Ad valorem tax
Encyclopedia
An ad valorem tax is a tax
based on the value of real estate
or personal property
. It is more common than a specific duty, a tax based on the quantity of an item, such as cents per kilogram, regardless of price.
An ad valorem tax is typically imposed at the time of a transaction (a sales tax
or value-added tax [VAT]), but it may be imposed on an annual basis (real or personal property tax
) or in connection with another significant event (inheritance tax
, surrendering citizenship, or tariff
s). In some countries stamp duty
is imposed as an ad valorem tax.
charged at the point of purchase for certain goods and services. The tax is usually set as a percentage
by the government charging the tax. There is usually a list of exemption
s. The tax can be included in the price (tax-inclusive) or added at the point of sale (tax-exclusive).
Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, and is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a gross receipts tax
levied on the intermediate business
who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale. There are several types of sales taxes: seller or vendor taxes, consumer excise taxes, retail transaction taxes, or value-added taxes.
on exchanges. It is levied on the added value that results from each exchange. It differs from a sales tax
because a sales tax is levied on the total value of the exchange. For this reason, a VAT is neutral with respect to the number of passages that there are between the producer and the final consumer. A VAT is an indirect tax
, in that the tax is collected from someone other than the person who actually bears the cost of the tax (namely the seller rather than the consumer). To avoid double taxation on final consumption, exports (which by definition are consumed abroad) are usually not subject to VAT and VAT charged under such circumstances is usually refundable.
, joint director of the French tax authority, the Direction générale des impôts, as taxe sur la valeur ajoutée (TVA in French
) was first to introduce VAT with effect from 10 April 1954 for large businesses, and extended over time to all business sectors. In France
, it is the most important source of state finance, accounting for approximately 45% of state revenues.
or other property
pays on the value of the property being taxed. There are three species or types of property: Land, Improvements to Land (immovable man made things), and Personal (movable man made things). Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal
of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.
ing goods into the United States
because the amount of duty owed is often based on the value of the imported commodity. Ad valorem taxes (mainly real property tax and sales taxes) are a major source of revenues for state and municipal governments, especially in jurisdictions that do not employ a personal income tax.
"Ad valorem" is used frequently to refer to property values by county tax assessors. In many states, the central appraisal district sends no values to the county tax assessor, who determines the final tax rate to be imposed on the property. Other states use a state tax commission, which notifies the appropriate taxing authorities of the assessed value of property within their billing jurisdiction.
Ad valorem tax relates to a tax with a rate given as a proportion of the price. Virtually all state and local sales taxes in the United States are ad valorem.
The common expression county tax assessor is a misnomer. Assessors do not tax nor do they assess a tax; the assessor's job is to value property (real estate, personal property, etc.), so that officials described as tax assessors would more accurately be called property assessors. After a property's value is determined by the assessor, a tax rate is determined by the appropriate taxing authority, which in turn calculates the tax due by the property owner. The tax is then collected by the tax collector.
Goods and Services Tax (GST) (French
: Taxe sur les produits et services, TPS) is a multi-level value-added tax introduced in Canada on January 1, 1991, by Prime Minister
Brian Mulroney
and finance minister Michael Wilson
. The GST replaced a hidden 13.5% Manufacturers' Sales Tax (MST) because it hurt the manufacturing sector's ability to export. The introduction of the GST was very controversial. As of January 1, 2008, the GST stood at 5%.
As of July 1, 2010, the federal GST and the regional Provincial Sales Tax (PST) were combined into a single value-added sales tax, called the Harmonized Sales Tax
(HST). The HST is in effect in five of the ten Canadian provinces: British Columbia
, Ontario
, New Brunswick
, Newfoundland and Labrador
, and Nova Scotia
.
.
It was introduced by the Howard Government
on 1 July 2000, replacing the previous federal wholesale sales tax
system and designed to phase out the various state and territory taxes such as banking taxes, stamp duty
and land value tax
. While this was the stated intent at the time, the States still charge duty on a various transactions, including but not limited to vehicle transfers and land transfers, insurance contracts and agreements for the sale of land. Many States, such as Western Australia, have made recent amendments to duties laws to phase out particular duties and clarify existing ones. The Duties Act 2008 (WA) is available online at the Western Australian State Law Publisher
.
