The value added tax is a type of consumption tax that is added during the production and final sale of goods and services. Commonly (and most frequently) used in European nations, it is a method of collecting tax throughout the process of producing items as opposed to the sales tax commonly used in the United States. The value added tax is a tax process where a tax is applied every time value is added to an item. The manufacturer is charged a value added tax when they purchase parts for an item, and the end-use consumer is taxed based on what has already been paid.
The tax is not collected by the European Union, but is collected by the individual member states. The states then use that tax to fund the European Union.
There are two types of Value Added Tax (VAT). The output VAT is charged by a business and paid for by its customers. VAT paid by a business to another business in the purchase of supplies or materials is an input VAT. The input VAT is recovered by the business through the payment of the output VAT or by reimbursement by the government.
VAT is charged on services as well as goods, and is dictated by the member state. The rates and method of collecting the tax varies based on the type of service and where the service takes place. Different rates apply based on the state of origin, where the goods or services are located and the threshold of the company. There are distinctions made for companies and organizations that may be eligible for tax exemptions. Companies wishing to do business within the European Union must abide by the VAT tax codes and may require the assistance of a financial professional who is familiar with the specific tax regulations.