No, only the end consumer pays VAT in the country of consumption. Everything else nets out, because as a supplier you either you claim back the amount of VAT you've been charged from your local tax authority or you are subject to a "reverse charge" where the cross-border supplies are effectively treated as domestic for tax purposes.
Everybody pays VAT. As a business you charge VAT for everything you sell and pay that out to the tax authority, and you get VAT back for anything you buy. As a consumer it's just an item on the bill.
Say the VAT rate is 20%. Now if you buy something for $100, install it and charge $100 to your customer, you get back $20 from the tax authority and pay them $20, so if billing cycles align no money actually flows to or from the tax authority. But if you add value, say by buying $100 in parts, assemble them and sell the assembly for $150, you get back $20 for parts purchased but collect $30 for the sale, creating a net flow of $10 to the tax authority.
If everything happens under the same tax authority this nuance doesn't matter, in total there's always a $30 tax on a $150 part, no matter how complex the supply chain. But if more countries are involved the difference matters: if a company in Poland makes parts worth $100 and a company in Germany assembles them and sells them in the German market for $150, that's $20 in taxes for Poland and $10 for Germany. With a sales tax that's only collected when selling to a consumer it would have been $30 for Germany and $0 for Poland.
The Polish company invoices the German company under the "reverse charge" regime. The German company treats the parts as if they were supplied by another Germany company, charging itself German VAT and refunding itself an equal amount of German VAT. There's nothing collected in Poland.
Reverse charge only moves vat collection from seller to buyer, so seller doesn't have to deal with 27 tax agencies and buyer only deals with their tax agency.
Nothing collected directly doesn't necessarily mean nothing collected at all. The turnover subject to said regime still needs to be reported, in higher detail if significant. Although I have no idea what exactly happens with such information, it's not hard to imagine it being used to settle the bill between countries.
It's actually less paperwork, because you don't have two companies filing separate VAT rates with two tax authorities. On the surface, the reverse charge sounds complex but it actually simplifies things for the importer.
That's not how VAT works in EU, when I'm buying stuff as business expenses from EU I need a reverse charge bill with my VAT ID and no VAT is applied on purchase. If I buy locally then I subtract the input when I'm paying my VAT or request a return if it's more than I owe in VAT (which happens when you are selling to other countries).
this is correct. the main advantage of a VAT is incentive alignment. every intermediary producer must collect and remit VAT if they want to claim their VAT refunds for inputs. i.e., a seller of a good in Europe must collect VAT if they want to claim a VAT refund on whatever they paid for the good.
compare to American sales taxes, where sellers have no economic incentive to collect sales taxes beyond the probability of being caught and fined.
Primarily though, they must collect VAT because it's the law. In Germany, you can get an exception if you're tiny and have very low revenue.
If it was optional if you didn't want to claim expended VAT, quite a few companies would happily choose that, because you don't pay VAT on labor and that's the biggest cost in many industries. If you're primarily b2c, you could effectively lower your prices by a good chunk or get a healthy chunk of extra profit.
But you can't, because there's no choice, it's just the law.
In my country, segments more prone to “informal” sales (SMEs, cash transactions, limited incentive for paperwork), have reduced VAT (final sale has a reduced rate compared to many supplies), and the customer can get some of that VAT back as an income tax deduction if they demand to be invoiced.
The advantage of this, is that if you have to have accounting for sales, you'll probably have accounting too for labour, and you'll also pay income tax, social security, etc.
In my US state, vendors & service providers are quite open about "if you pay cash, I will not charge you the Gross Receipts Tax" (GRT is New Mexico's weird attempt at something vaguely like a cross between VAT and a sales tax).
How does Germany define low revenue for VAT purposes? In the UK, the threshold for compulsory VAT registration is currently £90,000 annual revenue, which I would say is quite large.
Max 100k € in the current year, max 25k € in the previous, so effectively you can do it indefinitely only if you remain below 25k. Should you ever cross 100k, you have to immediately switch to the regular scheme, collecting VAT (and being able to file any VAT you paid).
I don't know any numbers, but I only ever see it being used by sellers on Amazon.
Many businesses in the UK operate comfortably with revenue less than £90k. Sole traders mainly. But yes, once you employ staff it's likely you'll be looking at needing a higher revenue.
Sole traders working labour only may operate below this comfortably. But this is irrelevant to this thread about international trade in GOODS. Not many who are shipping goods and trying to make a decent income off a margin will fall under £90k. If you think you want to make £50k a year on a 25% margin, for instance, you will smash that threshold.
Fair. I wanted to compare the German and UK thresholds more generally (the German threshold seems very low to me even for labour-only sole traders). But I would agree with you that trade in goods across borders would very likely cross the UK threshold very quickly.
If i offer a service for 100 €. I have play VAT for i, typically i add these to the bill, but for the sake of simple numbers i dont.
As an example, i have following costs for offering the service:
- Materials: 20€ - i can deduct these from the VAT.
- Salaries: 60€ - i can NOT deduct these from the VAT.
- Profit: 20€ - i can NOT deduct these from the VAT.