It was introduced by the Fourth Labour Government
on 1 October 1986 at a rate of 10%. This was increased to 12.5% on 1 July 1989 and 15% on 1 October 2010.
. The EU VAT system is imposed by a series of European Union directive
s, the most important of which is the Sixth VAT Directive (Directive 77/388/EC). Nevertheless, some member states have negotiated variable rates (Madeira
in Portugal
) or VAT exemption for regions or territories. The regions below fall out of the scope of EU VAT:
Under the EU system of VAT, where a person carrying on an economic activity supplies goods and services to another person, and the value of the supplies passes financial limits, the supplier is required to register with the local taxation authorities and charge its customers, and account to the local taxation authority for VAT (although the price may be inclusive of VAT, so VAT is included as part of the agreed price, or exclusive of VAT, so VAT is payable in addition to the agreed price).
VAT that is charged by a business and paid by its customers is known as output VAT (that is, VAT on its output supplies). 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 setting 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.
Different rates of VAT apply in different EU member states. The minimum standard rate of VAT throughout the EU is 15%, although reduced rates of VAT, as low as 5%, are applied in various states on various sorts of supply (for example, domestic fuel and power in the UK). The maximum rate in the EU is 25%.
The Sixth VAT Directive requires certain goods and services to be exempt from VAT (for example, postal services, medical care, lending, insurance, betting), and certain other goods and services to be exempt from VAT but subject to the ability of an EU member state to opt to charge VAT on those supplies (such as land and certain financial services). Input VAT that is attributable to exempt supplies is not recoverable, although a business can increase its prices so the customer effectively bears the cost of the 'sticking' VAT (the effective rate will be lower than the headline rate and depend on the balance between previously taxed input and labour at the exempt stage).
Finally, some goods and services are "zero-rated". The zero-rate is a positive rate of tax calculated at 0%. Supplies subject to the zero-rate are still "taxable supplies", i.e. they have VAT charged on them. In the UK, examples include most food, books, drugs, and certain kinds of transport. The zero-rate is not featured in the EU Sixth Directive as it was intended that the minimum VAT rate throughout Europe would be 5%. However, zero-rating remains in some Member States, most notably the UK, as a legacy of pre-EU legislation. These Member States have been granted a derogation to continue existing zero-rating but cannot add new goods or services.
The UK also exempts or lowers the rate on some products depending on situation; for example milk products are exempt from VAT, but if you go into a restaurant and drink a milk drink it is VAT-able. Some products such as feminine hygiene products and baby products (nappies etc.) are charged at 5% VAT along with domestic fuel.
When goods are import
ed into the EU from other states, VAT is generally charged at the border
, at the same time as customs duty. "Acquisition" VAT is payable when goods are acquired in one EU member state from another EU member state (this is done not at the border but through an accounting mechanism). EU businesses are often required to charge themselves VAT under the reverse charge mechanism where services are received from another member state or from outside of the EU.
Businesses can be required to register for VAT in EU member states, other than the one in which they are based, if they supply goods via mail order to those states, over a certain threshold. Businesses that are established in one member state but which receive supplies in another member state may be able to reclaim VAT charged in the second state under the provisions of the Eighth VAT Directive (Directive 79/1072/EC). To do so, businesses have a value added tax identification number
. A similar directive, the Thirteenth VAT Directive (Directive 86/560/EC), also allows businesses established outside the EU to recover VAT in certain circumstances.
Following changes introduced on July 1, 2003, (under Directive 2002/38/EC), non-EU businesses providing digital electronic commerce
and entertainment products and services to EU countries are also required to register with the tax authorities in the relevant EU member state, and to collect VAT on their sales at the appropriate rate, according to the location of the purchaser. Alternatively, under a special scheme, non-EU businesses may register and account for VAT on only one EU member state. This produces distortions as the rate of VAT is that of the member state of registration, not where the customer is located, and an alternative approach is therefore under negotiation, whereby VAT is charged at the rate of the member state where the purchaser is located.
