Whether you are just starting with cross-border trading or are a seasoned veteran, VAT/GST systems and (inter)national laws will always be applicable to you. But what is VAT and why do you need to pay it?
The ultimate purpose of VAT/GST is to impose a broad-based tax on final consumption by households. Typically, VAT/GST is collected through a staged process, which means that each business in the supply chain charges VAT/GST to its customer, regardless of whether the customer is a private individual or a business. In that sense, businesses serve as unpaid tax collectors for the government. They pay to the competent tax authorities the VAT/GST which they charged on their supplies and received from their customers. Since it is not the purpose of VAT/GST to tax businesses, VAT/GST systems employ mechanisms for relieving businesses of the burden of the VAT they pay when they acquire goods or services.
Basically, there are two methods to achieve a neutral result for businesses. The first one is the so-called “invoice-credit method”. In this methodology, each supplier in a supply chain charges VAT on each of its supplies. This amount is shown on the invoice to the customer. In his turn, the customer can credit that input tax against the output tax charged on his supplies if he is legally a business as well. Then, the customer remits the balance of the input and the output tax to the tax authorities. He receives a refund if there are excess credits.
The second method is the "subtraction method", which is effectively an accounts-based method. However, this method is not used that often as almost all jurisdictions that employ a VAT use the invoice-credit method. As a matter of fact, within the Organization for Economic Co-operation and Development (OECD), only Japan uses the subtraction method.
For more information on VAT/GST and other ecommerce related topics, please visit the Online Taxes & VAT topic on EcommerceWiki.
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