Say the VAT rate is 20%. Now if you buy something for $100, install it and charge $100 to your customer, you get back $20 from the tax authority and pay them $20, so if billing cycles align no money actually flows to or from the tax authority. But if you add value, say by buying $100 in parts, assemble them and sell the assembly for $150, you get back $20 for parts purchased but collect $30 for the sale, creating a net flow of $10 to the tax authority.
If everything happens under the same tax authority this nuance doesn't matter, in total there's always a $30 tax on a $150 part, no matter how complex the supply chain. But if more countries are involved the difference matters: if a company in Poland makes parts worth $100 and a company in Germany assembles them and sells them in the German market for $150, that's $20 in taxes for Poland and $10 for Germany. With a sales tax that's only collected when selling to a consumer it would have been $30 for Germany and $0 for Poland.
compare to American sales taxes, where sellers have no economic incentive to collect sales taxes beyond the probability of being caught and fined.
If it was optional if you didn't want to claim expended VAT, quite a few companies would happily choose that, because you don't pay VAT on labor and that's the biggest cost in many industries. If you're primarily b2c, you could effectively lower your prices by a good chunk or get a healthy chunk of extra profit.
But you can't, because there's no choice, it's just the law.
I don't know any numbers, but I only ever see it being used by sellers on Amazon.
The advantage of this, is that if you have to have accounting for sales, you'll probably have accounting too for labour, and you'll also pay income tax, social security, etc.
If i offer a service for 100 €. I have play VAT for i, typically i add these to the bill, but for the sake of simple numbers i dont.
As an example, i have following costs for offering the service: - Materials: 20€ - i can deduct these from the VAT. - Salaries: 60€ - i can NOT deduct these from the VAT. - Profit: 20€ - i can NOT deduct these from the VAT.
So earning my company 100€ will have me pay (in switzerland for example 7%) approximately 6€ VAT, the 1€ i did not have to pay, must be paid by the producer of the materials. Of course you can argue that the customer pays the 6€ and my company only pays the 1€, but it's never the less always a split bill.
So in your case the raw material producer would collect €1 of VAT from you, but this is entirely fictional, because you can immediately claim it back. Only when you sell the goods to an end consumer would VAT that cannot be claimed back be due.
Edit: Congratulations to the people who are down voting very basic mathematics.
Many B2B offers and proposals are negotiated or priced without VAT mentioned, but it is absolutely added to the bill.
The only time it "nets out" is if a business has the same expenses for their purchases as for their sales, meaning they're soon bankrupt.
Alice digs up some copper and tin and sells it to Bob for 10€ + 3€ VAT = 13€. Alice remits the 3€ to the authorities on Bob's behalf.
Bob casts bronze bars and sells them to Carol for 39€ + 11.70€ = 50.70€. Bob claims a 3€ refund for VAT he paid Alice and remits 11.70€ to the authorities on Carol's behalf.
Carol makes a sculpture from the bronze and sells it to a customer for 1014€ + 304.20€ VAT = 1318.20€. Carol claims a 11.70€ refund for VAT paid and remits 304.20€ to the authorities.
The end customer ends up paying 100% of the total VAT (304.20€). Everyone else nets out to 0.
You're correct with your calculations, but it's not honest to say that the customer pays the VAT and therefore it nets out for a business.
What's happening is that a business gets refunded by the government for any VAT they pay. Alice charges Bob VAT. Alice remits the money to the tax authorities who then refunds Bob the money they paid.
If after paying payroll taxes, the government decided to hand all the money back, that would be VAT. The only one who doesn't get refunded is the final customer.
Consider a business who only purchase products and sell them to consumers for a higher price:
Step 1: They buy inventory for a total of €1000. €250 of that is 25% VAT. They have paid a total of €250 in VAT.
Step 2: They sell inventory for a total of €1200. €300 of that is 25% VAT. They have charged a total of €300 in VAT.
Deducting what they paid from what they have charged, you get €300 - €250 = €50. They have to pay the government €50.
And this is for a business who only resells products with a margin. Normally a business tries to minimize their costs and maximize their revenue, meaning that the difference in VAT will be even bigger.
I urge you to examine these common myths with a clear mind. It doesn't matter if your family and uncles believe in them or if the people here on HN believe in them. What matters is when your business financials are wrong and you're loosing money unexpectedly because you have believed in something which isn't true.
They indeed pay no net VAT (it's not a cost for them in the sense of their profit and loss statement), but they do remit a bit of the VAT collected by the end consumer to their _local_ tax authority.