The differences between different rates of VAT was often originally justified by certain products being "luxuries" and thus bearing high rates of VAT, whereas other items were deemed to be "essentials" and thus bearing lower rates of VAT. However, often high rates persisted long after the argument was no longer valid. For instance, France
taxed cars as a luxury product (33%) up into the 1980s, when most of the French households owned one or more cars. Similarly, in the UK, clothing for children is "zero rated" whereas clothing for adults is subject to VAT at the standard rate of 20%.
shows that taxes on transfers can encourage firms to internalise costs and grow, whereas the absence of such transactions may result in a larger number of individually-smaller firms. For example, a VAT would realign the incentives of a steel mill in favor of operating its own coal mine, as opposed to simply buying coal in a transaction subject to taxation; the theory of the firm's model suggests that this would be less economically efficient as it results in a decline in specialization.
Tax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
based on the value of real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
or personal property
Personal property
Personal property, roughly speaking, is private property that is moveable, as opposed to real property or real estate. In the common law systems personal property may also be called chattels or personalty. In the civil law systems personal property is often called movable property or movables - any...
. It is more common than a specific duty, a tax based on the quantity of an item, such as cents per kilogram, regardless of price.
An ad valorem tax is typically imposed at the time of a transaction (a sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
or value-added tax [VAT]), but it may be imposed on an annual basis (real or personal property tax
Property tax
A property tax is an ad valorem levy on the value of property that the owner is required to pay. The tax is levied by the governing authority of the jurisdiction in which the property is located; it may be paid to a national government, a federated state or a municipality...
) or in connection with another significant event (inheritance tax
Inheritance tax
An inheritance tax or estate tax is a levy paid by a person who inherits money or property or a tax on the estate of a person who has died...
, surrendering citizenship, or tariff
Tariff
A tariff may be either tax on imports or exports , or a list or schedule of prices for such things as rail service, bus routes, and electrical usage ....
s). In some countries stamp duty
Stamp duty
Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp had to be attached to or impressed upon the document to denote that stamp duty...
is imposed as an ad valorem tax.
Sales tax
A sales tax is a consumption taxConsumption tax
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a value added tax...
charged at the point of purchase for certain goods and services. The tax is usually set as a percentage
Percentage
In mathematics, a percentage is a way of expressing a number as a fraction of 100 . It is often denoted using the percent sign, “%”, or the abbreviation “pct”. For example, 45% is equal to 45/100, or 0.45.Percentages are used to express how large/small one quantity is, relative to another quantity...
by the government charging the tax. There is usually a list of exemption
Tax exemption
Various tax systems grant a tax exemption to certain organizations, persons, income, property or other items taxable under the system. Tax exemption may also refer to a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income under some...
s. The tax can be included in the price (tax-inclusive) or added at the point of sale (tax-exclusive).
Ideally, a sales tax is fair, has a high compliance rate, is difficult to avoid, is charged exactly once on any one item, and is simple to calculate and simple to collect. A conventional or retail sales tax attempts to achieve this by charging the tax only on the final end user, unlike a gross receipts tax
Gross receipts tax
A gross receipts tax or gross excise tax is a tax on the total gross revenues of a company, regardless of their source. A gross receipts tax is similar to a sales tax, but it is levied on the seller of goods or service consumers...
levied on the intermediate business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...
who purchases materials for production or ordinary operating expenses prior to delivering a service or product to the marketplace. This prevents so-called tax "cascading" or "pyramiding," in which an item is taxed more than once as it makes its way from production to final retail sale. There are several types of sales taxes: seller or vendor taxes, consumer excise taxes, retail transaction taxes, or value-added taxes.
Value-added tax
A value-added tax (VAT), or goods and services tax (GST), is taxTax
To tax is to impose a financial charge or other levy upon a taxpayer by a state or the functional equivalent of a state such that failure to pay is punishable by law. Taxes are also imposed by many subnational entities...
on exchanges. It is levied on the added value that results from each exchange. It differs from a sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
because a sales tax is levied on the total value of the exchange. For this reason, a VAT is neutral with respect to the number of passages that there are between the producer and the final consumer. A VAT is an indirect tax
Indirect tax
The term indirect tax has more than one meaning.In the colloquial sense, an indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax...
