Value-added tax

What is VAT and how does it work?

Value-added tax is an indirect consumption tax charged on goods and services throughout the supply chain, from production to final sale. Businesses collect VAT on taxable sales and can generally recover VAT paid on eligible business purchases, while the final consumer ultimately bears the cost of the tax.

Unlike U.S. sales tax, which is typically collected only at the final point of sale, VAT is collected incrementally at multiple stages of production and distribution. VAT and similar systems, such as goods and services tax (GST), are among the most widely used forms of indirect taxation worldwide, making them an important consideration for businesses operating internationally.

When do businesses need to register for VAT?

VAT registration requirements vary by country, but businesses may need to register for VAT when they exceed local sales thresholds, establish a taxable presence in a jurisdiction, import goods, or make taxable sales to customers in a country where VAT applies.

For example, businesses generally must register for VAT in the United Kingdom once their taxable turnover exceeds £90,000 within a rolling 12-month period. In Germany, foreign businesses are required to register for VAT from the start of taxable activities, although small business relief provisions may apply. In Ireland, the registration threshold is generally €85,000 for businesses supplying goods and €42,500 for businesses supplying services. Across the European Union, businesses that sell goods or services to consumers in other member states may be required to collect and remit VAT once they exceed the €10,000 cross-border e-commerce threshold under the One-Stop Shop (OSS) regime.

In some jurisdictions, nonresident businesses may be required to register for VAT even without a physical presence or local establishment. For example, foreign businesses selling digital services to consumers in many countries may have VAT registration obligations from their first sale.

Because registration thresholds and rules differ significantly around the world and can change over time, businesses should evaluate their VAT obligations in every market where they operate.

What is a VAT return?

A VAT return is a tax filing that reports the value-added tax a business has collected on sales and the VAT it has paid on eligible purchases during a specific reporting period.

Businesses typically use VAT returns to calculate the difference between output VAT and input VAT and determine whether they owe additional tax or are entitled to a refund. Filing frequencies, reporting requirements, and submission methods vary by jurisdiction.

Which countries have VAT?

VAT systems are used throughout much of the world, including the European Union and the United Kingdom. In some jurisdictions — including Australia, New Zealand, Singapore, and India — the tax is commonly referred to as a goods and services tax, although it operates on principles similar to VAT.

While the structure and rates differ by jurisdiction, the underlying principle of taxing value added throughout the supply chain remains broadly consistent.

Does the U.S. have VAT?

No. The United States does not have a national VAT system. Instead, the U.S. relies primarily on state and local sales taxes. Businesses operating internationally may therefore encounter both U.S. sales tax obligations and VAT obligations in foreign jurisdictions.

Do businesses have to charge VAT to overseas customers?

Sometimes. Whether VAT applies to overseas customers depends on factors such as:

• The location of the customer
• Whether the customer is a business or consumer
• The type of product or service being sold
• Local place-of-supply rules
• Registration requirements in the destination country

Determining whether VAT applies to cross-border transactions can be challenging because rules vary by country, product type, and customer status. Automated tax determination solutions such as ONESOURCE Indirect Tax Determination can help businesses apply the correct VAT treatment based on current jurisdictional rules.

Who pays VAT?

VAT is generally charged and collected at each stage of the supply chain. Suppliers, manufacturers, distributors, retailers, and consumers may all pay VAT on purchases, but businesses can typically recover eligible VAT through input tax credits, input tax recovery mechanisms, or similar VAT offset procedures. Businesses must track and document the VAT they pay on purchases to claim eligible input VAT recovery on their VAT returns.

In short, VAT may be charged throughout the supply chain, but VAT-registered businesses can generally recover eligible input VAT. The final consumer typically bears the economic burden because they generally cannot deduct or recover VAT.

What is a VAT ID?

A VAT identification number is a unique registration number assigned to businesses registered for VAT purposes. Tax authorities use VAT IDs to track transactions, verify registrations, and facilitate cross-border trade.

VAT registration requirements vary by country and may depend on factors such as sales volume, transaction type, or whether the business has a local presence.

Who needs a VAT ID?

Businesses may need a VAT ID when they are:

• Selling taxable goods or services in a VAT jurisdiction
• Importing or exporting goods
• Conducting business-to-business (B2B) transactions across borders
• Filing VAT returns and claiming VAT refunds

How is VAT calculated?

From a consumer's perspective, VAT is calculated as a percentage of the purchase price of a good or service. For example, if an item costs $100 and the applicable VAT rate is 20%, the consumer would pay $120 total, with $20 representing VAT.

Behind the scenes, businesses are responsible for collecting VAT from customers and remitting it to tax authorities. However, businesses can generally recover VAT paid on eligible business purchases, meaning they typically remit only the difference between the VAT collected on sales — output VAT — and the VAT paid on expenses — input VAT.

The amount a business owes is generally calculated as: Output VAT – Input VAT = Net VAT payable

For example, if a business collects $10,000 in VAT from customers and pays $7,000 in recoverable VAT on business purchases, it would remit the remaining $3,000 to the tax authority.

