VAT in EU

WHAT IS VAT?

Value added tax, or VAT, in the European Union is a general consumption tax levied on the added value of goods and services. This mostly applies to all goods and services that are bought and sold for use or consumption within the European Union. Therefore, goods sold for export or services sold to customers abroad are generally not subject to VAT. Conversely, imports of goods are taxed to ensure a fair system for EU producers so that they can compete on an equal footing in the European market with suppliers located outside the Union.

VAT has next features

1. Is a general tax. That is, one that is applied, in general, to all business activities related to the production, distribution of goods and provision of services. Usually, entrepreneurs have to collect VAT on sales after reaching a certain annual turnover.
2. Is a consumption tax. The final tax payer is an individual consumer.
3. Is a neutral tax. That is, it is collected partly through a system of partial payments, with the help of which taxpayers (i.e. businesses registered as VAT payers) deduct from the collected VAT the amount of tax they have paid to other VAT payers on purchases for their business activities.
4. Is an indirect tax. VAT is paid by the seller of the goods, who is a registered VAT payer, but is actually a component of the price paid by the buyer to the VAT-paying seller.

At the stage of VAT implementation in the European Union, it became obvious that in order to create an effective single market in Europe, a neutral and transparent turnover tax system is needed, which would ensure fiscal neutrality and allow the exact amount of tax to be returned in case of export. VAT allows you to be sure that exports are fully and transparently tax-free.

How VAT is paid

VAT payable on sales is a percentage that is embedded in the cost of goods (services), but the VAT paying company has the right to deduct all VAT that was paid by such a company before that. In this way, double taxation is avoided and tax is paid only on the value added at each stage of production and supply. Therefore, since the final price of the product is equal to the sum of the value added at each previous stage, the final VAT paid consists of the amount of VAT paid at each stage.

Companies registered as VAT payers must show in their invoices the amount of VAT that is included in the cost of the goods. In this way, the VAT payer sees the tax amount that he can then deduct, and the end consumer sees the tax value that is included in the cost of the product and that he will pay to the budget.

VAT rates in EU

European legislation in the field of VAT is unified, but at the same time flexible. Directive 2006/112/EC on the general system of VAT establishes the regulatory procedure for VAT in the European Union. However, it gives national states the freedom to set their own tax rates, subject to certain rules:

Rule 1. Standard rate for all goods and services.

Rule 2. EU country has the right to apply one or two reduced rates, but only to goods and services listed in Directive 2006/112/EC.

Standard VAT rate

This is the rate that applies to all goods and services that are not exempt from taxation. It should not be less than 15%. There is no maximum rate.

Reduced VAT rate

EU countries have the right to apply one or two reduced VAT rates, which:

• can be applied to goods and services from the list defined in Annex III of Directive 2006/112/EC, except for electronic services;
• can’t be less than 5%.

An exception to the rules – «special rate» of VAT

"Special rates" refer to numerous exceptions to the basic rules. Mainly for historical reasons and under certain conditions, many EU countries (in some cases most of them) have been allowed to derogate from these rules for a transitional period, in order to ensure the gradual alignment of national legislation with Directive 2006/112/EC until the final adoption of agreed mechanisms VAT by all EU countries.

NOTE
The import of goods within the EU is subject to the rate that is usually applied for this type of goods to the imported EU member country.

BASIS FOR TAXATION AND MOMENT OF TAXATION OF VAT

The basis for charging occurs when the legal conditions for the obligation to charge VAT are met.

In most cases, VAT must be paid only when submitting a declaration for the relevant period.

Usually the taxable event and the chargeable event is the completion of a taxable (taxable/exempt) transaction, but sometimes it can happen during or before such a transaction, for example when an advance is received.

There are certain differences between the taxation procedures in some cases. In general, three main distinct categories can be distinguished:

• taxation upon supply of goods/services;
• taxation of imports within EU members;
• taxation of imports of goods from countries outside the EU.