, in that the tax is collected from someone other than the person who actually bears the cost of the tax (namely the seller rather than the consumer). To avoid double taxation on final consumption, exports (which by definition are consumed abroad) are usually not subject to VAT and VAT charged under such circumstances is usually refundable.
History
The VAT was invented by a French economist in 1954. Maurice LauréMaurice Lauré
Maurice Lauré is primarily known for creating the taxe sur la valeur ajoutée ....
, joint director of the French tax authority, the Direction générale des impôts, as taxe sur la valeur ajoutée (TVA in French
French language
French is a Romance language spoken as a first language in France, the Romandy region in Switzerland, Wallonia and Brussels in Belgium, Monaco, the regions of Quebec and Acadia in Canada, and by various communities elsewhere. Second-language speakers of French are distributed throughout many parts...
) was first to introduce VAT with effect from 10 April 1954 for large businesses, and extended over time to all business sectors. In France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
, it is the most important source of state finance, accounting for approximately 45% of state revenues.
Property tax
A property tax, millage tax is an ad valorem tax that an owner of real estateReal estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
or other property
Property
Property is any physical or intangible entity that is owned by a person or jointly by a group of people or a legal entity like a corporation...
pays on the value of the property being taxed. There are three species or types of property: Land, Improvements to Land (immovable man made things), and Personal (movable man made things). Real estate, real property or realty are all terms for the combination of land and improvements. The taxing authority requires and/or performs an appraisal
Appraisal
Economic appraisal is a type of decision method applied to a project, programme or policy that takes into account a wide range of costs and benefits, denominated in monetary terms or for which a monetary equivalent can be estimated. Economic Appraisal is a key tool for achieving value for money and...
of the monetary value of the property, and tax is assessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.
United States
Ad valorem duties are important to those importImport
The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...
ing goods into the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
because the amount of duty owed is often based on the value of the imported commodity. Ad valorem taxes (mainly real property tax and sales taxes) are a major source of revenues for state and municipal governments, especially in jurisdictions that do not employ a personal income tax.
"Ad valorem" is used frequently to refer to property values by county tax assessors. In many states, the central appraisal district sends no values to the county tax assessor, who determines the final tax rate to be imposed on the property. Other states use a state tax commission, which notifies the appropriate taxing authorities of the assessed value of property within their billing jurisdiction.
Ad valorem tax relates to a tax with a rate given as a proportion of the price. Virtually all state and local sales taxes in the United States are ad valorem.
The common expression county tax assessor is a misnomer. Assessors do not tax nor do they assess a tax; the assessor's job is to value property (real estate, personal property, etc.), so that officials described as tax assessors would more accurately be called property assessors. After a property's value is determined by the assessor, a tax rate is determined by the appropriate taxing authority, which in turn calculates the tax due by the property owner. The tax is then collected by the tax collector.
United Kingdom
The third largest source of government revenues is value-added tax (VAT), charged at the standard rate of 20% on supplies of goods and services. It is therefore a tax on consumer expenditure. Certain goods and services are exempt from VAT, and others are subject to VAT at a lower rate of 5% (the reduced rate) or 0% ("zero-rated").Canada
The CanadianCanada
Canada is a North American country consisting of ten provinces and three territories. Located in the northern part of the continent, it extends from the Atlantic Ocean in the east to the Pacific Ocean in the west, and northward into the Arctic Ocean...
Goods and Services Tax (GST) (French
French language
French is a Romance language spoken as a first language in France, the Romandy region in Switzerland, Wallonia and Brussels in Belgium, Monaco, the regions of Quebec and Acadia in Canada, and by various communities elsewhere. Second-language speakers of French are distributed throughout many parts...
