Value Added Tax (VAT)
VAT is a consumption tax used in over 160 countries, including all of Europe, but not the United States (which uses sales tax). VAT is applied at each stage of production and distribution, with businesses collecting it from customers and remitting it to governments. Standard VAT rates range from 15% to 27% in Europe, with reduced rates (5-10%) for essentials like food and medicine.
Unlike US sales tax which is added at final sale, VAT is often included in displayed prices. A €100 item in a store already includes VAT. If the rate is 20%, the net price is €83.33 and VAT is €16.67. Businesses can reclaim VAT paid on business expenses, so it ultimately falls on the final consumer, not businesses in the supply chain.
For businesses operating internationally, understanding VAT is crucial. EU businesses must charge VAT on sales to EU customers, with rates depending on customer location. Non-EU businesses selling to EU consumers must register for VAT in relevant countries once exceeding €10,000 in annual sales. Digital services and goods have special VAT rules. Compliance is complex, and many businesses use VAT specialists or software to manage obligations.
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Frequently Asked Questions
VAT is charged at each production stage (businesses reclaim it), while sales tax applies only at final sale. VAT is usually included in displayed prices; sales tax is added at checkout. VAT rates are generally higher (15-27%) than US sales tax (0-10%).
In many countries, yes. Non-residents can claim VAT refunds on goods taken out of the country. Keep receipts, get validation at customs when leaving, and submit refund claims (typically 15-20% of purchase price minus processing fees).
Businesses don't ultimately pay VAT - they collect it from customers and reclaim VAT paid on business expenses. Only the final consumer pays VAT. Small businesses below registration thresholds (typically €20,000-100,000 annual revenue) may be exempt.
Most countries have reduced rates (5-10%) for essentials: food, medicine, children's items, books, and public transport. Some items are zero-rated (0% VAT) or exempt (outside VAT system entirely). Standard rates apply to most goods/services.
Depends on buyer location and business location. EU businesses charge VAT based on customer's country. Non-EU businesses selling to EU consumers must register for VAT once exceeding thresholds. Digital services have special rules. It's complex - many use VAT automation software.