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 in national legislation 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.

History

German industrialist Wilhelm von Siemens proposed the concept of a value-added tax in 1918 to replace the German turnover tax however, the turnover tax was not replaced until 1968. The modern variation of VAT was first implemented by Maurice Lauré, joint director of the French tax authority, who implemented VAT on 10 April 1954 in France's Ivory Coast colony. Assessing the experiment as successful, France introduced it domestically in 1958.
Following creation of the European Economic Community in 1958, the Fiscal and Financial Committee set up by the European Commission in 1960 under the chairmanship of Professor Fritz Neumark made its priority objective the elimination of distortions to competition caused by disparities in national indirect tax systems.
The Neumark Report published in 1962 concluded that France's VAT model would be the simplest and most effective indirect tax system. This led to the EEC issuing two VAT directives, adopted in April 1967, providing a blueprint for introducing VAT across the EEC, following which, other member states introduced VAT.
The First Directive was concerned with harmonising the legislation of the member states with respect to turnover taxes. This act was 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.

How it works

The EU value-added tax 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 individuals 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 directives

The EU VAT system is regulated by a series of European Union directives.
The aim of the EU VAT directive is to harmonize VATs within the EU VAT area and specifies that VAT rates must be above a certain limit.
It has several basic purposes:
  • Harmonization of VAT law
  • Harmonization of content and layout of the VAT declaration
  • Regulation of accounting, providing a common legal accounting framework
  • Providing detailed invoices and receipts, meaning that member states have a common invoice framework
  • Regulation of accounts payable
  • Regulation of accounts receivable
  • Standard definition of national accountancy and administrative terms
The VAT directive is published in all EU official languages.

Sixth Directive

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.
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, adopted in 1979, 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.
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.

Thirteenth Directive

The Thirteenth VAT Directive, adopted in 1986, allows businesses established outside the EU to recover VAT in certain circumstances.

Recast Sixth Directive

In 2006, the Council sought to improve on the Sixth Directive by recasting it.
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.
Abuse criteria are identified by the jurisprudence of the European Court of Justice developed from 2006 onwards: VAT cases of Halifax and University of Huddersfield, and subsequently Part Service, Ampliscientifica and Amplifin, Tanoarch, Weald Leasing and RBS Deutschland. EU member states are under a duty to make their anti-abuse laws and rules compliant with the ECJ decisions, besides to retroactively re-characterize and prosecute transactions which meet those ECJ criteria.
The accrual of an undue tax advantage may be even found under a formal application of the Sixth Directive and shall be based on a variety of objective factors highlighting that the "organization structure and the form transactions" freely chosen by the taxpayer are essentially aimed to carry out a tax advantage which is contrary to the purposes of the EU Sixth Directive.
Such a jurisprudence implies an implicit judicial evaluation of the organizational structure chosen by the entrepreneurs and investors operating across multiple EU member states, in order to establish if the organization was appropriately ordered and necessary to their economic activities or "had the purpose of limiting their tax burdens". It is in contrast with the constitutional right to the freedom of entrepreneurship.

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 or €35,000 in any 12 consecutive months, that sale of goods may qualify for a distance sales treatment. Distance sales treatment allowed 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 exceeded €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 was 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 was allowed if the importing member states fears that without the lower threshold amount competition within the member state would be distorted. Only Germany, Luxembourg and the Netherlands applied the higher €100,000 threshold.