Value Added Tax (VAT) Worldwide: Overview of Consumption Taxes

The Value Added Tax (VAT) is one of the primary revenue collection tools in many countries around the world and can vary significantly from one nation to another, significantly influencing the cost of goods and services for consumers.

A Bit of History

VAT has its roots in the indirect taxation systems of the 19th century. The Value Added Tax or VAT is an indirect tax on consumption invented in France by the senior official Maurice Lauré and introduced by the law of April 10, 1954.

After its initial introduction in France, VAT quickly spread to other European countries. The European Union (then the European Economic Community) adopted VAT as the standard system of consumption tax in 1967.

VAT has continued to expand globally over the years, with many countries adopting this system to collect taxes on goods and services. Countries such as Canada, Japan, and Australia have introduced systems similar to VAT.

VAT is an indirect tax on consumption that is charged on goods and services each time value is added during the production and distribution chain. Businesses collect VAT on behalf of the government and remit it to the tax authorities.

This system offers several advantages, including:

Tax Efficiency: VAT is considered more efficient than other forms of taxation as it reduces the complexity of commercial transactions and can be applied at various levels of the production and distribution chain.

Equity: VAT is considered fair as individuals pay tax based on actual consumption. Those who consume more pay more.

Control of Tax Fraud: VAT can help reduce tax fraud as businesses are responsible for collecting and remitting the tax to the tax authorities.

Regional Variations: VAT rates and exemptions can vary significantly from one country to another and even within regions of a single country. Some countries apply uniform standard rates on all goods and services, while others may have differentiated rates for certain products or services considered essential. In summary, VAT has had a significant impact on global fiscal policies and has become a fundamental tool for revenue collection in countries around the world.

VAT revenues are used to finance a range of government sectors and programs. These include essential public services such as education, healthcare, public safety, and infrastructure. Additionally, VAT funds are intended to support welfare and social assistance programs, such as subsidies for low-income families and support for the unemployed, elderly, and disabled. A portion of the revenues is also used to pay interest on public debt and to finance public investments in economic development projects, research and development, and public infrastructure. VAT funds are also allocated to government programs to promote economic development, scientific research, education, and culture. Some revenues are also earmarked for emergency reserves to address crisis situations or unforeseen events.

Let’s take a closer look at VAT rates in different countries and regions of the world, along with other consumption taxes.

European Union (EU):

Within the European Union, VAT rates range from 17% to 27%, with some nations offering reduced rates for specific categories of goods and services.

Here’s an overview of the standard VAT (Value Added Tax) rate in some EU countries:

Italy: The standard VAT rate in Italy is 22%. This tax came into effect on January 1, 1973, to align the Italian tax system with that of other European Community member states.

France: The standard VAT rate is 20%.

Germany: The standard VAT rate is 19%.

Spain: The standard VAT rate is 21%.

Netherlands: The standard VAT rate is 21%.

Belgium: The standard VAT rate is 21%.

Sweden: The standard VAT rate is 25%.

Denmark: The standard VAT rate is 25%.

Austria: The standard VAT rate is 20%.

Greece: The standard VAT rate is 24%.

Cyprus: The standard VAT rate is 19%.

Finland: The standard VAT rate is 24%.

Czech Republic: The standard VAT rate is 21%.

Slovakia: The standard VAT rate is 20%.

Hungary: The standard VAT rate is 27%.

Poland: The standard VAT rate is 23%.

Bulgaria: The standard VAT rate is 20%.

Luxembourg: The standard VAT rate is 17%.

Romania: The standard VAT rate is 19%.

Croatia: The standard VAT rate is 25%.

Slovenia: The standard VAT rate is 22%.

Portugal: The standard VAT rate is 23%.

Ireland: The standard VAT rate is 23%.

Latvia: The standard VAT rate is 21%.

Malta: The standard VAT rate is 18%.

Estonia: The standard VAT rate is 20%.

Lithuania: The standard VAT rate is 21%.

United Kingdom

In the United Kingdom, VAT is referred to as “Value Added Tax” (VAT). Currently, the standard VAT rate in the UK is 20%. This rate applies to most goods and services sold in the country.

However, there are some categories of goods and services that may benefit from reduced VAT rates or even be exempt. For example, some food products, books, magazines, newspapers, healthcare services, and education may be subject to reduced rates or exempt from VAT.

VAT rules in the UK are set by Her Majesty’s Revenue and Customs (HMRC), the national tax authority. Businesses that exceed certain turnover thresholds are required to register for VAT and collect the sales tax on behalf of the government.

Switzerland and Liechtenstein

Currently, the VAT rates in Switzerland updated to 2024 are as follows:

Standard rate: 8.1%Reduced rate: 2.6%Special rate for the hotel industry: 3.8%

The same rates are also applied in the Principality of Liechtenstein.

