European Union value added tax


The European Union value-added tax is a value added tax on goods and services within the European Union. The EU's institutions do not collect the tax, but EU member states are each required to adopt a value added tax that complies with the EU VAT code. Different rates of VAT apply in different EU member states, ranging from 17% in Luxembourg to 27% in Hungary. The total VAT collected by member states is used as part of the calculation to determine what each state contributes to the EU's budget.

How it works

The EU VAT is based on the "destination principle": the value-added tax is paid to the government of the country in which the consumer who buys the product lives.
Businesses selling a product charge the VAT and the customer pays it. When the customer is a business, the VAT is known as an "input VAT." When a consumer purchases the end product from a business, the tax is called the "output VAT."

Coordinated administration

A value-added tax collected at each stage in the supply chain is remitted to the tax authorities of the member state concerned and forms part of that state's revenue. A small proportion goes to the European Union in the form of a levy.
The co-ordinated administration of value-added tax within the EU VAT area is an important part of the single market. A cross-border VAT is declared in the same way as domestic VAT, which facilitates the elimination of border controls between member states, saving costs and reducing delays. It also simplifies administrative work for freight forwarders. Previously, in spite of the customs union, the differing VAT rates and the separate VAT administration processes resulted in a high administrative and cost burden for cross-border trade.
For private persons who transport to one member state goods purchased while living or traveling in another member state, the VAT is normally payable in the state where the goods were purchased, regardless of any differences in VAT rates between the two states, and any tax payable on distance sales is collected by the seller. However, there are a number of special provisions for particular goods and services.

European Union directive

The aim of the EU VAT directive is to harmonize VATs within the EU VAT area and specifies that VAT rates must be within a certain range.
It has several basic purposes:
The VAT directive is published in all EU official languages.

Authority and scope

The European Community Treaty authorises the Council and the Commission to make regulations and issue directives.
The EU VAT system is regulated by a series of European Union directives, such as the Sixth VAT Directive. This directive has been replaced by another directive since 1 January 2007. Important changes will occur when a subsequent Directive addresses the issue on "the place of supply of services" (hereafter referred to as "and will be enforced on 1 January 2010.

History

Most member states already had a system of VAT before joining the EU but for some countries, such as Spain, VAT was introduced with membership into the EU.
In 1977, the Council of the European Communities sought to harmonise 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. In 2006, the Council sought to improve on the Sixth Directive by recasting it.

First Directive

The First Directive is concerned with harmonising the legislation of the Member States with respect to turnover taxes. This act was adopted to replace the multi-level cumulative indirect taxation system in the EU member states by simplifying tax calculations and neutralising the indirect taxation factor in relation to competition in the EU.

Sixth Directive

The Sixth Directive characterised the EU VAT as harmonisation of the member states' general tax on the consumption of goods and services. The Sixth Directive defined a taxable transaction within the EU VAT scheme as a transaction involving the supply of goods, the supply of services, and the importation of goods.

Eighth Directive

The Eighth Directive focuses on harmonising the legislation of the Member States with respect to turnover taxes—provisions on the reimbursement of value added tax to taxable persons not established on the territory of the country.

Recast Sixth Directive

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 and rearranged text order to make it more readable. 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.

Supply of goods

Domestic supply

A domestic supply of goods is a taxable transaction where goods are received in exchange for consideration within one member state. One member state then charges VAT on the goods and allows a corresponding credit upon resale.

Intra-Community acquisition

An Intra-Community acquisition of goods is a taxable transaction for consideration crossing two or more member states. The place of supply is determined to be the destination member state, and VAT is normally charged at the rate applicable in the destination member state; however there are special provisions for distance selling.
The mechanism for achieving this result is as follows: the exporting member state 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 . The importing member state "reverse charges" the VAT. In other words, 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 normally.

Distance sales

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 in any 12 consecutive months, that sale of goods may qualify for a distance sales treatment. Distance sales treatment allows the vendor to apply domestic place of supply rules for determining which member state collects the VAT. This allows VAT to be charged at the rate applicable in the exporting member state. However, there are some additional restrictions to be met: certain goods do not qualify, and a compulsory VAT registration is required for a supplier of excise goods such as tobacco and alcohol to the U.K.
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 must then seek a VAT registration in each country where the volume of sales in any 12 consecutive months exceeds the local threshold.
A special threshold amount of €35,000 is allowed if the importing member states fears that without the lower threshold amount competition within the member state would be distorted.

