VAT (Value Added Tax) is an indirect tax on consumption.

This tax is levied on each invoice issued or equivalent document for deliveries of goods or services by increasing the price for each item or service by a percentage (VAT rate).

We therefore, in each purchase, pay the price of the good plus a percentage that is applied to such price. For example, let us imagine we buy a watch whose price without VAT is 100 euros. In this case, the customer must pay 100 euros plus the applicable VAT amount (each country has its own VAT rates). If the country of consumption were Germany, we would have to pay VAT at 19% (Germany’s general VAT rate) so the total amount to be paid would be 119 euros (i.e. 100 euros of the item purchased plus 19 euros of VAT).

The seller plays the role of a mere tax collector so that the 19 euros collected as VAT is paid to the German Tax Office through the required VAT return.

The seller, however, is entitled to deduct (subtract or reduce) the VAT paid on its purchases or on the services received in connection with its business so that it pays the difference to the Tax Office. So, to continue with this example, if the seller purchased the same watch from his supplier for EUR 80 plus VAT and assuming it had no other invoices, this seller’s VAT settlement would be as follows:

Watch sale – output VAT charged 100,00 19,00
Watch purchase – input VAT paid -80,00 -15,20
TOTAL 20,00 3,80

Therefore, the result of the settlement would amount to 3.80 euros that the seller should pay through its periodic VAT return.

Sometimes, e-commerce sellers set their prices on platforms without taking into account the VAT system, setting prices including VAT, below the recommended price for their sales margin, which has a negative impact on their business. This is why it is so important to know how VAT works and how it affects your business.

If you have questions about any VAT-related issues, do not hesitate to contact one of our VATONTIME team agents.