: Taxe sur les produits et services, TPS) is a multi-level value-added tax introduced in Canada on January 1, 1991, by Prime Minister
Prime Minister of Canada
The Prime Minister of Canada is the primary minister of the Crown, chairman of the Cabinet, and thus head of government for Canada, charged with advising the Canadian monarch or viceroy on the exercise of the executive powers vested in them by the constitution...
Brian Mulroney
Brian Mulroney
Martin Brian Mulroney, was the 18th Prime Minister of Canada from September 17, 1984, to June 25, 1993 and was leader of the Progressive Conservative Party of Canada from 1983 to 1993. His tenure as Prime Minister was marked by the introduction of major economic reforms, such as the Canada-U.S...
and finance minister Michael Wilson
Michael Wilson (politician)
Michael Holcombe Wilson, PC, CC is a Canadian diplomat, politician and business leader.Born in Toronto, Ontario, Wilson attended Upper Canada College, Trinity College at the University of Toronto where he joined The Kappa Alpha Society...
. The GST replaced a hidden 13.5% Manufacturers' Sales Tax (MST) because it hurt the manufacturing sector's ability to export. The introduction of the GST was very controversial. As of January 1, 2008, the GST stood at 5%.
As of July 1, 2010, the federal GST and the regional Provincial Sales Tax (PST) were combined into a single value-added sales tax, called the Harmonized Sales Tax
Harmonized Sales Tax
The Harmonized Sales Tax is the name used in Canada to describe the combination of the federal Goods and Services Tax and the regional Provincial Sales Tax into a single value added sales tax in five of the ten Canadian provinces: Ontario, New Brunswick, Newfoundland and Labrador, British...
(HST). The HST is in effect in five of the ten Canadian provinces: British Columbia
British Columbia
British Columbia is the westernmost of Canada's provinces and is known for its natural beauty, as reflected in its Latin motto, Splendor sine occasu . Its name was chosen by Queen Victoria in 1858...
, Ontario
Ontario
Ontario is a province of Canada, located in east-central Canada. It is Canada's most populous province and second largest in total area. It is home to the nation's most populous city, Toronto, and the nation's capital, Ottawa....
, New Brunswick
New Brunswick
New Brunswick is one of Canada's three Maritime provinces and is the only province in the federation that is constitutionally bilingual . The provincial capital is Fredericton and Saint John is the most populous city. Greater Moncton is the largest Census Metropolitan Area...
, Newfoundland and Labrador
Newfoundland and Labrador
Newfoundland and Labrador is the easternmost province of Canada. Situated in the country's Atlantic region, it incorporates the island of Newfoundland and mainland Labrador with a combined area of . As of April 2011, the province's estimated population is 508,400...
, and Nova Scotia
Nova Scotia
Nova Scotia is one of Canada's three Maritime provinces and is the most populous province in Atlantic Canada. The name of the province is Latin for "New Scotland," but "Nova Scotia" is the recognized, English-language name of the province. The provincial capital is Halifax. Nova Scotia is the...
.
Australia
The Goods and Services Tax is a value-added tax of 10% on most goods and services sold in AustraliaAustralia
Australia , officially the Commonwealth of Australia, is a country in the Southern Hemisphere comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands in the Indian and Pacific Oceans. It is the world's sixth-largest country by total area...
.
It was introduced by the Howard Government
John Howard
John Winston Howard AC, SSI, was the 25th Prime Minister of Australia, from 11 March 1996 to 3 December 2007. He was the second-longest serving Australian Prime Minister after Sir Robert Menzies....
on 1 July 2000, replacing the previous federal wholesale sales tax
Sales tax
A sales tax is a tax, usually paid by the consumer at the point of purchase, itemized separately from the base price, for certain goods and services. The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale....
system and designed to phase out the various state and territory taxes such as banking taxes, stamp duty
Stamp duty
Stamp duty is a tax that is levied on documents. Historically, this included the majority of legal documents such as cheques, receipts, military commissions, marriage licences and land transactions. A physical stamp had to be attached to or impressed upon the document to denote that stamp duty...
and land value tax
Land value tax
A land value tax is a levy on the unimproved value of land. It is an ad valorem tax on land that disregards the value of buildings, personal property and other improvements...