Norway

VAT in Norway, known as “MVA” (Merverdiavgift), is applied to goods and services sold in the country. The standard VAT rate in Norway is 25%, one of the highest in the world. This rate applies to most goods and services, including consumer products, restaurant services, accommodations, and other non-exempt goods and services.

However, there are some categories of goods and services that may benefit from reduced VAT rates. For example, public transportation is taxed at 12%, while basic food items such as bread, milk, and eggs are taxed at 15%. Some goods and services, such as education, healthcare, and culture, may be exempt from VAT.

VAT in Norway is managed by the Norwegian Tax Administration (Skatteetaten) and follows guidelines set by national tax legislation.

Iceland

The standard VAT rate in Iceland is 24%, one of the highest in the world. This rate applies to most goods and services, including consumer products, restaurant services, accommodations, and other non-exempt goods and services.

However, there are some categories of goods and services that may benefit from reduced rates, such as food, public transportation, and books, which are taxed at 11%. Some goods and services, such as land and building sales, are exempt from VAT.

VAT in Iceland is managed by the Icelandic Tax Authorities (Ríkisskattstjóri) and follows guidelines set by national tax legislation.

Principality of Monaco

The Principality of Monaco applies a value-added tax (VAT) with a standard rate of 20%. However, some categories of goods and services may be subject to reduced rates or exempt from VAT, in accordance with the Principality’s tax legislation.

Principality of Andorra

In Andorra, VAT is referred to as IGI, which stands for General Indirect Tax. IGI or VAT in Andorra came into effect on January 1, 2013. IGI has become the tax to be applied to deliveries of goods, imports, and the provision of services within the national territory. In this case, professionals and entrepreneurs are responsible for transferring the tax to the end user.

In Andorra, VAT is classified into five different categories:

General VAT (IGI): This is the most common category, with a rate of 4.5%. It is significantly lower compared to the general VAT in Spain and France.

Increased VAT: Applies to financial and banking services with a rate of 9.5%.

Super Reduced VAT: Used for certain goods and services considered of primary social importance. The rate is lower than the normal rate.

Reduced VAT: Applied to specific goods and services, with a lower rate than the general VAT.

Special VAT: Applies to particular cases defined by Andorran tax laws.

Africa

Value Added Tax (VAT) in Africa varies from country to country and may be subject to different rates and regulations. Some African countries have implemented VAT systems similar to those of European and Western nations, while others may have different tax regimes or alternative consumption taxes.

Here are some examples of VAT rates in some African countries:

South Africa: VAT in South Africa was introduced in 1991 and is currently at 15%.

Nigeria: The standard rate is 7.5%.

Kenya: There are currently three VAT rates: standard at 16%, zero-rated, and exempt.

Egypt: VAT in Egypt is 14%.

Morocco: The standard rate is 20%. Lower rates of 7%, 10%, and 14% apply to specifically designated transactions.

Ghana: The standard rate is 12.5%.

Ivory Coast: The standard rate is 18%.

Tanzania: The standard rate is 18%.

Uganda: The standard rate is 18%.

Angola: The standard rate is 14%.

Senegal: The standard rate is 18%.

In some African countries, alternatives to traditional VAT have been adopted to regulate consumption taxes.

North America

United States: In the United States, there is no national VAT; however, some states apply sales taxes that are similar, though not identical, to VAT. Sales tax rates vary from state to state and, in some cases, even from city to city or county to county. Some states also apply additional taxes on specific goods or services. Sales tax rates in the United States can range from zero (in some states, no sales tax is applied) to over 10% in certain jurisdictions.

Some states do not apply sales taxes at the state level. These states are known as “sales tax-free states,” and currently, these states are: Alaska, Delaware, Montana, Oregon, and New Hampshire.

These sales tax-free states may be attractive for buyers and businesses, as purchases within these states are not subject to state-level sales tax. However, it’s important to note that local taxes on certain goods or services may be present in some cities or communities within these states.

Californiais one of the states that applies sales taxes and currently has one of the highest sales tax rates in the United States. The sales tax in California has been 7.25% at the state level. However, with additional taxes at the local level, the effective tax rate may vary depending on the city or county where the purchase takes place. In some areas of California, the overall sales tax rate can exceed 10%, making California one of the jurisdictions with the highest sales tax rates in the United States.

Canada: Canada applies a Goods and Services Tax (GST) of 5% at the federal level, with some provinces adding their own Provincial Sales Tax (PST) or Harmonized Sales Tax (HST) in addition to the GST.

South America

Argentina: VAT in Argentina is 21% for most goods and services.

Brazil: In Brazil, VAT is known as “ICMS” (Imposto sobre Circulação de Mercadorias e Serviços) and varies from region to region. Standard rates can range from 7% to 18%.

Chile: In Chile, VAT is 19% for most goods and services.

Colombia: In Colombia, VAT is 19% for most goods and services.

Peru: In Peru, VAT is 18% for most goods and services.

Ecuador: In Ecuador, VAT is 12% for most goods and services.

Venezuela: In Venezuela, VAT is 16% for most goods and services.

