The Value-added tax reference article from the English Wikipedia on 24-Apr-2004 (provided by Fixed Reference: snapshots of Wikipedia from wikipedia.org)

Value-added tax

Value-added tax (VAT), is a consumption tax levied on the sale of goods and services. In some countries, including Singapore, Australia, New Zealand and Canada, this tax is known as "goods and services tax" or GST. VAT is an indirect tax, in that the tax is collected from someone other than the person who actually bears the cost of the tax.

Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT where they use the supplies that they receive that bear VAT to make further supplies that also bear VAT. In this way, the total tax levied at each stage in the economic chain of supply is a fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. VAT was invented because very high sales taxes and tariffs encourage cheating and smuggling.

Table of contents

1 VAT in the European Union 2 Comparison with Sales Tax 3 Example 4 VAT Rates 5 External links

VAT in the European Union

A common VAT system is compulsory for members of the European Union. The EU VAT system is imposed by a series of European Union directives, the most important of which is the Sixth VAT Directive, Directive 77/388/EC.

Under the EU system of VAT, where a person carrying on an economic activity supplies goods and services to another person, and the value of the supplies passes financial limits, the supplier is required to register with the local taxation authorities and charge its customers, and account to the local taxation authority for, VAT (although the prive may be inclusive of VAT, so VAT is not paid in addition to the agreed price, or exclusive of VAT, so VAT is payable on top of the agreed price). In the UK, Customs and Excise is responsible for administering VAT.

The VAT charged by a business and paid by its customers is known as output VAT (i.e. the VAT on its outputs). VAT paid by a business to other businesses on the suplpies that it receives is known as input VAT (i.e. the VAT in its inputs). A business is generally able to recover its input VAT to the extent that the input VAT is attributible to 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.

The minimum standard rate of VAT throughout the EU is 15%, although different rates apply in the various member states. Reduced rates of VAT, as low as 5%, are applied in various states on various sorts of supply (for example, domestic fuel and power in the UK).

The Sixth VAT Directive requires certain goods and services to be exempt from VAT (for example, postal services, medical care, 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 financial services). Input VAT that is attributible to exempt supplies is not recoverable, although a business can increase its prices so the customer effectively bears the cost of the VAT.

Finally, some goods and services are "zero rated" (otherwise known, in European language, as exempt with the right to deduct input VAT). This means that no VAT is charged on the supply of those goods and services (i.e. they are effectively exempt), but the supplier is still able to recover input VAT attributible to these supplies. This effectively provides a governmental subsidy for these supplies. In the UK, examples include most food, books, drugs, and certain kinds of transport. Similar treatment applies to goods and services which are "exported" from the EU.

VAT is generally charged as a customs duty when goods enter the EU. Acquisition VAT is payable when goods are acquired from another EU member state. EU businesses are often required to charge themselves VAT under the reverse charge mechanism where services are received from another member state or from outside of the EU.

Special provisions can required businesses to register for VAT in another EU member state where they supply goods via mail order.

Finally, following changes introduced on July 1, 2003 (under directive 2002/38/EC), non-EU businesses providing digital electronic commerce and entertainment products and services to EU countries are also required to register with the European tax authorities, and to collect VAT on their sales at the appropriate rate according to the location of the purchaser.

Comparison with Sales Tax

The difference from conventional sales tax is that it is levied on every business as a fraction of the price of each sale they make, but they are in turn reimbursed VAT on their purchases, hence the tax is applied to the value of the goods that has been added.

Example

Without a VAT:

• A widget manufacturer spends $1 on raw materials to make a widget.
• The widget is sold wholesale to a widget retailer for $1.20.
• The widget retailer then sells the widget to a widget consumer for $1.50.

Adding on a 10% VAT:

• The manufacturer pays $1.10 for the raw materials, and the seller of the raw pays the government $0.10.
• The manufacturer charges the retailer $1.32 and pays the government $0.02 ($0.12 minus $0.10), leaving the same profit of $0.20.
• The retailer charges the consumer $1.65 and pays the government $0.03 ($0.15 minus $0.12), , leaving the same profit of $0.30

So the consumer has paid 10% ($0.15) extra. The businesses have not lost anything directly to the tax, but they do have the extra paperwork to do so that they correctly pass on to the government the difference between what they collect in VAT (an 11th of their income) and what they spend in VAT (an 11th of their expenditure).

VAT Rates

Country	Rate
	Standard	Reduced
Singapore	5.0 %
Canada	7.0%
Switzerland	7.6 %	2.3 %
Australia	10.0 %
New Zealand	12.5 %
Luxembourg	15.0 %	3.0 %
Germany	16.0 %	7.0 %
Spain	16.0 %	7.0 %
Portugal	17.0 %	12.0 %
Greece	18.0 %	8.0 %
United Kingdom	17.5 %	5.0 %
Estonia	18.0 %
Netherlands	19.0 %	6.0 %
Romania	19.0 %	9.0 %
France	19.6 %	5.5 %
Italy	20.0 %	10.0 %
Austria	20.0 %	14.0 %
Ireland	21.0 %	12.5 %
Belgium	21.0 %	12.0 % or 6 %
Czech Republic	22.0 %	5.0 %
Finland	22.0 %	17.0 %
Croatia	22.0 %
Norway	24.0 %
Hungary	25.0 %	12.0 %
Sweden	25.0 %	12.0 % or 6.0 %
Denmark	25.0 %

See also: Sales tax, GST (Canada)

External links

• European VAT rates by service type.
• VAT/GST sales tax rates in over two hundred countries around the world

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