European Union VAT area

The European Union value added tax (or EU VAT) is a value added tax on goods and services within the European Union (EU). The EU's institutions do not collect the tax, but EU member states are each required to adopt a value added tax that complies with the EU VAT code. Different rates of VAT apply in different EU member states, ranging from 17% in Luxembourg to 27% in Hungary. The total VAT collected by member states is used as part of the calculation to determine what each state contributes to the "EU's budget".

EU VAT (known as "output VAT", that is, VAT on its output supplies) is charged by a business and paid by its customers. VAT that is paid by a business to other businesses on the supplies that it receives is known as "input VAT" (that is, VAT on its input supplies). A business is generally able to recover input VAT to the extent that the input VAT is attributable to (that is, used to make) its taxable outputs. Input VAT is recovered by offsetting it against the output VAT for which the business is required to account to the government, or, if there is an excess, by claiming a repayment from the government. The final consumer does not receive a credit for the VAT paid. The net effect of this is that each supplier in the chain remits tax on the value added, and ultimately the tax is paid by the end consumer.

Value added tax collected at each stage in the supply chain is remitted to the tax authorities of the member state concerned and forms part of that state's revenue. A small proportion goes to the European Union in the form of a levy ("VAT-based own resources").

The co-ordinated administration of value added tax within the EU VAT area is an important part of the single market. Cross-border VAT is declared in the same way as domestic VAT, which facilitates the elimination of border controls between member states, saving costs and reducing delays. It also simplifies administrative work for freight forwarders. Previously, in spite of the customs union, the differing VAT rates and the separate VAT administration processes resulted in a high administrative and cost burden for cross-border trade.

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