What Is a VAT Tax?
VAT is an acronym for value-added tax. It is used in every member state of the European Union (EU) as well as in other nations such as Japan and Australia. The tax is added onto the value of the goods or services being purchased which are intended for consumption within the country or, in the case of the EU, in any of the member states.
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Tax Type
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The VAT is considered a general tax because it is applied to all commercial activities that involve the provision of a service or the distribution of a good. However, it can also be considered a consumption tax, because it is the end user or final consumer of a product or service who ultimately pays the VAT. The tax is applied in parts along the production process of a product or development of a service so that each business passes the tax along to the next consumer. The rate of the VAT that is charged varies from country to country, but must meet the minimum taxation required by the country's current legislation regarding VAT.
VAT Collection
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Imagine a company that mines ore. They then sell ore to a company that makes jewelry. That company then sells the jewelry to a jeweler, who finally sells to the customer. During each transaction, the seller charges the appropriate VAT to the buyer. The seller is then required to pay that collected VAT to the treasury. However, the seller is allowed to deduct any VAT already paid before sending in the remaining VAT.
Therefore, if the jeweler charges €1,000 for a ring and the VAT is 20 percent, the customer pays €200 VAT to the jeweler. The jeweler reimburses himself for the VAT he paid to the jewelry-making company and then sends the rest of the VAT to the treasury. The jewelry-making company and the mine would have done the same. So in the end, the treasury receives partial payments from each business involved in developing the product, which will add up to the full €200 VAT paid by the customer.
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Exports
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When a product is exported to another country, VAT is not charged. The VAT that has already been paid during the production process may be deducted by the exporter. This results in the export price being effectively VAT-free. If a product is exported from one member state of the EU to another member state of the EU, the VAT due can be deducted (zero-rated) if the recipient of the product is a VAT-registered trader.
Imports
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When products are imported into countries using a VAT system, the VAT must be paid immediately when the goods are imported. Levying this tax helps ensure that imported products will compete fairly with products that were manufactured within the country.
VAT Refund
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Individuals who are not citizens or residents of the country where they were charged VAT are usually eligible for a refund of the VAT paid on any goods such as gifts and souvenirs that they plan to take back home with them. However, only businesses are able to receive a refund of VAT paid on services such as hotel rooms or conference fees. Contact the VAT authority of the country where you plan to visit to understand that country's full rules regarding VAT refunds.
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References
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