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VAT Tax Is Required in the EU, U.S. Businesses May Need to Be Registered for It

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Mar. 14 2022, Published 3:41 p.m. ET

Paying taxes can be a cumbersome thing but when doing global business, being informed on various tax requirements is important. One particular tax that's important is VAT tax. Do U.S. businesses have to be registered for VAT tax? Here are some things to consider.

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VAT tax stands for value-added tax. According to the European Commission, it's a “broadly based consumption tax assessed on the value added to goods and services.” The tax is applicable to any goods or services that are sold or consumed in the European Union.

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What is a VAT tax and how does it work?

However, this doesn't apply to things that are sold for export. VAT tax works in a few ways, one of them being that it operates like a general tax applying to “all commercial activities involving the production and distribution of goods and the provision of services.” Note that if a person's annual turnover income is less than the threshold (determined by the state) the person may not have to charge a VAT tax.

The second way VAT tax operates is in the form of a consumption tax that's “borne ultimately by the final consumer. It is not a charge on the business.” The third way a VAT tax works is by collecting fractional amounts through payments “whereby taxable persons deduct from the VAT they have collected the amount of tax they have paid to other taxable persons on purchases for their business activities.”

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VAT tax also works indirectly by being paid by sellers of goods to revenue authorities. However, the buyer is the one paying the tax since it's folded into the total cost of the price for the item. Based on EU law, the VAT tax rate is charged at a minimum of 15 percent.

Why was VAT tax created?

VAT tax was birthed out of the tax confusion that ensued between early EU countries. Each of the original six countries used its own form of indirect tax. At each stage of the production process, a different tax amount was levied. This created confusion since it became extremely difficult to determine the actual tax amount in the final price of a product.

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According to the European Commission, “As consequence, there was always a risk that E.U. countries would deliberately or accidentally subsidize their exports by overestimating the taxes refundable on exportation.” The VAT tax was created to eliminate overestimation and tax confusion for EU countries.

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Should you be VAT registered?

If you wonder whether or not you should be VAT registered, there are a few things to consider. The U.S. doesn't have a VAT tax system due to politicians believing VAT tax is regressive or may harm low-income families. However, it doesn't mean a VAT registration shouldn't be considered.

There are four main criteria for determining whether or not a person or business should register for VAT tax:

  • if goods are sold online to the EU or the United Kingdom
  • if they ship from one EU country to another
  • if they own goods in Europe (including warehouses and being an Importer of Record)
  • if they're organizing an event or conference

To register for the VAT tax, a person or business can go to the U.K. government website.

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