Value Added Tax

Question 1

who is a taxable person?

Answer 1

anyone that independently carries out an economic activity in any place. they collect VAT and give it to the gov.

Question 2

define the tax base of VAT (formula)

Answer 2

= value of all sales (w/out VAT) - value of all purchases = S - P

Question 3

state the three methods of calculating VAT and define the formulas for two of them.

Answer 3

1. indirect substraction method (used most widely): T = tS - tP = tax rate * value of all sales - tax rate * value of all purchases = output VAT - input VAT
2. direct substraction method (used in tourism): T = t(S-P) (example of second-hand car sale)
3. addition method (not used in Europe)

Question 4

does VAT ever influence the profit of the company?

Answer 4

no, never. it only influences fluidity.

Question 5

what is the difference between VAT and retail sales tax?

Answer 5

with retail sales, only the last in the supply chain pays the tax (with VAT, everyone does). the gov receives the same amount, but only from one person. it is still used in USA.

Question 6

explain zero rating.

Answer 6

it is an exemption with a right to deduct input VAT. that means that the output VAT is zero (since it’s an exemption), so the ‘tax paid’ amount is actually a negative input VAT (T = 0 - inputVAT), which means it is deducted from the (eg.) next year’s tax. (or the company gets it from the gov. usually not though)
it is used for exports.

Question 7

explain exemptions with VAT.

Answer 7

these exemptions refer to exemptions without the right to deduct input VAT. that means that while the output VAT is zero, the input VAT is still there. applicable for small traders (those who have an annual turnover of less than 50k) and for non-taxable persons. they don’t calculate tax returns.

Question 8

how is tax return calculated when the exempt transactions are only a part of the company’s operations?

Answer 8

1. option: separate accounting systems
2. option: proportional deduction (T = t(taxableS) - tθP; θ = taxable trans./all trans.) -> these transactions are viewed from the sales perspective! (so you ‘divide’ the purchase amount between the taxable and non-taxable parts)

Question 9

how long is the usual taxable period for VAT?

Answer 9

1 month

Question 10

which principle is VAT usually based on? what can it als be be based on?

Answer 10

usually based on accrual principle (tax return calculated for all invoices, regardless of the pay status), but can also be on the cash flow principle (tax return takes into account only paid invoices)

Question 11

state three special schemes with VAT.

Answer 11

sale of second hand goods and tourist agencies (using the direct substraction method)

3. farmers - they have 3 options:
   a. be a taxable person (only when income is > 7.5k)
   b. be exempt of VAT (profit is lower than in a.)
   c. flat-rate compensation (acts as output VAT for farmer, to compensate for the input VAT they get) (profit is highest)

Question 12

what are the VAT policies in EU?

Answer 12

minimum rate is 15%. there can be max 2 reduced rates (reduced for a min of 5%)

Question 13

explain carousel fraud.

Answer 13

1. company A imports an item and reverse charges it.
2. A sells the item to B (who is the only buffer = not a bad guy) for profit.
3. B sells the item to C for bigger profit.
4. C exports the item to D and gets money from gov
5. D imports it back to the country of A, B and C
   company A disappears after selling the item to B (= missing trader)
   A+C+D share profit

Question 14

define destination principle and explain reverse charge mechanism.

Answer 14

it is applied in international trade. imports are taxed according to rates in the DESTINATION country.
it can be applied in customs (a stop between the exporter and importer) or with the reverse charge mechanism. that means that the importer applies both input and output VAT at the same time (to declare that the item was imported). This is important because it gives the exporter the needed proof that the item was exported and not just untaxed.
reverse charge is used for taxing goods in importing countries, taxing services (when the parties are not from the same country) and taxing construction + supply of waste/residue in one country.

Question 15

define origin principle.

Answer 15

exports are taxed with rates from the country of ORIGIN.
used when physical persons buy something aborad (except when they buy cars, that’s destination) and smaller amounts of distance sales (under 35k)

Question 16

where is the reverse charge mechanism used?

Answer 16

in the EU, because it is a single market. outside of it, customs apply the destination principle.

Question 17

why is a single market better than trading with third countries?

Answer 17

because the import costs are lower (due to reverse charge mechanism being used) and that means the importing countries have more liquidity

Question 18

if the price WITH VAT is given, how can the price WITHOUT VAT be derived?

Answer 18

(P with VAT) / 1.22

Question 19

which goods have the VAT rate of 9.5%?

Answer 19

food, medicine, non-alcoholic drinks.

Question 20

state the formula for P with VAT in case of excise duties.

Answer 20

P with tax = (P w/out tax + excise duty) * 1.22

Question 21

state the three kinds of taxes of goods and services.

Answer 21

1. general consumption tax (VAT, retail sales tax)
2. exise duties
3. taxes on use of goods