Tax on the added-value

History

Origins

The tax on the added-value was invented by the French tax inspector Maurice Lauré in 1954, then assistant editor of the Head office of the Taxes. Its idea convinces the political directors by his effectiveness: the VAT is raised on each company progressively of the production process. Previously, the installation of such an indirect tax (one spoke about the Tax on the turnover) caused mistrust because he had been thought only like final taking away near a great number of tradesmen and retailers. The system of Lauré was set up on April 10th, 1954 and touched initially the large companies. January 6th, 1966, on proposal of Valery Giscard d'Estaing then Minister for Finance, the VAT is extended to the retail business. The normal level, initially fixed at 17,6% then passed to 18,6%, then 20,6% as from the 1995 to go down again to 19,6% starting from April 1st 2000.

VAT in the European Union

In the middle of the years 1960, the success of the VAT in France encourages the Member States of the Common Market to adopt the VAT to replace the systems of indirect taxation of the goods and services existing in each country. April 11th, 1967, the the Council of Ministers adopts the Directive 67/227/CEE (1st directive VAT) - always into force currently - which establishes the bases and the principles of the Community system of the taxes on the Turnover. This directive is coming into effect on January 1st, 1970. There were however exceptions, all the Member States not being ready with this date. Nevertheless, on January 1st, 1974, the directive was applicable in all the Member States of the time.

At the same time, the Council had adopted the 2nd directive VAT which laid down rules of harmonization out of matter:

of definition of the taxable operations
of rules of Territoriality (Place of the taxable operations)
of Plate (Taxable amount)
of Exemption S. (it would be advisable to say exemption)

Harmonization of the VAT in the European Union

Very quickly, a need increased for harmonization was going to be felt, which was going to push the Council, on Commission proposal to adopt on May 17th, 1977 the directive 77/388/CEE (6th directive VAT) which constitutes still at the present time the text of reference as regards Community VAT. In accordance with the treaties founders of the European Union, all the Member States had to transpose this directive, as well as the modifications which it underwent with the wire time, in their internal legal order.

It was in the same way for the newcomers in the Community, the directives adopted by the European Union belonging to the community asset that the latter have the obligation to transpose in their internal legal order to become Member States.

The transitory mode of 1993

The most important modification of the 6th directive is that which is coming into effect on January 1st, 1993, at the time when the advent of the Single European market abolished customs controls at the borders for the intracommunity traffic of goods.

Notwithstanding the disappearance of these controls, it was necessary to implement measurements making it possible to ensure the tax follow-up of the goods. It was the occasion to introduce into the regulation a new category of exemptions, namely those which apply to the intracommunity deliveries of goods as well as a new called taxable operation the intracommunity Acquisition of goods.

In fact, measurements in question were to be only transitory, a final mode of tax on the exchanges of goods between the Member States having to be adopted and come into effect on January 1st, 1997. Fault of agreement between the Member States, the final mode was never adopted so that at present it is always the transitory mode initiated into 1993 which regulates the intracommunity traffic of goods.

The reform of 1993 was also the occasion to implement measurements of harmonization as regards VAT rate. Thus, the normal level was fixed at a minimum of 15%. No agreement could however be found on a maximum normal level; from where the great disparity of the current rates in the Community: from the 15% applied to the Grand Duchy of Luxembourg to the 25% (without reduced taxes) applied to the Denmark. At the same time, the Member States were authorized to apply one or more reduced taxes.

As it had proven to be impossible to gum the great disparities of rate, the transitory mode also contained intended measures to avoid the “tax shopping” of the taxable people, i.e. the purchase in the country where the VAT is the least expensive. These measurements are indicated under the term of mode of the remote sales.

Recent developments

Since then, the 6th directive underwent other modifications, in particular as regards:

specific scheme for the sales of goods of occasion and works of art
telecommunication services
transactions on gold intended for ends of placement
electronic services (in particular all related services with the use of Internet)
harmonization of the invoices
electronic invoicing
sales of electricity and gas by drains

With the wire of time, the many modifications inserted in the text of the 6th directive ended up returning the text little structured and difficult to read. To cure in this state of the things, the European commission proposed in 2004 a new text which, according to its own terms, " codify the current provisions without modifying the legislation in force. The modifications of structure and presentation only aim at improving quality of the text. The substance of this last is of nothing modifiée". In other words, the directive 2006/112/CE adopted by the Conseil of the European Union on November 28th, 2006 causes to consolidate in a single text the preexistent directives 67/227/CEE (1e directing) and 77/388/CEE (6th directive) without deteriorating of it less world the text and the range. The new directive in addition contains an appendix comprising a table of agreement between the articles of the 1e and 6th directives and those of the directive 2006/112/CE.

