Value added tax

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Value added tax or VAT is an indirect tax on consumption.

It was established for the first time in France in the 1950s, then spread to the rest of Europe and gradually to other parts of the world.

Operation

Principle
The central principle of VAT is to avoid cumulative "cascade" taxation.

In the calculation of VAT, the tax base — at each stage of expenditure on manufacturing — is the only value added at this stage. It cannot apply to the added value of any previous stage. Indeed, taxing expenditure at each stage of the marketing of a good or service, on the basis of the value spent, amounts to incorporating into the tax base the value of taxes already collected at the previous stage. By construction, VAT is not calculated on the amount of transactions carried out (sales and/or services), unlike most indirect tax systems which are based only on turnover.

The natural or legal person liable for VAT must:

collect VAT by increasing its tax-free prices from the statutory rate of value added tax;
return to the State the difference between the total VAT collected on its transactions carried out and the total VAT deductible on its expenses.

Thus, only "value added" is taxed (defined as the difference between the product of sales and/or services and the cost of invoiced intermediate consumption). Taxpayers — in particular businesses — generally keep their tax-free accounts and record for this purpose valued entries "excluding tax" (in abbreviated as HT, the conventional abbreviation in France for "tax-free", the abbreviation "tax included" meaning "all taxes included").

The collection of VAT in the European Union implies a transfer of ownership of the property to the end user. Taxation is made at the rate in force in the country of the buyer (see also Incoterm). Purchases of goods manufactured outside the European Community are subject to VAT.

Example
A shop in France buys an HT pen from its supplier, it is invoiced including VAT for a 20% VAT.

The same store sells the pen to HT; it applies VAT on the final price either × (1 + 20%) = + = . It therefore declares at the time of payment that all the VAT collected when it was resold (VAT collected), either from which it reduces the VAT paid to the supplier or (deductible VAT). Thus, the store does not actually return to the tax administration only (net VAT), i.e. the difference between the VAT due as a result of the sale of the pen and the VAT paid to the supplier at the time of purchase. In other words, it actually only pays tax to the tax on the part of value it has "added" to the product.

VAT = VAT Supplier, VAT = VAT Store, VAT = VAT State