Value added tax, or VAT is a consumption tax that many countries impose. It's paid by the buyer when an item is purchased, and it adds to the sales price of whatever is being sold. In the European Union there are twenty-seven member states who all have their own national VAT rate which also makes taxation confusing for consumers buying from outside their state.
The amount of money brought into each country from VAT taxes could be disputed depending on how expensive your accountant's rates are but the countries with the highest VAT rates are Sweden and Hungary at 25%. The lowest is Luxembourg which has a 17% VAT rate.
How VAT works in the EU
The European Union has different rules for how countries can share revenue from Value Added Tax within their borders. Countries that form the European Union have an agreement on this system of sharing, and it's called "destination principle", or "origin principle". This means that if you're a supplier to another country, then you charge them your domestic tax rate and remit it to them, and if they buy from you as an importer, they will pay your domestic tax rate…e.g. French company selling German Company: France charges 20%, pays 0%.
The first VAT country you enter is the one that collects it and this means if a company has branches in many countries then each branch pays their own tax rate. This is called an intra-community supply, and it's done by completing a form called an intrastat.
How does VAT work when you're an importer?
If you're buying from another EU country then they will charge their local tax rate, collect it (because they are the importer), and send it to their government. You can't claim this back if your goods never leave the state, nor would you want to because some countries have low rates. If your goods cross borders to get to you, e.g. through another country with different tax laws (like the UK), then that's where border dues come into play…i.e. duty or tariffs on both sides of the transaction, plus since each country has its own rates of VAT there may be more VAT collected than was originally!
How does VAT work when you're a re-seller?
When you buy from one EU country and sell to another, then you will collect their local tax rate. If it's the same as your country when that's where it ends; but if they have a lower rate like Luxembourg then you forward on their share of VAT to them, and keep yours! If they have a higher rate than your home country, then their government gets the VAT money at their end and refunds what yours didn't take.
If this is too confusing for example if you want to understand which countries apply each other's rates, or how it works with non-EU trade partners – contact us - Global Trade Business.