Updated
GL-V-04
Glossary · Taxes and residency
VAT - Value Added Tax
VAT — value added tax, an indirect consumption tax included in the price of goods and services.
01 / In 30 seconds
The short answer
- What it is
- VAT — value added tax, an indirect tax on consumption
- How it works
- It is included in the price of goods and services at every stage
- Who bears it
- The final burden falls on the end consumer
- For business
- Companies charge and deduct VAT and file returns
- How to use it
- Take it into account when doing business and making purchases
02 / In plain words
What VAT means
VAT (value added tax) is an indirect tax on consumption included in the price of most goods and services. It is called a tax “on value added” because it is levied at every stage of creating and selling a product — on the value added by each participant in the chain — but in the end the whole burden falls on the end consumer.
The mechanism works like this: a company charges VAT on its sales (output VAT) and deducts the VAT paid to its suppliers (input VAT), and pays the difference to the state. Thanks to this, the tax does not accumulate many times over but is effectively paid on the final value added. VAT rates differ between countries, and some goods and services are taxed at reduced rates or exempt.
For an entrepreneur VAT is an important part of doing business: you need to register correctly as a taxpayer, charge the tax, keep records and file returns on time. Mistakes here lead to penalties. When planning international business and structures, we take the VAT consequences into account so that the tax is administered correctly and the business does not face unexpected obligations.
A case from practice
An entrepreneur is launching a business and is unsure when they must register as a VAT payer and how to keep records. We help determine the obligations and set up correct charging and deduction of the tax and a reporting schedule — so that VAT does not become a source of penalties and unexpected additional assessments.
Where VAT matters
- Doing business and making sales
- Importing and exporting goods
- Providing services
- Registering as a VAT payer
- International transactions
- A company’s tax reporting
03 / What it covers
What matters about VAT
What it is
- An indirect tax
- On consumption
- In the price of goods and services
Mechanism
- Output VAT
- Deducting input VAT
- The difference is paid to the state
Who bears it
- The end consumer
- Business administers it
- It does not accumulate
Keep in mind
- Rates by country
- Reliefs and exemptions
- Reporting is mandatory
04 / How it works
How to deal with VAT
Determine your VAT obligations
Register as a taxpayer
Charge and deduct VAT
File returns
Correct administration
05 / Key facts
What you need to know
01
VAT is an indirect tax on consumption included in the price of goods and services
02
It is levied at every stage on the value added
03
The final burden is borne by the end consumer
04
Business charges and deducts VAT and files returns
05
Rates and reliefs differ by country
Common mistakes
- Not registering as a taxpayer in time
- Deducting input VAT incorrectly
- Ignoring different rates and reliefs
- Missing reporting deadlines
- Not taking VAT into account in international transactions
06 / Expert advice
How to prepare in advance
When doing business, determine your VAT obligations in advance: whether you need to register as a taxpayer, which rates apply, whether there are reliefs or exemptions. Set up correct accounting for input and output tax and a reporting schedule. In international transactions, take the VAT consequences in each country into account. Then the tax is administered without mistakes or penalties.
What we do for you. We take VAT into account when planning your business and international structures: we help determine your registration obligations, administer the tax properly and keep up with reporting. That way VAT is correctly built into the business, and you do not face unexpected obligations and penalties.
Dmitry NagyTax consultant, international taxation and compliance (ex-Big4)
07 / Questions
Frequently asked questions
Value added tax — an indirect tax on consumption included in the price of most goods and services. It is levied at every stage on the value added.
The final burden falls on the end consumer. Business only administers the tax: it charges it on sales and deducts what it paid to suppliers.
A company charges VAT on sales (output) and deducts the VAT paid to suppliers (input), and pays the difference to the state. That way the tax does not accumulate many times over.
No, the rates differ between countries, and some goods and services are taxed at reduced rates or exempt from VAT. This is confirmed for the jurisdiction.
It depends on the country and the business’s turnover. We help determine the registration obligation and set up correct administration of the tax.
Penalties and additional assessments: for late registration, incorrect deduction or missed returns. That is why it matters to keep proper records from the start.
Related terms
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