In the context of a growing complexity and interdependence between social and

economic processes, normal performance of economic and social activity needs the overall
management of economy and the coordination and synchronization of these processes.

In a market economy, the state is present both in politics and in economic and social life,
with the main role of providing public goods and services. Continuous development of socio-
cultural domain (education, health, culture, art, national defense, public order, etc..), normal
functioning of public administration, development of economic sector activity (research, science,
communication, transport, etc) involve an increase and a diversification of funding needs of the
state. The functions of the state, organization, leadership and development of national socio -
economic activity, can be accomplished only by the existence of public money.

“The Commission in its Communication "Tax Policy in the European Union - Priorities for the years ahead" of 23
May 2001 stated its belief that taxes on personal income may be left to Member States even when the European
Union achieves a higher level of integration than at present . At the same time the Commission acknowledged that
co-ordination at EU level is in some cases necessary to safeguard the application of the Treaty freedoms and to
eliminate tax obstacles to cross-border activities. The Commission also referred to the need to co-ordinate personal
income taxes to prevent double taxation or unintentional non-taxation in cross-border situations, or to tackle cross-
border tax evasion.

The European Court of Justice has consistently held that, in the absence of
harmonisation, taxes on personal income fall within the competence of the Member
States but they must respect the fundamental Treaty principles on the free
movement of workers, services and capital and the freedom of establishment
(Articles 39, 43, 49 and 56 of the EC Treaty). In particular, there must not be any
direct or indirect discrimination on the basis of nationality, nor may there be any
unjustified restrictions to the four freedoms.

Moreover, in more general terms, the Treaty provides that every citizen of the Union
has the right to move and reside freely within the territory of the Member States
(Article 18 of the Treaty). It should be noted that the applicability of the four
freedoms is extended to Norway , Liechtenstein and Iceland through the Agreement
creating the European Economic Area (Articles 28 to 45).
The Communications on the taxation of pensions of April 2001 and dividends of
December 2003 are the first two examples of the Commission's new approach to
achieve a co-ordinated response from Member States to important case-law of the
European Court of Justice and eliminate tax obstacles to the Internal Market. Both
Communications stress that Member States are free to choose their pension and
dividend taxation systems as long as they respect the four freedoms of the EC
Treaty.
Respect for the Treaty freedoms is equally important in the area of migrant and
cross-border workers, where the European Court of Justice has already given a
number of rulings on the taxation of persons earning income in Member States
other than where they live.
Double taxation agreements form an integral part of Member States' tax rules, and
the personal tax rules included in these agreements have to remain within the
boundaries set by the EC Treaty, just like any other national laws.
Finally, the need to avoid distortions to the movement of capital and the need to
ensure effective taxation of interest payments received by individuals in Member
States other than the Member State of residence have led to the adoption of a
Directive on the taxation of savings income in the form of interest payments. This
Directive enables such interest payments to be made subject to effective taxation
in accordance with the laws of the Member State of residence.”
http://ec.europa.eu/taxation_customs

Value added tax (VAT) is similar to a sales tax. It is a tax on the estimated market
value added to a product or material at each stage of its manufacture or
distribution, ultimately passed on to the consumer. Maurice Lauré, Joint Director of
the French Tax Authority, the Direction générale des impôts, was first to introduce
VAT on April 10, 1954, although German industrialist Dr. Wilhelm von Siemens
proposed the concept in 1918. Initially directed at large businesses, it was extended
over time to include all business sectors. In France, it is the most important source
of state finance, accounting for nearly 50% of state revenues.[1]
Personal end-consumers of products and services cannot recover VAT on purchases,
but businesses are able to recover VAT (input tax) on the products and services that
they buy in order to produce further goods or services that will be sold to yet
another business in the supply chain or directly to a final consumer. In this way, the
total tax levied at each stage in the economic chain of supply is a constant fraction
of the value added by a business to its products, and most of the cost of collecting
the tax is borne by business, rather than by the state. VAT was invented because
very high sales taxes and tariffs encourage cheating and smuggling. Critics point
out that it disproportionately raises taxes on middle- and low-income homes.
Value added tax (VAT) avoids the cascade effect of sales tax by taxing only the
value added at each stage of production. For this reason, throughout the world, VAT
has been gaining favour over traditional sales taxes. In principle, VAT applies to all
provisions of goods and services. VAT is assessed and collected on the value of
goods or services that have been provided every time there is a transaction
(sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to
the government. If, however, the purchaser is not an end user, but the goods or
services purchased are costs to its business, the tax it has paid for such purchases
can be deducted from the tax it charges to its customers. The government only
receives the difference; in other words, it is paid tax on the gross margin of each
transaction, by each participant in the sales chain.