. While this was the stated intent at the time, the States still charge duty on a various transactions, including but not limited to vehicle transfers and land transfers, insurance contracts and agreements for the sale of land. Many States, such as Western Australia, have made recent amendments to duties laws to phase out particular duties and clarify existing ones. The Duties Act 2008 (WA) is available online at the Western Australian State Law Publisher
New Zealand
The Goods and Services Tax is a value-added tax of 12.5% on most goods and services sold in New ZealandNew Zealand
New Zealand is an island country in the south-western Pacific Ocean comprising two main landmasses and numerous smaller islands. The country is situated some east of Australia across the Tasman Sea, and roughly south of the Pacific island nations of New Caledonia, Fiji, and Tonga...
.
It was introduced by the Fourth Labour Government
Fourth Labour Government of New Zealand
The Fourth Labour Government of New Zealand was the government of New Zealand from 26 July 1984 to 2 November 1990. It enacted major social and economic reforms, including reformation of the tax system. The economic reforms were known as Rogernomics after Finance Minister Roger Douglas...
on 1 October 1986 at a rate of 10%. This was increased to 12.5% on 1 July 1989 and 15% on 1 October 2010.
Europe
A common VAT system is compulsory for member states of the European UnionEuropean Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
. The EU VAT system is imposed by a series of European Union directive
European Union directive
A directive is a legislative act of the European Union, which requires member states to achieve a particular result without dictating the means of achieving that result. It can be distinguished from regulations which are self-executing and do not require any implementing measures. Directives...
s, the most important of which is the Sixth VAT Directive (Directive 77/388/EC). Nevertheless, some member states have negotiated variable rates (Madeira
Madeira
Madeira is a Portuguese archipelago that lies between and , just under 400 km north of Tenerife, Canary Islands, in the north Atlantic Ocean and an outermost region of the European Union...
in Portugal
Portugal
Portugal , officially the Portuguese Republic is a country situated in southwestern Europe on the Iberian Peninsula. Portugal is the westernmost country of Europe, and is bordered by the Atlantic Ocean to the West and South and by Spain to the North and East. The Atlantic archipelagos of the...
) or VAT exemption for regions or territories. The regions below fall out of the scope of EU VAT:
- Åland IslandsÅland IslandsThe Åland Islands form an archipelago in the Baltic Sea. They are situated at the entrance to the Gulf of Bothnia and form an autonomous, demilitarised, monolingually Swedish-speaking region of Finland...
(FinlandFinlandFinland , officially the Republic of Finland, is a Nordic country situated in the Fennoscandian region of Northern Europe. It is bordered by Sweden in the west, Norway in the north and Russia in the east, while Estonia lies to its south across the Gulf of Finland.Around 5.4 million people reside...
) - HeligolandHeligolandHeligoland is a small German archipelago in the North Sea.Formerly Danish and British possessions, the islands are located in the Heligoland Bight in the south-eastern corner of the North Sea...
island, BüsingenBüsingenBüsingen am Hochrhein is a German town entirely surrounded by the Swiss canton of Schaffhausen and, south across the Rhine, by the cantons of Zürich and Thurgau. It has a population of about 1,450 inhabitants...
territory (GermanyGermanyGermany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
) - GuadeloupeGuadeloupeGuadeloupe is an archipelago located in the Leeward Islands, in the Lesser Antilles, with a land area of 1,628 square kilometres and a population of 400,000. It is the first overseas region of France, consisting of a single overseas department. As with the other overseas departments, Guadeloupe...
, MartiniqueMartiniqueMartinique is an island in the eastern Caribbean Sea, with a land area of . Like Guadeloupe, it is an overseas region of France, consisting of a single overseas department. To the northwest lies Dominica, to the south St Lucia, and to the southeast Barbados...
, French GuianaFrench GuianaFrench Guiana is an overseas region of France, consisting of a single overseas department located on the northern Atlantic coast of South America. It has borders with two nations, Brazil to the east and south, and Suriname to the west...
, RéunionRéunionRéunion is a French island with a population of about 800,000 located in the Indian Ocean, east of Madagascar, about south west of Mauritius, the nearest island.Administratively, Réunion is one of the overseas departments of France...
