VAT in a Nutshell

VAT stands for “Value added tax”. These little three words describe one of the most powerful taxes on the globe to drive consumers and businesses. The principles of VAT are quite simple and quick to understand. Although, some principles are easy to understand, it is possible to create complex cases within this domain.

 

VAT increases the sales price by adding the VAT amount to the net price.

  • Net price + VAT amount = Sales price
  • 100 EUR + 20 EUR = 120 EUR

 

The VAT amount is calculated by multiplying the VAT rate with the net price.

  • Net price * VAT rate = VAT amount
  • 100 EUR * 20% = 20 EUR

 

By paying the sales price, the final consumer pays the VAT amount. Therefore, VAT is known as a “consumption tax”. 

 

VAT is the predominant form of consumption tax in the world. In all countries where VAT is applied, businesses need to plan their sales prices with applying the correct VAT rate, to calculate their margins.

 

VAT rates applicable depend on the products or services of the sales. Standard VAT Rates apply to most consumer products and services. Reduced VAT Rates are usually applied to basic groceries, basic need products and services.

 

Some countries apply Special VAT Rates to control the level of consumption of those products by increasing or decreasing the rates.

 

Knowledge of applicable VAT rules enables businesses to do proper sales price planning, maintain proper bookkeeping, invoicing and further planning of compliance duties.

 

There are many software tools and service providers to support eCommerce sellers and its tax advisors to apply compliance duties to their transaction data. Complying with VAT rules is data driven and rule-based. Mastering transaction data to comply with VAT rules is a major success factor for sustainable growth in eCommerce.

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