Sales tax is normally charged on end users (consumers). The VAT mechanism
means that the end-user tax is the same as it would be with a sales tax. The main
difference is the extra accounting required by those in the middle of the supply
chain; this disadvantage of VAT is balanced by application of the same tax to each
member of the production chain regardless of its position in it and the position of its
customers, reducing the effort required to check and certify their status.

A general economic idea is that if sales taxes exceed 10%, people start engaging in
widespread tax evading activity (like buying over the Internet, pretending to be a
business, buying at wholesale, buying products through an employer etc.) On the
other hand, total VAT rates can rise above 10% without widespread evasion
because of the novel collection mechanism. However, because of its particular
mechanism of collection, VAT becomes quite easily the target of specific frauds like
carousel fraud, which can be very expensive in terms of loss of tax incomes for
states.

The standard way to implement a VAT involves assuming a business owes some
percentage on the price of the product minus all taxes previously paid on the good.
If VAT rates were 10%, an orange juice maker would pay 10% of the £5 per litre
price (£0.50) minus taxes previously paid by the orange farmer (maybe £0.20). In
this example, the orange juice maker would have a £0.30 tax liability. Each
business has a strong incentive for its suppliers to pay their taxes, allowing VAT
rates to be higher with less tax evasion than a retail sales tax.

Basis for VATs

By the method of collection, VAT can be accounts-based or invoice-based.[2] Under
the invoice method of collection, each seller charges VAT rate on his output and
passes the buyer a special invoice that indicates the amount of tax charged. Buyers
who are subject to VAT on their own sales (output tax), consider the tax on the
purchase invoices as input tax and can deduct the sum from their own VAT liability.
The difference between output tax and input tax is paid to the government (or a
refund is claimed, in the case of negative liability). Under the accounts based
method, no such specific invoices are used. Instead, the tax is calculated on the
value added, measured as a difference between revenues and allowable purchases.
Most countries today use the invoice method, the only exception being Japan, which
uses the accounts method.
By the timing of collection,can be either accrual or cash based. Cash basis
accounting is a very simple form of accounting. When a payment is received for the
sale of goods or services, a deposit is made, and the revenue is recorded as of the
date of the receipt of funds — no matter when the sale had been made. Checks are
written when funds are available to pay bills, and the expense is recorded as of the
check date — regardless of when the expense had been incurred. The primary focus
is on the amount of cash in the bank, and the secondary focus is on making sure all
bills are paid. Little effort is made to match revenues to the time period in which
they are earned, or to match expenses to the time period in which they are
incurred. Accrual basis accounting matches revenues to the time period in which
they are earned and matches expenses to the time period in which they are
incurred. While it is more complex than cash basis accounting, it provides much
more information about your business. The accrual basis allows you to track
receivables (amounts due from customers on credit sales) and payables (amounts
due to vendors on credit purchases). The accrual basis allows you to match
revenues to the expenses incurred in earning them, giving you more meaningful
financial reports.
Wikipedia

The VAT in the European Union is a general, broadly based consumption tax
assessed on the value added to goods and services. It applies more or less to all
goods and services that are bought and sold for use or consumption in the
Community. Thus, goods which are sold for export or services which are sold to
customers abroad are normally not subject to VAT. Conversely imports are taxed to
keep the system fair for EU producers so that they can compete on equal terms on
the European market with suppliers situated outside the Union .

The essential piece of EU VAT legislation since 1 January 2007 has been Directive
2006/112/EC. That 'VAT Directive' is effectively a recast of the Sixth VAT Directive of
1977 as amended over the years. The recast brings together various provisions in a
single piece of legislation. It provides a clearer overview of EU VAT legislation
currently in force.
As it is usual practice, the Directive contains a correlation table providing the bridge
between the provisions of the Sixth VAT Directive and those of the new Directive.

What is a taxable person?

For VAT purposes, a taxable person is any individual, partnership, company or
whatever which supplies taxable goods and services in the course of business.
However, if the annual turnover of this person is less than a certain limit (the
threshold), which differs according to the Member State, the person does not have
to charge VAT on their sales.

How is it charged?
The VAT due on any sale is a percentage of the sale price but from this the taxable
person is entitled to deduct all the tax already paid at the preceding stage.
Therefore, double taxation is avoided and tax is paid only on the value added at
each stage of production and distribution. In this way, as the final price of the
product is equal to the sum of the values added at each preceding stage, the final
VAT paid is made up of the sum of the VAT paid at each stage.
Registered VAT traders are given a number and have to show the VAT charged to
customers on invoices. In this way, the customer, if he is a registered trader, knows
how much he can deduct in turn and the consumer knows how much tax he has
paid on the final product. In this way the correct VAT is paid in stages and to a
degree the system is self-policing. The system operates as follows:
Example
Stage 1
A mine sells iron ore to a smelter. The sale is worth €1000 and, if the VAT rate is
20%, the mine charges its customers €1200. It should pay €200 to the treasury, but
as it has bought €240 worth of tools in the same accounting period, including €40
VAT, it is only required to pay €160 (€200 less €40) to the treasury. The treasury
also receives the €40 and now gets €160 making €200 - which is the correct amount
of VAT due on the sale of the iron ore.
• Supply: €1000
• VAT on supply: €200
• VAT on purchases: €40
• Net VAT to be paid: €160

