production process was taxed separately.

As a result, EU countries were constantly at risk of subsidizing 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 because of its transparency and completeness, as mentioned in VAT on import and exports.

How is it charged?

Taxable persons are allowed to reduce whatever tax they’ve already paid from their sales price when calculating the amount of VAT they owe on a sale.

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 VAT paid at each stage.

VAT-registered businesses are assigned a unique identification number and are required to display the VAT they collect from clients on their invoices.

A registered trader who buys the product knows exactly how much he can deduct, and the consumer knows exactly how much tax he has to pay on the finished product. To a certain extent, the system is self-policing in this manner.

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Example

Iron ore is mined and sold to a smelter in the first stage. 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 owe €160 (€200 minus €40) to the government.

The Treasury also receives the additional €40, bringing its total to €200, the right VAT owed on the sale of iron ore.

Input: €1000, €200 VAT on supplies, €40 VAT on purchases
There is a final VAT payment of €160 to be made at this stage.
The smelter has paid the mine €200 in VAT and, say, another €20 in VAT on other purchases, such as furniture, stationery, etc. If you buy €2000 worth of steel, you’ll have to pay €2400, which includes VAT. This means the smelter deducts his €220 in input costs and pays €180 to the government. The smelter pays the treasury €180, plus the mine pays €160, and the tool supplier to the mine pays €40, plus the smelter’s furniture/stationary provider pays €20.

Availability: €2000 per month.
VAT: €400 for the supply
Amount paid in sales tax: €220
In the end, the smelter will pay €180 in VAT, plus the mine will pay €160 in VAT, plus the mine supplier will pay €40 in VAT, and the smelter supplier will pay €20 in VAT. This totals to €400 in VAT, which is the proper amount on a sale of €2000 in value.

VAT rates

In accordance with EU regulations, 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).

Between EU countries and between different products, the actual rates are different.

In addition, certain EU countries have decided to keep their own tariffs in place for particular goods.

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A country’s VAT authority is the best resource for current VAT rates for a specific product in an EU jurisdiction. The EU information document provides an overview of the various rates in all EU countries.

In-depth information on the various VAT rates

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

The European Commission is responsible for ensuring that the VAT Directive is implemented correctly.

They must be translated into national law and applied in accordance with the law of the Member State where the legislation is being implemented. The Commission, as “Guardian of the Treaties,” is responsible for ensuring that EU law is reflected in national legislation and practice.

How do the EU countries apply VAT?

The VAT Directive’s common rules are adopted by EU countries in their own laws. Therefore, each EU country’s administrative procedures and operational methods are unique.

A little more information about country VAT policies

Can the Commission intervene in specific cases of application of the 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.

Member State may be subject to an infringement procedure initiated by the Commission.

Taxpayers are not considered parties in this proceeding, but the Commission and the Member States. As a result, no one’s life is impacted by the results of this surgery.

If you have a specific problem, the only method to get help is to go through your country’s official channels of appeal. SOLVIT is another option for submitting a case.

Some more information on grievances

Find out more about VAT rules by topic here.