The specific calculation rules, exemptions, and input VAT recovery provisions vary by jurisdiction.

Is VAT the same as sales tax?

No. While both VAT and sales tax are consumption taxes, they operate differently.

Typically, sales tax is charged only at the final point of sale to the end customer. VAT, by contrast, is collected throughout the supply chain whenever value is added.

Because VAT is collected in stages and supported by input tax recovery mechanisms, it generally provides greater visibility into transactions throughout the supply chain.

What is a reverse charge VAT?

The reverse charge mechanism shifts responsibility for accounting for VAT from the supplier to the customer.
Rather than the seller charging VAT, the buyer self-assesses and reports the applicable VAT on the transaction. Reverse charge rules are commonly used in cross-border B2B transactions to reduce the need for foreign VAT registrations and help prevent VAT fraud.

The specific requirements for reverse charging VAT vary by country and transaction type.

What are the VAT rates by country?

VAT rates vary significantly around the world. Standard rates commonly range from approximately 5% to 27%, although some jurisdictions impose higher rates or apply GST systems with different structures. Rates can also change as governments update tax policy.

Many countries maintain:

• A standard VAT rate
• One or more reduced rates for certain goods and services
• Zero-rated supplies
• VAT-exempt transactions

All European Union member states operate VAT systems under a common EU VAT framework, although rates and specific rules vary by country. Standard VAT rates in EU member states generally cannot be lower than 15%, although reduced rates may apply to certain goods and services.

Is VAT a tariff?

No. VAT and tariffs are different types of taxes.

VAT is a consumption tax applied to goods and services sold within a country. Tariffs are taxes imposed on imported goods crossing international borders.

Although imported goods may be subject to both tariffs and VAT, the two taxes serve different purposes and are administered separately.

How do you get a VAT refund?

Businesses may be eligible to recover VAT paid on qualifying business expenses, subject to local rules and documentation requirements.

In many jurisdictions, VAT recovery occurs through offsetting input VAT against output VAT on periodic VAT returns rather than through a separate refund process. Refunds typically arise when recoverable input VAT exceeds VAT collected on sales.

Common VAT refund scenarios include:

• Recovering input VAT through regular VAT returns
• Claiming refunds on business purchases
• Seeking refunds on eligible foreign VAT incurred while operating internationally

To obtain a refund, businesses typically need supporting documentation such as invoices, import records, and VAT registration information. Managing VAT recovery across multiple jurisdictions can be complex, particularly for multinational organizations.

Refund eligibility, timelines, and procedures vary by jurisdiction.

Using automated indirect tax solutions can help businesses maintain documentation, identify recovery opportunities, and support compliance with local VAT requirements.

What is included in VAT compliance?

VAT compliance refers to the processes and requirements businesses must follow to meet their VAT obligations in each jurisdiction where they operate.

Common VAT compliance responsibilities may include:

• Registering for VAT
• Calculating the correct VAT rate
• Issuing compliant invoices
• Maintaining transaction records
• Filing VAT returns
• Remitting VAT payments
• Supporting VAT audits and inquiries

As businesses expand internationally, VAT compliance can become increasingly complex due to differing rules, rates, filing requirements, and documentation standards.

What happens if a business does not comply with VAT requirements?

Failure to comply with VAT requirements can result in penalties, interest charges, audits, delayed VAT refunds, and potential restrictions on business operations in certain jurisdictions.

Common compliance issues include underreporting VAT, applying incorrect tax rates, failing to register when required, and submitting inaccurate or late VAT returns. Automated tax determination and compliance tools can help businesses reduce risk by applying current tax rules and maintaining accurate transaction records.

Is VAT charged on digital products and services?

In many countries, VAT applies to digital products and services, including software, streaming subscriptions, online courses, cloud services, and other electronically supplied services.

VAT treatment often depends on the location of the customer rather than the location of the seller. As a result, businesses selling digital products internationally may have VAT registration, collection, and reporting obligations in multiple jurisdictions.

What are good VAT tools for international businesses?

The best VAT solution depends on a company's size, geographic footprint, transaction volume, and compliance requirements. When evaluating VAT software, businesses should look for:

• Automated tax determination capabilities
• Support for multiple countries and jurisdictions
• Real-time rate and rule updates
• ERP and e-commerce integrations
• Audit trails and reporting tools
• Scalability for business growth
• Support for both VAT and other indirect tax requirements

By integrating tax determination directly into business systems and applying current VAT, GST, sales tax, and other indirect tax rules automatically, ONESOURCE Indirect Tax Determination helps multinational organizations streamline compliance, improve reporting accuracy, and increase confidence in global tax operations.

To find the right indirect tax solution to automate your VAT, GST, and sales tax processes, download our latest indirect tax software vendor checklist. For real world results, check out how ONESOURCE Determination solved Cisco's tax challenges and transformed Henry Company’s tax determination.

We last updated this information on 07/03/2026.