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 (GST)".

Personal end-consumers of products and services cannot recover VAT on purchases. In this way, the total tax levied 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, under directive 77/388/EEC, which specifies a minimum rate of 15% although different rates apply in the various member states.

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.
• The manufacturer charges the retailer $1.32 and pays the government $0.02, leaving the same profit of $0.20.
• The retailer charges the consumer $1.65 and pays the government $0.03, leaving the same profit of $0.30

So the consumer has paid 10% 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	4.0 %
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