Value-Added Tax (VAT) is an indirect consumption tax used in more than 150 countries including China, India, and the European Union. VAT registered merchants collect VAT from their customers and pay the government the difference between the total VAT collected and total VAT paid by the merchant to acquire resources to produce the goods sold. This difference is the "value-added" to the good by the merchant.
Furniture Maker pays the Lumber Company 55€.
Lumber Company pays the Government 5€.
|50€||Price of Lumber|
5€ Initial VAT Paid
Total VAT is 5€.
The Government receives 5€ from the Lumber Company.
Retail Store pays the Furniture Maker 132€.
Furniture Maker pays the Government 7€.
|120€||Price of Furniture|
12€ - 5€ = 7€ VAT Paid
Total VAT is now 12€.
The government already received 5€ from the Lumber Company, so 7€ is owed by the Furniture Maker to the Government.
Consumer pays the Retail
Retail Store pays the
|150€||Price of Furniture|
15€ - 12€ = 3€ VAT Paid
Total VAT is now 15€.
The Government already received 12€ from the Lumber Company and the Furniture Maker combined, so 3€ owed by the Retail Store to the Government.
This VAT website focuses on the EU's system of VAT collection for digital/electronic services. A merchant may be required to register and collect VAT in a member state of the EU when they have a physical presence in that member state or their annual sales in the member state reach a certain volume. See full list of EU countries.
This is a simplified summary of current EU VAT rate rules. Please visit the European Commission's website for full rule details.
1. Sale Within Same EU Country
The country rate of the merchant is applied, which equals the customer's country rate.
2. Sale Between Different EU Countries
The country rate of the merchant is applied. If the customer is in a country that is in the merchant’s nexus jurisdiction, the country rate of the customer is applied.
3. Sale Between a Non-EU Country and an EU Country
If the customer is in the EU and the merchant is outside of the EU, the customer's country rate is applied. If the customer is outside the EU and the merchant is in the EU, no VAT is applied.
4. Sale to a VAT Registered Business
If a customer is in an EU country that is different than the merchant’s country and identifies themselves as a VAT registered business by providing a valid VAT number, VAT is not applied to the sale. The customer is responsible to pay VAT to the government themselves, at the customer's country rate. This is often called a Reverse Charge.”
The EU VAT rules around invoicing focus on providing information about what was purchased, by whom, from whom, and the VAT details. In addition to normal invoice best practices, here are some important EU VAT invoicing rules:
The European Commission issued EU VAT rule changes that went into effect January 1, 2015. The main rule change is that the applied country rate for digital/electronic services will now be the place of consumption, where the customer is located. Read the EU VAT rules.