(FranceFranceThe French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
) - Mount AthosMount AthosMount Athos is a mountain and peninsula in Macedonia, Greece. A World Heritage Site, it is home to 20 Eastern Orthodox monasteries and forms a self-governed monastic state within the sovereignty of the Hellenic Republic. Spiritually, Mount Athos comes under the direct jurisdiction of the...
(GreeceGreeceGreece , officially the Hellenic Republic , and historically Hellas or the Republic of Greece in English, is a country in southeastern Europe....
) - CeutaCeutaCeuta is an autonomous city of Spain and an exclave located on the north coast of North Africa surrounded by Morocco. Separated from the Iberian peninsula by the Strait of Gibraltar, Ceuta lies on the border of the Mediterranean Sea and the Atlantic Ocean. Ceuta along with the other Spanish...
, MelillaMelillaMelilla is a autonomous city of Spain and an exclave on the north coast of Morocco. Melilla, along with the Spanish exclave Ceuta, is one of the two Spanish territories located in mainland Africa...
, The Canary Islands (SpainSpainSpain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
) - LivignoLivignoLivigno is a town and comune in the province of Sondrio, in the region of Lombardy, Italy, located in the Italian Alps.- Geography :Livigno is located 1,816 metres above sea level. Livigno's main river is called Aqua Granda or Spöl. Trepalle, a frazione in the municipality of Livigno, is...
, Campione d'ItaliaCampione d'ItaliaCampione d'Italia is an Italian comune of the Province of Como in the Lombardy region, occupying an enclave within the Swiss canton of Ticino, separated from the rest of Italy by Lake Lugano and mountains...
, Lake LuganoLake LuganoLake Lugano is a glacial lake in the south-east of Switzerland, at the border between Switzerland and Italy. The lake, named after the city of Lugano, is situated between Lake Como and Lago Maggiore...
(ItalyItalyItaly , officially the Italian Republic languages]] under the European Charter for Regional or Minority Languages. In each of these, Italy's official name is as follows:;;;;;;;;), is a unitary parliamentary republic in South-Central Europe. To the north it borders France, Switzerland, Austria and...
) - GibraltarGibraltarGibraltar is a British overseas territory located on the southern end of the Iberian Peninsula at the entrance of the Mediterranean. A peninsula with an area of , it has a northern border with Andalusia, Spain. The Rock of Gibraltar is the major landmark of the region...
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Under the EU system of VAT, where a person carrying on an economic activity supplies goods and services to another person, and the value of the supplies passes financial limits, the supplier is required to register with the local taxation authorities and charge its customers, and account to the local taxation authority for VAT (although the price may be inclusive of VAT, so VAT is included as part of the agreed price, or exclusive of VAT, so VAT is payable in addition to the agreed price).
VAT that is charged by a business and paid by its customers is known as output VAT (that is, VAT on its output supplies). 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 setting 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.
Different rates of VAT apply in different EU member states. The minimum standard rate of VAT throughout the EU is 15%, although reduced rates of VAT, as low as 5%, are applied in various states on various sorts of supply (for example, domestic fuel and power in the UK). The maximum rate in the EU is 25%.
The Sixth VAT Directive requires certain goods and services to be exempt from VAT (for example, postal services, medical care, lending, insurance, betting), and certain other goods and services to be exempt from VAT but subject to the ability of an EU member state to opt to charge VAT on those supplies (such as land and certain financial services). Input VAT that is attributable to exempt supplies is not recoverable, although a business can increase its prices so the customer effectively bears the cost of the 'sticking' VAT (the effective rate will be lower than the headline rate and depend on the balance between previously taxed input and labour at the exempt stage).
Finally, some goods and services are "zero-rated". The zero-rate is a positive rate of tax calculated at 0%. Supplies subject to the zero-rate are still "taxable supplies", i.e. they have VAT charged on them. In the UK, examples include most food, books, drugs, and certain kinds of transport. The zero-rate is not featured in the EU Sixth Directive as it was intended that the minimum VAT rate throughout Europe would be 5%. However, zero-rating remains in some Member States, most notably the UK, as a legacy of pre-EU legislation. These Member States have been granted a derogation to continue existing zero-rating but cannot add new goods or services.
