An introduction to the most important features of the European VAT system related to goods
The European VAT system is a system of sales tax. This system is applicable to all members of the European Union and a number of other countries when companies from outside Europe are engaged in buying and selling goods and rendering services in Europe. This new system has eliminated the administrative burden faced by businesses is EU whilst at the same time respecting and maintaining local VAT legislations because of which the VAT rates may differ but with a minimum limit of 15%
Transactions subject to European VAT are supply of goods by a taxable person within the EU, supply of services to companies established in EU, import of goods from outside EU, transfer of goods from one EU member to another.
When goods are supplied from one EU member state to another, then zero per cent VAT is applicable in the member state from where goods are dispatched and VAT becomes applicable in the member state where goods are received. The transaction is called intra community supply. The supplier has to prove why the zero rate applies and this can be done using freight notes, customer orders, bank statements and sales invoices.
Similarly, when own goods are transferred to another member state for storage in a warehouse and then the same goods will be used for taxable supplies, then in that case VAT doesn’t apply in the member state of origin but VAT applies in the country where goods are sent and in the VAT return the VAT due on acquisition will be reduced from VAT due on taxable supplies.
When goods are installed in another member state or in the buyer’s country, then supply is deemed to be made in the country of installation and that’s where VAT will become applicable
In chain transactions the intra community supplies should be identified and these will be subject to zero per cent VAT.
Distance selling becomes important when goods are sold to individuals who are subject to VAT in the country where the purchase takes place. One can take advantage of this and buy in the EU member state with lowest VAT rate. But when purchase takes place in a member state and then the goods are transferred into the EU state of residence then VAT becomes applicable in destination member state.
On a parting note please note that all public interest activities are VAT exempt.