Current location in the European Union: an unfinished harmonization

Although the 6th directive has, to a large extent, harmonized the common system of taxation of the turnover, of many disparities remain between the Member States:

in many fields, the directive leaves with the Member States the choice between various options, which necessarily leads to different applications according to the practices and of the national preferences
of the divergences of interpretation of the Community texts exist between Member States, leading in particular to cases of non-taxation or double taxation of the same operation. In this context, the jurisprudence of the Court of justice of the European Communities already played - and will continue to play - a uniformisator part of first importance
adaptation of the practices of each country: the Czech Republic had to raise her VAT rates from 5% to 22% on the restoration and the phone services at the time of its adhesion to the European Union.
requests for exemption on behalf of the governments wishing to use a fall of VAT to start again an economic activity. The Polish Parliament voted little before adhesion an exemption of VAT on the supply of access Internet to the private individuals which, a priori, appears contrary with the provisions of the 6th directive.
the unpopularity of the Commission to the eyes of the taxpayers when their national government cannot lower VAT rate directly, even if they are the Member States themselves which decided some thus unanimously!
the wish of the Member States to be able to carry out to them Fiscal policy freely, often regarded as one of the last ramparts of the National sovereignty.

To solve the problems mentioned in particular above, the Commission of the European Communities continuous to file in draft Directives regularly intended to improve operation of the VAT as to make it pay in the country where the goods are sold and not where it is bought. These proposals are nevertheless difficult to make pass, any decision of the the Council of Ministers of the European Union requiring the unanimity of the Member States to be adopted.

VAT in the world

In same time, the VAT gradually was essential in many countries which are not members of the European Union like the mechanism of taxation preferred for the goods and the services. At present, among the developed countries, only the the United States did not adopt the VAT, preferring a system close to " to them; Dirty taxes " ( taxation of the sale , cf). Canada also uses the principle of the dirty taxes . The rate defined by each federate State or province (Canada) is added at the national rate (for example, 6,45% + 7% with the Quebec).

Field of application of the VAT

In France

The field of application of the VAT is defined in two manners: on the one hand by the taxable operations with the VAT and on the other hand by the rules of territoriality.

Operations subjected to VAT

It is necessary to distinguish the operations which are out of the field of application of the VAT and the operations which, being in the field of application of the VAT are subjugated with the VAT or are exonerated from it.

Being oneself the operations out of the field of application of the VAT, they act, overall of the operations carried out by the not-taxable people (article 4 of the 6th directive), such as the people who are not independent (employees) or the public agencies for the operations carried out as a public authority. It is the same of the operations carried out by the companies in " good father of famille" (perception of dividends) which constitutes operations out of the field of application of the VAT because of the absence of counterpart.

Being oneself the operations located in the field of application of the VAT, they are necessary to distinguish the operations which are exonerated from the subjugated VAT and operations.

The operations are taxable under the terms of their nature or of the quality of their author, the principle is rather simple: Are subjected obligatorily to the VAT the supplies of goodss and the performances of service which concern an economic activity carried out subject to payment by a taxable person.

It is necessary here to include/understand delivery with the legal direction transfer of property , and consequently one understands by supplies of goodss all the sales transactions of tangible asset; by performances of service one understands all the operations other than the sale of tangible asset (transport, work of studies, expertises, etc). The concept of economic activity as for it embraces a very broad sector, the sector of the operations of the economic market, whether it is the production, the trade or the services. By subject to payment , one understands the operations concluded in exchange from a counterpart, but not monetary forcing, indeed barter is him also touched by the VAT. To finish, the concept of subjugated designates all the natural persons or morals which carry out in an independent way, that it is in a usual or occasional way, of the operations touched by the VAT.

Ensuite comes the taxable operations under the terms of a provision express of the legislator. Of the General Tax Code a list of operations contains which are taxable with the VAT although not answering the definition of principle above. By this article the deliveries are aimed in particular to oneself, for example a company of manufacture of offices which for the needs for the company would deliver pieces of furniture on a purely free basis with the seat of the company. This operation is obligatorily subjected to the VAT. In addition this category aims also the production and the sale of new buildings.

Conversely, certain operations are exonerated from VAT. One distinguishes the operations nonsubjugated by nature (for example the loans, medical acts, purchases near not fixed public agencies), and the operations normally taxable but excluded by the legislator. This second category gathers mainly the operations of export (sales out of the national territory), in order to support the competitiveness of the market products abroad. To note that the export businesses can despite everything deduce the VAT which they pay on their purchases.