VAT coverage and VAT rates

Given that EU law only requires that the standard VAT rate must be at least 15%
and the reduced rate at least 5% (only for supplies of goods and services referred to
in an exhaustive list), actual rates applied vary between Member States and
between certain types of products. In addition, certain Member States have retained
separate rules in specific areas.
The most reliable source of information on current VAT rates for a specified product
in a particular Member State is that country's VAT authority. Nevertheless, it is
possible to get an overview of the different rates applied from the VAT rates in the
European Union information document.

VAT on imports and exports

For the purpose of exports between the Community and non-member countries, no
VAT is charged on the transaction and the VAT already paid on the inputs of the
good for export is deducted - this is an exemption with the right to deduct the input
VAT, sometimes called 'zero-rating'. There is thus no residual VAT contained in the
export price.
However, as far as imports are concerned, VAT must be paid at the moment the
goods are imported so they are immediately placed on the same footing as
equivalent goods produced in the Community. Taxable people registered for VAT will
be allowed to deduct this VAT in their next VAT return.

VAT on goods moving between Member States

No frontier controls exist between Member States and therefore VAT on goods
traded between EU Member States is not collected at the internal frontier between
tax jurisdictions.
Goods supplied between taxable persons (or VAT registered traders) are exempted
with a right to deduct the input VAT (zero-rated) on despatch if they are sent to
another Member States to a person who can give his VAT number in another
Member State. This is known as an "intra-Community supply". The VAT number can
be checked using the VAT Information Exchange System (VIES).
The VAT due on the transaction is payable on acquisition of the goods by the
taxable customer in the Member State where the goods arrive. This is known as
"intra-Community acquisition". The customer accounts for any VAT due in his normal
VAT return at the rate in force in the country of destination.

VAT on services
VAT on services is paid at the place where the service has been supplied. This will
most often, but not always, be where the service supplier is established. The trader
will in those cases account for VAT on his services in the Member State where he is
established, applying the VAT rate of that country.
Depending on the nature of the service, VAT may need to be paid in another
Member State than that where the supplier is established. This is for example the
case with services connected to immovable property; transport of passengers or
goods; cultural, artistic, sporting, scientific, educational, and entertainment
services.

How do the Member States apply VAT?

The detailed application of VAT varies according to the administrative customs and
practices of each Member State within the framework set out by Community
legislation.

Why do all Member States use VAT?

At the time when the European Community was created, the original six Member
States were using different forms of indirect taxation, most of which were cascade
taxes. These were multi-stage taxes which were each levied on the actual value of
output at each stage of the productive process, making it impossible to determine
the real amount of tax actually included in the final price of a particular product. As
a consequence, there was always a risk that Member States would deliberately or
accidentally subsidise their exports by overestimating the taxes refundable on
exportation.
It was evident that if there was ever going to be an efficient, single market
in Europe, a neutral and transparent turnover tax system was required
which ensured tax neutrality and allowed the exact amount of tax to be rebated at
the point of export. As explained in VAT on imports and exports, VAT allows for the
certainty that exports there are completely and transparently tax-free.

The history of VAT in the European Union until 1993

On 11 April 1967 the first two VAT Directives were adopted, establishing a general,
multi-stage but non-cumulative turnover tax to replace all other turnover taxes in
the Member States. However, the first two VAT Directives laid down only the general
structures of the system and left it to the Member States to determine the coverage
of VAT and the rate structure. It was not until 17 May 1977 that the Sixth VAT
Directive was adopted which established a uniform VAT coverage.
On 1 January 2007, the Sixth Directive was replaced by the VAT Directive (Directive
nº 2006/112/EC). It brings together the various provisions into one piece of
legislation, so gives a clearer overview of EU VAT legislation currently in force. The
VAT Directive guarantees that the VAT contributed by each of the Member States to
the Community's own resources can be calculated. It still however, allows Member
States many possible exceptions and derogations from the standard VAT coverage.
Moreover, it does not set out the rates of VAT to be applied in Member States, only a
minimum rate of 15% fixed until 31 December 2010. This means that VAT rates
differ widely. Currently, Member States apply a standard rate of between 15% and
25%. They may also apply 1 or 2 reduced rates of at least 5%. There are a number
of temporary derogations, e.g. zero rates in the United Kingdom and Ireland . The
VAT coverage also still differs from one Member State to another.