European Union Value Added Tax

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 15 to 27%.

Some of the VAT collected by member states is used to fund the European Union as part of

the system of "own resources".1

When it was adopted for the first time, in France in 1954, value added tax (VAT) was

regarded as merely another tax on turnover or on consumption and did not attract the

attention of other countries. It was only since 1962, with the publication of two reports

ordered by the Commission recommending its adoption by all Member States, that its interest

for the Community was understood. Acting on the basis of Commission proposals, the

Council adopted on 11 April 1967 the first Directives on the harmonisation of the legislation

of Member States concerning turnover taxes.

Value added tax or VAT is an indirect tax, which is imposed on goods and services at

each stage of production, starting from raw materials to final product. VAT is levied on the

value additions at different stages of production.

Value added tax, also known as goods and services tax or GST proves to be beneficial

for the government. Through implementation of this tax system, government can raise

revenues invisibly, where the tax is not shown on the bill paid by the buyer. VAT is different

from sales tax in various aspects. While sales tax is to be paid on the total value of the goods

and services, VAT is levied on every exchange of the product, so that consumers do not have

to carry the total cost of tax. However, VAT is generally not applied on export goods to avoid

double taxation on the final product. However, if VAT is charged on export goods, the tax

amount is usually refunded to the tax payer.

Value added tax can also be recovered. The individual consumers cannot recover

VAT on purchases made by them. However, businesses can recover VAT on the services and

materials, which are bought by them in order to continue the supply of the products and

services.

VAT was introduced to arrest the increasing smuggling and cheating, which were

resultants of high sales tax and tariffs. Initiated in France, VAT is used as an instrument of

1 https://en.wikipedia.org/wiki/European_Union_value_added_tax

taxation in all the member states of the European Union. Different VAT rates are employed

in different member states of EU. The minimum VAT rate for the EU members is 15%.

Common system of value added tax2

The European Union has developed a common system of value added tax and covered

by Directive 2006/112 / EC of 28 November 20063.

Value added tax is a general tax on consumption applied to commercial activities

involving the production and distribution of goods and the provision of services. This VAT

Directive codifies the provisions governing the introduction of the common system of VAT

in the European Union.

The common system of VAT applies to goods and services bought and sold for

consumption within the EU. The tax is calculated on the basis of the value added to goods

and services at each stage of production and of the distribution chain. The tax is collected

through a system of partial payments which allows taxable persons (firms identified for

VAT) to deduct from their VAT accounts the amount of tax which they have paid to other

taxable persons on their purchases for commercial purposes during the preceding stage. This

mechanism means that the tax is neutral, irrespective of the number of transactions.

In the end, VAT is borne by the final consumer in the form of a percentage addition to

the final price of the goods or services. This final price is the total of the value added at each

stage of production and distribution. The supplier of goods or services (the taxable person)

pays the VAT paid on the goods or services to the national tax administration after deducting

the VAT already paid to his suppliers.

Transactions carried out for consideration on the territory of an EU country by a

taxable person acting in that capacity are subject to VAT. Imports by any person are also

subject to VAT. Taxable transactions include:

supplies of goods by a taxable person;

intra-EU acquisitions in an EU country of goods from another EU country;

supplies of services by a taxable person;

imports of goods from outside the EU (a third territory or a non-EU country).

An intra-EU acquisition of goods occurs only when goods are transported from one

EU country to another. It occurs when goods sold by a taxable person in the EU country of

departure are purchased in another EU country (of arrival) by a taxable person acting in that

2 http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV:l310573 Directive 2006/112 / EC of 28 November 2006

capacity or by a non-taxable legal person. It also occurs in the case of new means of transport

and of products subject to excise duty purchased by other persons.

A taxable person is a person who, independently, carries out in any place any

economic activity, whatever the purpose or results of that activity. Economic activity includes

any activity of producers, traders or persons supplying services, including mining and

agricultural activities and activities of the professions. To the extent that they are bound to

their employer by a contract of employment or by any other legal ties creating the

relationship of employer and employee, the activities of salaried and other persons are not

regarded as being carried out independently.

Any person who, on an occasional basis, supplies a new means of transport

transported to another EU country is also regarded as a taxable person.

An EU country may also regard as a taxable person anyone who carries out, on an

occasional basis, an operation relating to an economic activity and, in particular, the supply,

before first occupation, of a building or part of a building and of the land on which the

building stands or the supply of building land. States, regional and local government

authorities and other bodies governed by public law are not regarded as taxable persons in

respect of the activities or transactions in which they engage as public authorities, except

where their treatment as non-taxable persons would lead to significant distortions of

competition. When they carry out certain commercial operations, such bodies are

nevertheless taxable persons.