Supply of services

A supply of services is the supply of anything that is not a good.
The general rule for determining the place of supply is the place where the supplier of the services is established, such as a fixed establishment where the service is supplied, the supplier's permanent address, or where the supplier usually resides. VAT is charged at the rate applicable in and collected by the member state where the place of supply of the services is located.
This general rule for the place of supply of services is subject to several exceptions if the services are supplied to customers established outside the Community, or to taxable persons established in the Community but not in the same country as the supplier. Most exceptions switch the place of supply to the place of receipt. Supply exceptions include:
Miscellaneous services include:
The place of real estate-related services is where the real estate is located.
There are special rules for determining the place of electronically delivered supply of services.
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 the Intra-Community Acquisitions of goods; zero-rating by the supplier and reverse charge by the recipient of the services for taxable persons. But if the recipient of the services is not a taxable person, 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.

Importation of goods

Goods imported from non-member states are subject to VAT at the rate applicable in the importing member state, whether or not the goods are received for consideration and the importer. VAT is generally charged at the border, at the same time as customs duty and uses the price determined by customs. However, as a result of EU administrative VAT relief, an exception called Low Value Consignment Relief is allowed on low-value shipments.
VAT paid on importation is treated as input VAT in the same way as 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 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.Directive 2002/38/EC. Alternatively, under a special scheme, non-EU and non-digital-goods businesses may register and account for VAT on only one EU member state. This produces distortions as the rate of VAT is that of the member state being registered to, not where the customer is located, and an alternative approach is therefore under negotiation where VAT is charged at the rate of the member state where the purchaser is located.

Exemptions

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. For example, a book manufacturer in Ireland who purchases paper including VAT at the 23% rate and sells books at the 0% rate is entitled to the manufacturer reimbursing them the VAT 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, and have to pay full VAT for purchases without reimbursement. Additionally, in Malta, the purchase of food for human consumption from supermarkets, grocers etc., the purchase of pharmaceutical products, school tuition fees and scheduled bus service fares are exempted from VAT. The EU commission wants to abolish or reduce the scope of exemptions.
There are objections from sports federations since this would create cost and a lot of bureaucracy for voluntary staff.

Eighth and Thirteenth Directives

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 established in one member state but receive supplies in another member state may be able to reclaim VAT charged in the second state. To do so, businesses have a value added tax identification number. The Thirteenth VAT Directive allows businesses established outside the EU to recover VAT in certain circumstances.

Mini One Stop Shop (MOSS)

To comply with these new rules, businesses need to decide if they want to register to use the EU VAT Mini One Stop Shop simplification scheme. Registration for MOSS is voluntary. If suppliers decide against the MOSS, registration will be required in each Member State where B2C supplies of e-services are made. With no minimum turnover threshold for the new EU VAT rules, VAT registration will be required regardless of the value of e-service supply in each Member State. EU MOSS registrations opened on 1 October 2014. As of 1 January 2021, the MOSS will be extended and turned into a OSS:
  • The non-Union scheme for supplies of e-services by taxable persons not established in the EU will be extended to all types of cross-border services to final consumers in the EU;
  • The Union scheme for intra-EU supplies of e-services will be extended to all types of B2C services as well as to intra-EU distance sales of goods and certain domestic supplies facilitated by electronic interfaces. The extension to intra-EU distance sales of goods goes hand in hand with the abolition of the current distance sales threshold, in line with the commitment to apply the destination principle for VAT;
  • An import scheme will be created covering distance sales of goods imported from third countries or territories to customers in the EU up to a value of EUR 150.
  • The seller will charge and collect the VAT at the point of sale to EU customers and declare and pay that VAT globally to the Member State of identification in the OSS. These goods will then benefit from a VAT exemption upon importation, allowing a fast release at customs.
  • The introduction of the import scheme goes hand in hand with the abolition of the current VAT exemption for goods in small consignment of a value of up to EUR 22. This is also in line with the commitment to apply the destination principle for VAT.

