International Tax

VAT is that?

Written by Gregory Fallon, EA, MST on Wednesday, 06 November 2013. Posted in International Tax

General explanation of how VAT works in the EU.

VAT is that?

Most people who are unfamiliar with Value Added Tax (“VAT”) assume it is similar to the U.S.’s sales tax but it is very different.  Unlike other developed countries of the world the U.S. does not impose VAT so many U.S. businesses are unfamiliar with how VAT works.  This article is meant to educate U.S. entrepreneurs on the general workings of VAT in the European Union (“EU”) and strategies to minimize exposure.  All 27 countries in the EU adhere to similar VAT rules base on The Recast Sixth Directive. Each member is allowed some room to customize their VAT laws but these differences for the most part are immaterial differences. The main feature of VAT that distinguishes it from U.S. sales tax is how the sourcing of sales and who is responsible for collecting it can change based on the status of the buyer and seller.  Unlike the U.S. system where the seller always collects and remits the sales tax the VAT system can force either buyers or sellers to collect VAT depending on what is sold and if they are register for VAT.