Taxation upon supply of goods/services

Basic rule

VAT is taxable when the goods or services are supplied (Article 63 of Directive 2006/112/EC).

A special rule when the supply takes place continuously or at a certain period of time

It is recommended to apply taxation in one of the events (advance payment) before the full supply of goods/services to avoid the unnecessary accumulation of all VAT in one payment at the end (Article 64 of Directive 2006/112/EC).

Basic rule

When successive statements of account are issued or successive payments are received for goods or services supplied during a period, a tax event occurs at the end of each period to which the statements or payments relate.

This rule does not apply to:

• goods rent for certain period;
• goods are sold on installment terms;
• continuous supply of goods between EU countries, if they are supplied for more than 1 calendar month, or are transferred from business to business for commercial purposes *.

*in this case, VAT is calculated at the end of each calendar month until the end of the supply.

Exceptions for cross-border B2B services lasting over time

If
пtaxable services supplied to a non-taxable, VAT-registered business or legal entity in another EU country:

• in a period of time lasting more than 1 year, and
• during the specified period, the account statement was not received, or payments for such operations were not received

in this case
VAT is chargeable at the end of each calendar year for as long as the supply continues.

Special rule for advance payments

When the supply of goods/services is partially or fully paid in advance, VAT is taxable at the time the payment is received. The taxable amount is the amount received as an advance payment (Article 65 of Directive 2006/112/EC).

Special rule for tax-exempt supplies within the borders of the EU

If
supply of tax-exempt goods is carried out within the EU

or
supply of tax-exempt goods is carried out by a business, for commercial purposes

in this case
VAT is due at the earliest:

• date of invoice issue

or

• 15th day of the next month following the month in which the delivery took place.

(Article 67 of Directive 2006/112/EC).

Taxation of import within EU countries

Basic rule

The taxable event for an intra-EU acquisition occurs when the acquisition takes place, i.e. when the supply of similar goods in the EU country of acquisition will be considered complete (Article 68 of Directive 2006/112/EC).

But

VAT is due at the earliest:

• date of invoice issue

or

• 15th day of the next month following the month in which the delivery took place.

(Article 69 of Directive 2006/112/EC).

Taxation of imports of goods from countries outside the EU

Basic rule
The moment of taxation and VAT collection occurs when the following list of goods is imported into the EU:

• goods that are not on free sale in the EU;
• goods from the territories of the EU, but those to which the actions of the VAT legislation do not apply (for example, Denmark, Germany, Finland).

(Article 70 of Directive 2006/112/EC)

WHERE TO TAX

Depending on the type of operation, different rules of the place of taxation apply:

• supply of goods;
• supply between EU member countries;
• supply of services;
• import of goods.

Supply of goods

As a general rule, the place where the goods are delivered is considered the place of taxation. That is, the VAT rate of the country where the goods were delivered will be applied, and the VAT itself will be paid into the budget of that country.

Supply between EU member countries

The same rules apply as for the Delivery of goods, but there are certain exceptions. If the goods were delivered to a third EU member country, VAT will be taxed in such third country with an adjustment from the VAT of the country of the customer of the goods.

Supply of services

Taxation of the supply of services contains many nuances, but as a general rule, to determine the place of taxation of services, it is first necessary to determine the category of the recipient of services: business or private client.

Import of goods

As a general rule, imports are taxed in the EU member country where the goods are delivered (Article 60 of Directive 2006/112/EC).

WHO WILL BE INTERESTED IN CONSULTATION ON THE APPLICATION OF VAT IN THE EU

If You:

• supply digital goods in EU and interested in the possibility of exemption from taxation;
• have a business and sell physical goods in EU countries;
• registered in third countries, but you supply goods or services to private individuals in the EU;
• sell goods through the marketplaces;
• carry out other operations that involve the EU market in one way or another

in such case, You may be interested in consultation on the application of VAT in EU. The Finance Business Service team has extensive experience in the field of VAT application in the European Union and will be happy to assist you in solving your questions.