There exist finally operations subjected on option to the VAT: certain activities are not subjected to the VAT according to the rules of the common right of the VAT, but the organizations or the people who carry them out are authorized to voluntarily subject itself to this mode. They find interest there because they can thus recover the VAT which they usually pay on their purchases, which they could not make as long as they did not collect the VAT.

Territoriality

the supplies of goodss at the beginning of the Metropolitan France for the Metropolitan France are subjected to the VAT;
the supplies of goodss at the beginning of France towards the foreigner or the DOM-TOM are exonerated;
Contrary, imports, therefore the supplies of goodss whose starting place is abroad are subjected to the VAT;
As regards territoriality, of the rather complex rules applies to the performances of service. The general rule wants that service is subjected to the French VAT when the person receiving benefits of the service is established in France. This rule applies however only to title back-up troop and applies only when no exception is applicable. These exceptions are primarily based on the nature of the service or the identity (taxable person or not of the taker). It can thus happen that a French company invoices with another French company of the services without the French VAT not being supposed to be carried in account. It would be for example the case if a French architect invoices with a French promoter the design of the plans of a building which must be set up in Brussels. In this case, it is the Belgian VAT which must be carried in account, because it is the place where the building is established which is determining to locate the operation fiscally.
the operations carried out in Guyana are not subjected to VAT.

Operation of the VAT

In France

The mechanism of operation of the VAT rests on collected VAT from which one withdraws deductible VAT .

Collected VAT

The collected VAT is that which the taxable people invoice with their customers. It follows the rules relating to the taxable amount, the applicable rate and the operative event.

the bases imposition of the VAT is defined by General Tax Code (cgi). The taxable amount, according to this article, is made up of all the sums, values, received or to receive by the supplier or the service provider n the other hand of the delivery or the service. More simply the VAT must be calculated on the whole of the selling price of the good, by adding to it if it is necessary the postage and packing, and by excluding the taxes. An exception: the VAT on electricity is also calculated on the municipal tax and the departmental tax.
In Metropolitan France, there exist three applicable VAT rates :

the normal rate , to 19,6%, which applies to all the sales transactions of goods or services except those subjected by the law toanother rate;
the reduced rate , to 5,5%, for the products of first need and everyday consumption: not transformed food goods for example, as certain cultural products like the books ( cf the General Tax Code which contains a complete listing of the products to which this rate is applied);
the rate super-tiny room , to 2,1%, which relates to only very few categories of goods, for example refundable drugs by the Social security, press publications and the ticketting of the first 140 stage performances of works lately created or presented in a new setting in scene.
Of other reduced taxes also exists for the Corsica and DOM.

the makes generating , governed by of the cgi, is the fact by which are carried out the legal conditions necessary for the chargeability of tax. The operative event occurs at the time of the delivery, the purchase, intracommunity acquisition or the performance of service. The current liability corresponds to the right that the Treasury can put forward near the debtor to obtain the payment of the tax. The tax is exigible for the intracommunity deliveries, purchases, and acquisitions at the time of the supervening of the operative event. It intervenes for the performances of service at the time of the cashing of the price or the installments.

the VAT on the flows is that exigible at the time from the invoicing. It relates to primarily the sale of goods: the date appointed for the operative event is that of the transfer of property or the provision of the good, in other words the date being reproduced on the invoice.
the VAT on the cashings is exigible at the time from the payment by the customer. She addresses herself to the performances of service and the supplies uninterrupted (electricity, telephone). She is exigible on the intermediate payments in advance and payments. A taxable person with the VAT on the cashings can always choose the VAT on the flows: the invoice often preceding the payment, it will pay the VAT earlier, but its management will be simplified by it (VAT related on the invoice and not to the payments) and this mechanism will make it possible its customer to deduce this VAT as of reception from the invoice.

Deductible VAT

The taxable people with the VAT profit from the possibility of deducing the VAT which they supported on their purchases of goods or services necessary to their activities. This mechanism was installed so that the VAT remains neutral for the subjugated companies so as not to add an additional fiscal charge and especially so that this tax relates indeed to the added-value.

If the company must collect the VAT on the sales which it carries out, it has the right to deduce that which its suppliers invoice to him. To profit from the deduction, it is necessary to join together a certain number of conditions:

Formal requirements: the deduction of VAT must be justified by the invoices relating to the purchases giving right to the deduction. The invoice must comprise several obligatory mentions of which most important are: price HT, the amount of VAT, it (S) rate applied (S). Moreover the invoice must correspond to a real operation.
Basic conditions: to profit from this deduction, the most important condition is to be indebted VAT or to be comparable with a debtor (undertaken export for example). Moreover the VAT is deductible only if the goods concerned are assigned to the production or the operation of the exploitation.

For example, a chief of individual business which exploits his activity in its house can deduce the VAT related with its expenditure only on the part of the expenditure professionnelles.