Central America

VAT rates (Impuesto al Valor Agregado) for some countries in Central America:

Costa Rica: VAT in Costa Rica is 13% for most goods and services.

El Salvador: In El Salvador, VAT is 13% for most goods and services.

Guatemala: In Guatemala, VAT is 12% for most goods and services.

Honduras: In Honduras, VAT is 15% for most goods and services.

Nicaragua: In Nicaragua, VAT is 15% for most goods and services.

Panama: The standard VAT is 7% for most goods and services.

Dominican Republic: The standard VAT is 18% for most goods and services.

Barbados: The standard VAT is 17.5% for most goods and services.

VAT rates in countries like China, India, Japan, and South Korea range from 7% to 10%.

China: VAT in China is 13% for most goods and services.

India: In India, VAT is known as the “Goods and Services Tax” (GST). Rates vary depending on the category of goods and services and can be 5%, 12%, 18%, or 28%.

Japan: In Japan, VAT is called “Consumption Tax” and currently has a rate of 10%.

South Korea: In South Korea, VAT is 10% for most goods and services.

Indonesia: In Indonesia, VAT is 10% for most goods and services.

Thailand: In Thailand, VAT is 7% for most goods and services.

Philippines: In the Philippines, VAT is 12% for most goods and services.

Singapore: In Singapore, VAT is known as the “Goods and Services Tax” (GST) and is currently at 7%.

United Arab Emirates (UAE): VAT was introduced on January 1, 2018, and the standard VAT rate in the UAE is currently 5%. The introduction of VAT in the UAE represented a significant change in their tax system and required adjustments by businesses and consumers to comply with the new tax regulations.

Oman: VAT was introduced on April 16, 2021, with a standard rate of 5%. The implementation of VAT is part of the government’s efforts to diversify non-oil revenues and reduce dependence on oil exports.

Saudi Arabia: VAT was introduced on January 1, 2018, with a standard rate of 5%. Similarly, the goal is to diversify state revenues and reduce dependence on oil exports.

Oceania

Australia, New Zealand, and other Pacific countries apply VAT rates ranging from 9% to 15%.

Australia: In Australia, VAT is known as the “Goods and Services Tax” (GST) and is currently at 10%. However, some goods and services may be exempt from VAT or subject to reduced rates.

New Zealand: In New Zealand, VAT is known as the “Goods and Services Tax” (GST) and is currently at 15%. Here too, there are exemptions and reduced rates for certain goods and services.

Fiji: In Fiji, VAT is called the “Value Added Tax” (VAT) and is currently at 9%. Similarly, there are exemptions and reduced rates for certain goods and services.

Papua New Guinea: In Papua New Guinea, VAT is 10%. Here too, there may be exemptions and reduced rates.

Samoa: In Samoa, VAT is 15%. Again, there may be exemptions and reduced rates for certain goods and services.

Tonga: In Tonga, VAT is 15%. Similarly, there may be exemptions and reduced rates for certain goods and services.

Other Consumption Taxes

Some countries around the world, such as Kuwait, Qatar, the Bahamas, the Cayman Islands, and Hong Kong, do not levy VAT or a similar value-added tax. Instead, they may have other fiscal systems to generate government revenue.

VAT Refund Procedures

VAT refund procedures vary from country to country and involve a series of steps. Businesses must carefully retain documentation related to VAT-eligible purchases. Additionally, they must be registered as VAT taxpayers in the respective country to be eligible for a refund. Refund requests are then submitted to tax authorities using specific forms and established processes. These authorities may thoroughly review the requests and request additional information or documentation to verify their validity. After review and verification, tax authorities may proceed with the requested VAT refund or offset any tax credits against the business.

Tax Free

Tax-free, or tax exemption, refers to a situation where a good or service is not subject to taxes. This concept is often used in the context of international travel, where tourists can benefit from a special tax regime that allows them to obtain refunds on VAT (Value Added Tax) paid on purchases made abroad.

The Tax Free system operates similarly in many countries: tourists who do not permanently reside in the country can request a refund of the VAT paid on goods purchased during their stay. Typically, to obtain the refund, the tourist must meet certain criteria and follow a specific procedure, which may include completing refund forms and presenting tax receipts.

Stores participating in the Tax Free scheme are often identifiable by specific stickers or signs. After making a purchase, the tourist requests a Tax Free form from the store and completes the necessary documentation. Upon departure from the country, the tourist presents the Tax Free forms at VAT refund points at the airport or port to obtain the refund.

The Tax Free system has been implemented to promote tourism and encourage purchases by foreign visitors. However, rules and procedures may vary from country to country, so it is important to inquire in advance about the specific details and requirements for obtaining VAT refunds.

Disclaimer: Please note that the information on VAT presented in this article may not be up to date at the time of consultation. Tax regulations and VAT rates are subject to change and variation. It is advisable to verify the currency of the information through official sources or qualified consultants in the field.