So earning my company 100€ will have me pay (in switzerland for example 7%) approximately 6€ VAT, the 1€ i did not have to pay, must be paid by the producer of the materials. Of course you can argue that the customer pays the 6€ and my company only pays the 1€, but it's never the less always a split bill.
The bill looks like it is split because VAT is collected at each transaction, but in the end it nets out for everyone but the end consumer.
So in your case the raw material producer would collect €1 of VAT from you, but this is entirely fictional, because you can immediately claim it back. Only when you sell the goods to an end consumer would VAT that cannot be claimed back be due.
Lots of countries do fine with a rather simple tax system. Why should I be taxed when I spend the already taxed money? Not to mention that VAT discourages spending and stifles economic growth, and people wonder why the shops are closing and wages are stagnating
This is such a common misconception that even business owners get wrong. No, it doesn't even out for the business, because they sell their products with a profit and thus pay more in VAT than they get back. You only get more back if you're selling for cheaper than it costs you to make it, meaning you're out of business pretty quick.
Edit: Congratulations to the people who are down voting very basic mathematics.
Businesses don't "pay" VAT, they collect and remit VAT on behalf of the tax authority. A business (supplier) that doesn't sell to end consumers pays no VAT, even though they collect a lot and reclaim a lot. It fully nets out.
> A business (supplier) that doesn't sell to end consumers pays no VAT
They indeed pay no net VAT (it's not a cost for them in the sense of their profit and loss statement), but they do remit a bit of the VAT collected by the end consumer to their _local_ tax authority.
As an example, let's consider a VAT rate of 20%, and a Dutch company that buys from a French one and sells to a German one. Their costs per product are €80, and thus they pay €16 of VAT over that to their French suppliers. If they sell a product for €100 (i.e. they add €20 of value), then they collect €20 of VAT from their German buyers (which might in turn get it from the end consumers). There's a difference of €4 between what they received and paid in VAT, and that difference is collected by the Dutch tax authority. That €4 is not coincidentally the 20% VAT over the value added by the Dutch company.
Wrong, wrong, wrong. When the good passes from one country to the next, the vat from the first country is given back - as if it was bought tax-free - and the VAT of the country you're in applies.
Before the EU common market, you used to be able to do that VAT refund even for your own purchases as a private person on vacation - you can still, for example between the EU and Switzerland. It was even translating to tax-free vacation shopping because they weren't interested in collection taxes below a certain value.
No, that's not how it works. If a business sells to another business, then the buyer is the consumer, and VAT has to be paid. And of course they have to sell with a profit.
Many B2B offers and proposals are negotiated or priced without VAT mentioned, but it is absolutely added to the bill.
The only time it "nets out" is if a business has the same expenses for their purchases as for their sales, meaning they're soon bankrupt.
It nets out to everyone but the final consumer. Imagine 30% VAT rate:
Alice digs up some copper and tin and sells it to Bob for 10€ + 3€ VAT = 13€. Alice remits the 3€ to the authorities on Bob's behalf.
Bob casts bronze bars and sells them to Carol for 39€ + 11.70€ = 50.70€. Bob claims a 3€ refund for VAT he paid Alice and remits 11.70€ to the authorities on Carol's behalf.
Carol makes a sculpture from the bronze and sells it to a customer for 1014€ + 304.20€ VAT = 1318.20€. Carol claims a 11.70€ refund for VAT paid and remits 304.20€ to the authorities.
The end customer ends up paying 100% of the total VAT (304.20€). Everyone else nets out to 0.
That's just mental gymnastics. In the end the customer pays 100% of the costs a business has, that's completely obvious. Then we can say that businesses don't pay payroll tax either, because all salary costs are also baked into the price of the final products to customers.
You're correct with your calculations, but it's not honest to say that the customer pays the VAT and therefore it nets out for a business.
What's happening is that a business gets refunded by the government for any VAT they pay. Alice charges Bob VAT. Alice remits the money to the tax authorities who then refunds Bob the money they paid.
If after paying payroll taxes, the government decided to hand all the money back, that would be VAT. The only one who doesn't get refunded is the final customer.
Which really shouldn't be surprising: if a business is not adding value, it's not a viable business. But if a business is adding value on net, it should indeed owe tax charged on net value added.
You're right, it's not surprising at all. It's a tax meant to make revenue for the government. But all my life I've heard from people (who have never had a business), that businesses get back all their VAT. It doesn't help showing them the accounting, which very clearly shows VAT paid and VAT deducted.
It's a misconception that is on the level of people believing that their progressive tax rates are applied back towards previous salaries or business owners who think you should increase prices for the customers you have to make up for the customers you lost.
It’s not really a tax on their profits. Consumers have to pay it on top of the net sales price, and they know that it won’t add to the company‘s bottom line. The money goes to the state every month (or quarter sometimes), deducted by the VAT the business itself already paid for services/products.
For accounting purposes, VAT is a totally separate cycle of money, and for every important financial metric, VAT is ignored. [Removed] If you happen to spend more VAT than you collect, you’ll get the negative back from the state. Also, the net price is always known because it must be shown on every invoice.