The UK also exempts or lowers the rate on some products depending on situation; for example milk products are exempt from VAT, but if you go into a restaurant and drink a milk drink it is VAT-able. Some products such as feminine hygiene products and baby products (nappies etc.) are charged at 5% VAT along with domestic fuel.
When goods are import
Import
The term import is derived from the conceptual meaning as to bring in the goods and services into the port of a country. The buyer of such goods and services is referred to an "importer" who is based in the country of import whereas the overseas based seller is referred to as an "exporter". Thus...
ed into the EU from other states, VAT is generally charged at the border
Border
Borders define geographic boundaries of political entities or legal jurisdictions, such as governments, sovereign states, federated states and other subnational entities. Some borders—such as a state's internal administrative borders, or inter-state borders within the Schengen Area—are open and...
, at the same time as customs duty. "Acquisition" VAT is payable when goods are acquired in one EU member state from another EU member state (this is done not at the border but through an accounting mechanism). EU businesses are often required to charge themselves VAT under the reverse charge mechanism where services are received from another member state or from outside of the EU.
Businesses can be required to register for VAT in EU member states, other than the one in which they are based, if they supply goods via mail order to those states, over a certain threshold. Businesses that are established in one member state but which receive supplies in another member state may be able to reclaim VAT charged in the second state under the provisions of the Eighth VAT Directive (Directive 79/1072/EC). To do so, businesses have a value added tax identification number
Value added tax identification number
A value added tax identification number or VAT identification number is an identifier used in many countries, including the countries of the European Union, for value added tax purposes....
. A similar directive, the Thirteenth VAT Directive (Directive 86/560/EC), also allows businesses established outside the EU to recover VAT in certain circumstances.
Following changes introduced on July 1, 2003, (under Directive 2002/38/EC), non-EU businesses providing digital electronic commerce
Electronic commerce
Electronic commerce, commonly known as e-commerce, eCommerce or e-comm, refers to the buying and selling of products or services over electronic systems such as the Internet and other computer networks. However, the term may refer to more than just buying and selling products online...
and entertainment products and services to EU countries are also required to register with the tax authorities in the relevant EU member state, and to collect VAT on their sales at the appropriate rate, according to the location of the purchaser. Alternatively, under a special scheme, non-EU businesses may register and account for VAT on only one EU member state. This produces distortions as the rate of VAT is that of the member state of registration, not where the customer is located, and an alternative approach is therefore under negotiation, whereby VAT is charged at the rate of the member state where the purchaser is located.
The differences between different rates of VAT was often originally justified by certain products being "luxuries" and thus bearing high rates of VAT, whereas other items were deemed to be "essentials" and thus bearing lower rates of VAT. However, often high rates persisted long after the argument was no longer valid. For instance, France
France
The French Republic , The French Republic , The French Republic , (commonly known as France , is a unitary semi-presidential republic in Western Europe with several overseas territories and islands located on other continents and in the Indian, Pacific, and Atlantic oceans. Metropolitan France...
taxed cars as a luxury product (33%) up into the 1980s, when most of the French households owned one or more cars. Similarly, in the UK, clothing for children is "zero rated" whereas clothing for adults is subject to VAT at the standard rate of 20%.
Impact
The theory of the firmTheory of the firm
The theory of the firm consists of a number of economic theories that describe the nature of the firm, company, or corporation, including its existence, behavior, structure, and relationship to the market.-Overview:...
shows that taxes on transfers can encourage firms to internalise costs and grow, whereas the absence of such transactions may result in a larger number of individually-smaller firms. For example, a VAT would realign the incentives of a steel mill in favor of operating its own coal mine, as opposed to simply buying coal in a transaction subject to taxation; the theory of the firm's model suggests that this would be less economically efficient as it results in a decline in specialization.
External links
- http://www.investopedia.com/terms/a/advaloremtax.asp