Taxable transactions are taxed at the rates and under the conditions set by the EU

country where they take place. The standard rate of VAT is set as a percentage of the taxable

amount which, until 31 December 2015, may not be less than 15 %.4

EU countries may apply one or two reduced rates of not less than 5 %. The reduced

rates may only be applied to supplies of goods and services in the categories listed in Annex

III to the VAT Directive (as last amended by Directive 2009/47/EC).

The EU countries may also, after consultation of the VAT Committee, apply a

reduced rate to supplies of natural gas, electricity and district heating.

VAT is payable:

by any taxable person carrying out a taxable supply of goods or services, except in

certain specific cases where the tax is payable by another person, particularly a

customer using the reverse charge procedure;

4 http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=URISERV:l31057

by the person making an intra-EU acquisition of taxable goods;

on an importation by the person designated or recognised as liable by the EU country

of importation.

A taxable person must state when his activity as a taxable person commences, changes

or ceases and must keep sufficiently detailed records.

The directive on the common system of VAT established a package of common rules

making it possible to define the scope of the tax and the method of determining tax liability,

i.e. the territorial application of the tax, the taxable persons, the taxable transactions, the place

of applicability of such transactions, the chargeable event, the taxable amount, the detailed

procedures for applying rates of taxation, the exemptions and the special schemes. In

European Community/Union jargon all these rules are known as "the uniform basis of

assessment of VAT", and that basis is particularly important in that VAT is a basic source of

revenue for the Union. Moreover, the directive on the common system of VAT harmonised

the laws on turnover tax structures of the Member States in the fields of the provision of

services, agricultural production, small undertakings and exempt activities and operations

linked with importation, exportation and international trade in goods. Subject to Council

approval, a Member State may introduce into its legislation special measures for derogation

from the common system of value-added tax, either in order to simplify the procedure for

charging the tax or to prevent certain types of tax evasion or avoidance, or in the form of an

agreement with a non-member country or an international organisation.5

Combating VAT fraud

Directive 2013/42/EU incorporates within the VAT Directive a Quick Reaction

Mechanism (QRM) which, in very specific situations, permits EU countries to take

immediate measures in the event of sudden and massive VAT fraud.

An EU country wishing to introduce a QRM special measure must send a notification

to the Commission using a standardised form and at the same time send it to the other EU

countries. It must provide the Commission with the information indicating the sector

concerned, the type and the features of the fraud, the existence of imperative grounds of

urgency, the sudden and massive character of the fraud and its consequences in terms of

considerable and irreparable financial losses. The Commission then has a month to confirm

5 Moussis, Nicholas, Access to the European Union: Law, Economics, Policies, 21st edition, Editor Intersentia, 2015, p. 267

whether it will or will not issue an objection, taking into account the views of the other

countries.

The related Directive 2013/43/EU amends the VAT Directive as regards an optional

and temporary application of the reverse charge mechanism in relation to supplies of certain

goods and services susceptible to fraud. It allows EU countries to implement - on an optional

and temporary basis -, a reversal of liability for the payment of VAT on the supply of certain

goods and services (reverse charge mechanism).

Valued Added Tax in Romania

The VAT (value-added-tax) is one of the most important taxes in the Romania. It is an

indirect tax. A taxable person is any person that carries out, in an independent manner and

regardless of the place, economic activities, whatever the purpose or the result of such

activities. The taxable person who is established in Romania and who carries out or intends to

carry out an economic activity which involves taxable operations and operations exempted

from the tax with the right of deduction shall apply to be registered for VAT purposes at the

competent fiscal body.

The fiscal period for VAT is the calendar quarter. The VAT return has to be filed by

the 25th of the month following the quarter.

The standard tax rate in Romania is 24 %. There is also a reduced rate and it is 9 %.

The reduced VAT applies to the entries to castles, museums, memorial houses, historical,

archaeological and architectural monuments , zoos and botanical gardens, fairs , exhibitions ,

cinemas, hotel services, books, newspapers, magazines and medicines.

From 1 June 2015, the reduced rate was extended to the delivery of the following

goods : food , including beverages , but excluding alcoholic beverages for human

consumption and animal , animals and live poultry from domestic species , seeds, plants and

ingredients used in the preparation food products used to supplement or replace foodstuffs ,

as well as restaurant and catering services , excluding alcoholic beverages