EU VAT Number Validation (VIES Checker)

A Value-Added Tax (VAT), also known as a Goods and Services Tax (GST) or general consumption tax (GCT), is a consumption tax applied at each stage of a product’s production and distribution, based on the “value added” at that stage. It is an indirect tax, meaning the consumer ultimately bears the cost, not the entity that pays it to the government. VAT is a significant global revenue source, raising about “a fifth of total tax revenues worldwide” and for OECD members. As of January 2025, 175 of 193 UN member countries, including all OECD members except the United States, utilize VAT.

Key Characteristics and Mechanics:

• Levy on Value Added: The core principle of VAT is that tax is collected on the value added at each step of the supply chain. For instance, a manufacturer pays VAT on their sales and receives an invoice showing the input tax paid on raw materials. The difference between the output tax (on their sales) and the input tax (on their purchases) is what they pay to the government.
• Invoice-Based Method: Most VAT-collecting countries (all except Japan) use the invoice method. “Using invoices, each seller pays VAT on their sales and passes the buyer an invoice that indicates the amount of tax paid excluding deductions (input tax).” This method creates an incentive for businesses to register and keep invoices, as it allows them to claim VAT credits.
• Destination-Based Tax: VAT is usually implemented as a destination-based tax, meaning “the tax rate is based on the location of the customer.”
• Exemptions and Zero-Rating: Specific goods and services are often exempted or “zero-rated” in various jurisdictions. Exported products are typically zero-rated (exempted) through a rebate to the exporter. This prevents double taxation in international trade.

Advantages of VAT:

• Non-Distortion of Production Decisions: VAT “does not distort firms’ production decisions,” as the same amount of tax is collected regardless of how many times goods change hands before reaching the final consumer. This contrasts with sales taxes, which are collected on each transaction, potentially incentivizing vertical integration to reduce tax burden.
• Difficulty to Evade: The invoice-based system encourages businesses to keep records, making VAT “difficult to evade.”
• Substantial Revenue Generation: VAT “generates a substantial amount of revenue,” making it a crucial component of national fiscal policies.

Criticisms and Limitations:

• Regressivity: Critics argue that VAT can be regressive, meaning it disproportionately affects lower-income individuals as they spend a larger percentage of their income on goods and services subject to VAT. However, the incidence of VAT may not fall entirely on consumers, as traders might absorb some of the tax to maintain sales volumes.
• Deadweight Loss: If cutting prices due to VAT reductions pushes a business below profitability, it can lead to a deadweight loss.
• Churning: In some countries, where state benefits and public sector pay are linked to the price index (which includes VAT), some apparent revenue is “churned” back to taxpayers, reducing net revenue.
• Compliance Costs: Businesses incur costs to comply with VAT regulations.
• Fraud: VAT systems can be susceptible to fraud, such as “Missing Trader Fraud (Carousel VAT Fraud).”
• Trade Criticism (Border Adjustment): National VATs act as a “tariff on imports and their exports are exempt from VAT (zero-rated).” The assertion that this “border adjustment” is WTO-compatible is controversial, with allegations that it could favor domestically produced goods.

Global Implementation and Rates:

• Widespread Adoption: More than 160 countries collect VAT as of 2020.
• EU VAT System: The European Union VAT system is mandatory for member states, requiring a “minimum standard rate of 15% and one or two reduced rates not to be below 5%.” Some EU members have 0% VAT on certain items as part of their accession agreements. Luxembourg has the lowest standard rate at 17%, while Hungary has the highest at 27%.
• Notable Exceptions and Variations:United States: The U.S. is a notable exception among OECD members, not employing a nationwide VAT. Instead, sales taxes are collected at the state and local levels.
• Canada: Has a federal Goods and Services Tax (GST) of 5%, and some provinces have a harmonized sales tax (HST) that combines federal and provincial sales taxes.
• Australia: Introduced GST in 2000 at a 10% rate, with many domestically consumed items being GST-free (zero-rated), such as fresh food, education, and health services.
• Bangladesh: VAT was introduced in 1991 and has become the largest source of government revenue (about 56%), with a standard rate of 15%.
• Chile: VAT was introduced in 1974, with the standard rate at 19% since 2003, contributing 41.2% of the country’s total revenue.
• Nordic Countries: Denmark, Norway, Sweden, and Croatia generally have high standard VAT rates, with Denmark, Norway, and Sweden having a common rate of 25%.
• Saudi Arabia: Tripled its VAT rate from 5% to 15% as of July 2020.
• Switzerland and Liechtenstein: Have a standard VAT rate of 8.1%.
• Ukraine: Standard VAT rate is 20%, with a 7% rate for pharmaceuticals and healthcare products, and zero-rated exports.
• Vietnam: Has three VAT rates: 0%, 5%, and a standard rate of 10%.

This detailed briefing provides a comprehensive overview of VAT, its mechanisms, advantages, criticisms, and global adoption patterns.