Conditions of time: The deduction is normally valid only for the payment of the month during which the operation was carried out. A contrario , one cannot deduce by anticipation an expenditure to come, for example the payment of one service provider at the end of his service. To summarize, the rule is that the VAT deductible under the operations of purchases of goods or a month services given is charged to the amount of VAT collected during the same month. There is however possibility of regularizing the VAT in the 2 years after creation of the operative event.
Certaines operations, although giving right normally a deduction of VAT has, is excluded from it by provision express of the legislator. He is thus expenditure of housing of the leaders or members of the personnel, of transport of people, oil products (of the easings exist for these two last categories). A second category of expenditure does not give right to deductions, they are the goods bought in order to give them or to sell them at a very low price compared to the usual prices (there still of the easings were set up, in particular for the gifts of low value)

Clear VAT to pay

Every month, the company transfers with the Service Taxes of Companies (S.I.E.) the VAT which it collected near the customers. It from of deduced the VAT which it paid with its suppliers and transfers the difference with the S.I.E. When the amount of collected VAT is higher than the deductible amount of VAT, one speaks about clear VAT to pay . On the other hand if the deductible VAT is more important than the collected VAT, the company what is called has a credit of VAT . Two solutions are offered to it:

Is the credit of VAT will be deduced from the VAT to pour on the next CA3 or the next installment;
Is the company can require of the SIE to refund this credit to him. Refunding is possible when the collected VAT is systematically weaker than the deduced VAT, frequent case for the export businesses, or when the credit will last a long time, following a large investment for example.

Concretely, the company notes the amount of the collected VAT and of the deductible VAT on a printed paper form-type called CA 3 qu ' it returns to the SIE towards the 20 of the next month accompanied by the check of the clear VAT to pay. In the case of the small companies, the tax department simplifies the declaration while making pay each quarter an installment of VAT which will be regularized at the end of the year when the real results are known. In France since 2001, it is possible of télétransmettre its VAT in EFI (computerized Exchange of forms) or EDI (computerized Exchange of information) to the Edifact standard. In EFI, it is possible to declare and pay its VAT on Internet with Télétva. The payment by télérèglement is even obligatory since January 2006 for the companies carrying out 1.500.000 euros of turnover net of tax. The threshold which was initially to be lowered to 760.000 euros as from January 2007 at summer pushed back as of the provision of the certificate emitted by the DGI (for the companies only). Since August 2007 the DGI places at the disposal free a numerical certificate for submission to all the professionals who télédéclarent their VAT. This certificate usable and is intended only for tax téléprocédures of the professionals.

VAT rate

Country except EU

(*) Note: To Canada of the provincial taxes are added to the VAT, for example 7,5% in Quebec for a total of 13,95% of taxes (the TVQ applies to the TPS).

In the United States there does not exist federal tax on the added-value, but each state can impose some. The majority of the states impose between 5 and 10%, but some states like Oregon, Alaska or Delaware do not have VAT. Because of this disparity, the prices are indicated excluding VAT, with load for the consumer to add the rate of the state where it makes his purchase.

Country of the European Union

In the European Union, there exist 3 VAT rates:

the rate super tiny room: 5% maximum, for the drugs for example,
the reduced tax: minimum 5%, for the food products for example
the normal level: ranging between 15 and 25%
the rate on the luxury items, used in particular in France, was removed

(**) Note: In Belgium, certain goods are subjected to the VAT at the rate of zero pourcent, the such periodicals and materials of recovery.

(***) since January 1st, 2007

(****) Normal level brought back to 8,5% to Guadeloupe and Martinique, not of VAT to Guyana

Defraud carousel

The fraud carousel is in fact a form of fraud which consists in being made refund the deductible VAT on its purchases by declaring deliveries intracommunity exonerated fictitious. On the whole of the European Union, the cost of these intrigues is evaluated in a fork going from 15 to 50 billion euros per annum. …

Critical considerations on the VAT

The taxation of consumption weighs identically on the poor or rich household consumption, but in proportion of the income, they weigh more on the low incomes;

The VAT is a redistributive tax not : apparent rates of VAT paid by the households, i.e. the amount of VAT divided by the consumer expenditure of the household, varies little according to the level of incomes of households. The rate of effort (amount of VAT discharged compared to the income) is decreasing with the standard of living, partly because the high incomes devote a more significant part to the saving (whose incomes will be them-even taxed).

The poorest households devote a part a little greater of their incomes to the VAT, but a weaker part of their expenditure: the fiscal charge of the VAT, expressed as a percentage of the expenditure, the 10% of the households to the highest standard of living is of 11,6%. That of the 10% of the households to the lowest standard of living is of 10,5%

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