    Zero-rate derogation

Some goods and services are "zero-rated". The zero rate is treated as a positive rate of tax calculated at 0%. Supplies subject to the zero rate are still "taxable supplies", that is, they count as having VAT charged on them. In the U.K., examples include most food, books, and medications, along with 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, particularly 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 are not permitted to add new goods or services. An EU member state may uplift their domestic zero rate to a higher rate, for example to 5% or 20%; however, EU VAT rules do not allow a reversal back to the zero rate once it has been given up. Member states may institute a reduced rate on a previously zero-rated item even where EU law does not provide for a reduced rate. On the other hand, if a member state makes an increase from a zero-rate to the prevalent standard rate, they may not decrease to a reduced rate unless specifically provided for in EU VAT Law.
The U.K. 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 in a restaurant are subject to VAT at the standard 20% rate.

VAT rates

Different rates of VAT apply in different EU member states. The lowest standard rate of VAT throughout the EU is 16%, although member states can apply reduced rates of VAT to certain goods and services. Certain goods and services are required to be exempt from VAT, and certain other goods and services to be exempt from VAT but may be subject to an EU member state opting to charge VAT on those supplies. Input VAT that is attributable to exempt supplies is not recoverable.
JurisdictionRate Rate Abbr.Name
20%13% or 10%MwSt.; USt.Mehrwertsteuer / Umsatzsteuer
21%12% or 6%BTW; TVA; MWStBelasting over de toegevoegde waarde; Taxe sur la Valeur Ajoutée; Mehrwertsteuer
20%9%ДДСДанък върху добавената стойност

19%9% or 5%ΦΠΑΦόρος Προστιθέμενης Αξίας
21%15% or 10%DPHDaň z přidané hodnoty
25%13% or 5%PDVPorez na dodanu vrijednost
25%nonemomsMeromsætningsafgift
20%9%kmkäibemaks
24%14% or 10%ALV; MomsArvonlisävero; Mervärdesskatt
  • ∟
    		• 20%10%, 5.5% or 2.1%TVATaxe sur la valeur ajoutée
    16%5%MwSt.; USt.Mehrwertsteuer / Umsatzsteuer
    24%13% or 6%ΦΠΑΦόρος Προστιθέμενης Αξίας
    27%18% or 5%ÁFAáltalános forgalmi adó
    23%13.5%, 9%, 4.8% or 0%VAT; CBLlink=yes; Cáin Bhreisluacha
    22%10%, 5%, or 4%IVAImposta sul Valore Aggiunto
    21%12% or 5%PVNPievienotās vērtības nodoklis
    21%9% or 5%PVMPridėtinės vertės mokestis
    17% 14%, 8%, or 3%TVATaxe sur la Valeur Ajoutée
    18%7%, 5% or 0%VATTaxxa fuq il-Valur Miżjud; Value Added Tax
    21%9% or 0%BTWBelasting toegevoegde waarde / Omzetbelasting
    23%8%, 5%PTU; VATPodatek od towarów i usług
  • ∟
  • ∟
  • 23%
  • 18%
  • 22%
  • 13% or 6%
  • 9% or 4%
  • 12% or 5%
    		• IVAImposto sobre o Valor Acrescentado
    19%9% or 5%TVATaxa pe valoarea adăugată
    20%10%DPHDaň z pridanej hodnoty
    22%9.5%DDVDavek na dodano vrednost
    21%10% or 4%IVAImpuesto sobre el valor añadido
    25%12% or 6%MomsMervärdesskatt

    EU VAT area

    The EU VAT area is a territory consisting of all member states of the European Union and certain other countries which follow the European Union's rules on VAT. The principle is also valid for some special taxes on products like alcohol and tobacco.
    All EU member states are part of the VAT area. However some areas of member states are exempt areas:

    Areas outside of the EU that are included

    Included with the Republic of Cyprus at its 19% rate:
    Included with France at its 20% rate:
    Has its own VAT regime but included with EU VAT area:
    Areas of Finland:
    Areas of France:
    Areas of Germany:
    Areas of Greece:
    Areas of Italy
    Areas of Spain:
    Areas of the Kingdom of Denmark:
    Areas of France:
    Areas of the Kingdom of the Netherlands:
    Iceland, Liechtenstein, Norway and Switzerland are not included.