As an example, let's consider a VAT rate of 20%, and a Dutch company that buys from a French one and sells to a German one. Their costs per product are €80, and thus they pay €16 of VAT over that to their French suppliers. If they sell a product for €100 (i.e. they add €20 of value), then they collect €20 of VAT from their German buyers (which might in turn get it from the end consumers). There's a difference of €4 between what they received and paid in VAT, and that difference is collected by the Dutch tax authority. That €4 is not coincidentally the 20% VAT over the value added by the Dutch company.
Before the EU common market, you used to be able to do that VAT refund even for your own purchases as a private person on vacation - you can still, for example between the EU and Switzerland. It was even translating to tax-free vacation shopping because they weren't interested in collection taxes below a certain value.
Also it's a consumption tax, in the end the end consumer is the one paying it (through higher price). The businesses in the middle are mainly collecting the tax on behalf of the state.
A state might want to tax both of them at some level, because even unprofitable businesses should contribute. Or they might not.
It's just two forms of taxation. Sales tax/VAT is a fixed proportion of sales, and then you also pay tax on profit that's left.
You might as well ask why people pay income tax when they make money and then have to pay sales tax/VAT again when they spend it!
Of course, answering that is complicated, and there are a lot of factors. But the main one is basically that governments like to tax "everything", so that people/goods/services that might wind up evading one tax wind up paying another. Sales tax makes sure governments get revenue even when businesses make no profit, taxing profits makes sure governments get more revenue when businesses make more money.
For accounting purposes, VAT is a totally separate cycle of money, and for every important financial metric, VAT is ignored. [Removed] If you happen to spend more VAT than you collect, you’ll get the negative back from the state. Also, the net price is always known because it must be shown on every invoice.
VAT is most of the tax revenue by far. France’s budget is made of 50% VAT, 15% from corporate tax (IS), 10% from income tax (IR) and then the rest from various state revenue (like renting the palaces for movies).
VAT >> other revenues.
1. They need to tax every economic transaction possible to maintain demand for the Euro currency and keep it from loosing its value. This is the most important reason.
2. To get more money in taxes for the government. There's people who argue that lower tax rates increases economic activity and in the end would increase tax revenue also for the government. The government doesn't see things that way. "You pay me now, pay more!"
3. Taxes on profits are an incentive for business owners to reinvest any surplus into growing their business, meaning more jobs etc.
It's a misconception that is on the level of people believing that their progressive tax rates are applied back towards previous salaries or business owners who think you should increase prices for the customers you have to make up for the customers you lost.
From that one can make an additional insight. Most companies have less money during the early investment phase, which is where they get most benefit from removing vat from purchases.
Any stock that you couldn't sell is not an investment. It is inventory and you can only deduct VAT because you will one day sell it and pay VAT on it.
The assumption is not that you can one day sell it and pay vat on it. If a company buys a car, there is no assumption that they will sell the same car for profit at a later time. The assumption is that the car exist for the company in order to generate profit over time as part of the business operations, which is the reason why you don't need to pay VAT when purchasing it.
As a side note, there exist plenty of companies with zero or close to zero revenue, but with plenty of expenditures for which they get to remove VAT on. Those could be fake companies that are created for this specific purpose, or companies that are in theory investing into becoming profitable. A common example is a person investing into a expensive hobby, say photography, who could in theory turn it professional but has a company in order to avoid paying vat on equipment. In order to make the tax office "happy" they maybe sell a couple of photos a year, but is no where profitable and will likely never be it.
Different countries in EU may have different laws regarding VAT. The above is primarily about Swedish TAX system, but its very likely the same apply to Germany.
However, regarding the discussion if it "evens out" for a business on VAT in and VAT out, investments shouldn't be considered, since they are investments and not product or part of revenue. Not only can a business deduct VAT from their investments, they can deduct the entire cost from taxes, divided over several years if they want.
> which is the reason why you don't need to pay VAT when purchasing it.
Technically you always have to pay the VAT, but then you reclaim it, as I'm sure you know. Internally that is. If it's imports then it's more complicated and differs between countries.
Example I manufacture and sell teak wood tables in Portugal. I buy the wood from Asia, which does not have a VAT and is outside the EU. When I import said wood, I get assessed a value to pay VAT on. This is a tariff. I buy the stain and finish from Germany, which is inside the EU and has a VAT, through a complex paperwork system, I also pay VAT when the finish gets imported to me, but eventually I can claim that VAT paid back and it “nets out”. So I get this back. How do I get it back? I can subtract VAT paid from the VAT collected when I sell the goods.
Yes, VAT is a tariff, by a different name.
(I'm not an accountant, but as far as I know, the same VAT deductions for businesses apply whether they buy from an EU country or from a non-EU country, which your example doesn't take into account.)