INTRODUCTION TO THE VALUE ADDED TAX (VAT) Copyright, Rita Marie Cain, 2001

VAT Terminology Output VAT: Amount received by a seller as a percentage of the gross sale price of goods or services Input VAT: Amount paid by a buyer as a percentage of the gross purchase price for goods or services used in production.

VAT Terminology VAT Terminology (continued) Place of Supply: If goods or services are supplied from a VAT jurisdiction, the transaction is subject to VAT and the supplier must collect it. (Buyers in VAT jurisdictions who buy from non-VAT sellers may still owe input VAT. Self-assessment and remittance required). Place of transport: If goods are to be delivered, place of supply is the place where TRANSPORT BEGINS. Affects non-VAT sellers (such as US firms) that drop ship goods from sources within VAT jurisdictions.

VAT Terminology VAT Terminology (continued) Zero Rated: Transactions in which the seller collects no output tax and the corresponding input tax is fully refundable. Exports are zero rated Exempt: Transactions in which the seller collects no output tax but the corresponding input tax is non-refundable and absorbed by the seller. Financial services are commonly exempt.

VAT Calculation VAT taxpayers RELATE total OUTPUT VAT (amounts received from buyers in sales) to their total INPUT VAT (amounts paid to sellers in purchases). When total Output VAT exceeds total Input VAT the difference is paid to the taxing jurisdiction. When total Input VAT exceeds total Output VAT the taxpayer is entitled to a refund. Input VAT paid toward goods or services eventually sold in exempt transactions are not included in the running VAT calculation.

Classic VAT Application Manufacturer I purchases raw materials for parts production. The VAT paid by Manufacturer I goes into its VAT calculation as Input VAT. (Seller of raw materials treats the VAT collected as Output VAT). Manufacturer I produces machine parts with the raw materials. In the sale of machine parts to Manufacturer II, Manufacturer I collects Output VAT. Manufacturer II tallies the VAT paid as Input VAT in its running calculation.

Classic VAT Application Classic VAT Application (continued) Machine parts are components of equipment produced and sold by Manufacturer II to Service Provider I. In the sale of this equipment, Manufacturer II collects Output VAT, which goes into its running calculation. Service Provider I pays Input VAT on the equipment purchased for use in its services firm. When the Service Provider uses the equipment to perform services for Customers, it charges Output VAT on the price of the services. (VAT in most consumer service transactions IS WAIVED).

VAT ISSUES IN E-COMMERCE US virtual sellers of goods trigger VAT obligations by shipping from suppliers in VAT jurisdictions. What constitutes presence for place of supply determination? Most agree that a web server in a VAT jurisdiction is not enough.

VAT ISSUES IN E-COMMERCE VAT ISSUES IN E-COMMERCE (continued) Are digitally-transmitted products goods or services? VAT is WAIVED for consumers in service transactions, but not for goods. If digitally-transmitted items are goods then tax is due from businesses and consumers. But if seller is in a non-VAT jurisdiction, (with no VAT collection obligation), then VAT authorities have no imports and customs documentation to help monitor purchases and enforce self-assessment by buyers.

VAT ISSUES IN E-COMMERCE VAT ISSUES IN E-COMMERCE (continued) In certain service transactions that could be completed over the internet, the European Union treats Place of Supply as the CUSTOMERS LOCATION (e.g., transfer of intellectual property, advertising, consulting, and data processing). Virtual customers location could be unknown to sellers from VAT jurisdictions. Business buyers in VAT jurisdictions must self- assess and remit their home input VAT in these service transactions when a non-VAT seller does not collect it.

VAT ISSUES IN E-COMMERCE VAT ISSUES IN E-COMMERCE (continued) Internet Access is treated as telecommunications services by EU. VAT for telecom services to CONSUMERS is NOT WAIVED. EU expects non-VAT telecom service providers (including internet service providers) to collect and remit applicable VAT.