On a product of 120€ with 70€ wages, they pay 20€ VAT on the 100€-before-tax, and they pay 25% IS (corporate tax) on the 30€ margin, so 7.5€ (this example is for France). If they distribute the remaining 22.5€ as dividends, the recipients pay up to 30% IR, so 7€.
VAT is most of the tax revenue by far. France’s budget is made of 50% VAT, 15% from corporate tax (IS), 10% from income tax (IR) and then the rest from various state revenue (like renting the palaces for movies).
I don't know the initial incentives, but VAT is much harder to evade (businesses have to keep track/declare things if they want to reclaim the VAT they paid).
Also it's a consumption tax, in the end the end consumer is the one paying it (through higher price). The businesses in the middle are mainly collecting the tax on behalf of the state.
1. They need to tax every economic transaction possible to maintain demand for the Euro currency and keep it from loosing its value. This is the most important reason.
2. To get more money in taxes for the government. There's people who argue that lower tax rates increases economic activity and in the end would increase tax revenue also for the government. The government doesn't see things that way. "You pay me now, pay more!"
3. Taxes on profits are an incentive for business owners to reinvest any surplus into growing their business, meaning more jobs etc.
I mean, what's the rationale in the US for a business being taxed on their profits, and also having to pass along the sales tax they've collected?
It's just two forms of taxation. Sales tax/VAT is a fixed proportion of sales, and then you also pay tax on profit that's left.
You might as well ask why people pay income tax when they make money and then have to pay sales tax/VAT again when they spend it!
Of course, answering that is complicated, and there are a lot of factors. But the main one is basically that governments like to tax "everything", so that people/goods/services that might wind up evading one tax wind up paying another. Sales tax makes sure governments get revenue even when businesses make no profit, taxing profits makes sure governments get more revenue when businesses make more money.
The detail that is missing from the mathematics is that companies fairly often buy more than they sell, which is called investment. Most early companies do not go with great profit if one removes all assets from the company. Buildings, cars, equipment and so on. If a new company takes a loan as a as initial investment, they are unlikely to have profits the first taxation year to cover it, and yet they still get to remove the vat from purchases.
From that one can make an additional insight. Most companies have less money during the early investment phase, which is where they get most benefit from removing vat from purchases.
You are thinking of a different deductiblity. When investing into the company you can deduct cost from taxes on profit, assuming there is profit to deduct it from. VAT however is still removed regardless if there is profit, which apply both to inventory and to other assets like buildings, equipment, cars and so on. The deduction on taxes on profit is thus done after vat has already been removed.
The assumption is not that you can one day sell it and pay vat on it. If a company buys a car, there is no assumption that they will sell the same car for profit at a later time. The assumption is that the car exist for the company in order to generate profit over time as part of the business operations, which is the reason why you don't need to pay VAT when purchasing it.
As a side note, there exist plenty of companies with zero or close to zero revenue, but with plenty of expenditures for which they get to remove VAT on. Those could be fake companies that are created for this specific purpose, or companies that are in theory investing into becoming profitable. A common example is a person investing into a expensive hobby, say photography, who could in theory turn it professional but has a company in order to avoid paying vat on equipment. In order to make the tax office "happy" they maybe sell a couple of photos a year, but is no where profitable and will likely never be it.
Different countries in EU may have different laws regarding VAT. The above is primarily about Swedish TAX system, but its very likely the same apply to Germany.
You're right in everything. The key difference between a business running a deficit in VAT and a deficit in profits (a loss), is that the business gets paid by the taxman for the deficit in VAT, but not for any deficit in profits.
However, regarding the discussion if it "evens out" for a business on VAT in and VAT out, investments shouldn't be considered, since they are investments and not product or part of revenue. Not only can a business deduct VAT from their investments, they can deduct the entire cost from taxes, divided over several years if they want.
> which is the reason why you don't need to pay VAT when purchasing it.
Technically you always have to pay the VAT, but then you reclaim it, as I'm sure you know. Internally that is. If it's imports then it's more complicated and differs between countries.
And therein lies the rub. Any goods / materials from outside the VAT zone will have VAT charged on the import. Vis—a-vis a tariff.
Example
I manufacture and sell teak wood tables in Portugal.
I buy the wood from Asia, which does not have a VAT and is outside the EU. When I import said wood, I get assessed a value to pay VAT on. This is a tariff.
I buy the stain and finish from Germany, which is inside the EU and has a VAT, through a complex paperwork system, I also pay VAT when the finish gets imported to me, but eventually I can claim that VAT paid back and it “nets out”. So I get this back. How do I get it back? I can subtract VAT paid from the VAT collected when I sell the goods.
But the actual net VAT charged is the same as if I used native materials, so the imports are at no disadvantage to native sales. So it is not a tariff.
More like VAT is a sales tax, by a different name. Regardless of the name, the buyer should pay the same amount of tax whether they buy domestic or from abroad. If VAT wasn't paid when buying from abroad, it would unfairly disadvantage domestic suppliers.
(I'm not an accountant, but as far as I know, the same VAT deductions for businesses apply whether they buy from an EU country or from a non-EU country, which your example doesn't take into account.)
