4 min readJul 13, 2022


The subject of value-added taxation is complicated. Certainly in domestic concerns, but massively so in international commerce.

So, what is Value Added Tax (VAT) and how does it work? What makes this tax different from others? What can we anticipate in terms of future regulations? In this article, we’ll go over some of the fundamentals of VAT.

Value added tax (VAT) is a levy on the amount that a company adds to the price of goods during their manufacture and distribution (hence the name “value added”). It is essentially a consumption tax because it is a tax on goods purchased for consumption rather than on an individual’s or corporation’s income.

The VAT is normally collected using the tax credit method, in which each business applies the tax rate to its taxable sales but receives a credit for VAT paid on goods and services purchased for business use, including VAT paid on capital equipment purchases under a consumption-type value-added tax. As a result, the only tax that would not be eligible for a credit would be one levied on sales to individuals rather than enterprises.

The revenue base of a retail sales tax and a value-added tax with the same coverage are theoretically similar, and a particular tax rate will provide the same amount of tax revenue under either strategy and under equal implementation conditions, in other words, no exceptions or exclusions.

Value-added taxes, or VAT, are taxes that are based on consumption and targeted at end-consumers.

The tax is usually added to the price of a specific commodity or service, and it is deductible for most businesses and organizations. GST, or goods and services tax, is the term given to it in various nations.

Every stage of the supply chain, from production to distribution, is subject to VAT. Because sales taxes are exclusively imposed on the consumer, they differ greatly. Because of this distinction, businesses become tax collectors for the government. It’s a wise choice.

VAT hasn’t been applied in practice for very long, despite its enormous success.

Two people independently introduced the idea of a consumption tax handled by businesses and organizations in the early twentieth century.

It was proposed by Thomas S. Adams, an American tax specialist and economic counselor, as a more refined version of the corporate income tax.

Simultaneously, Wilhelm von Siemens, a German industrialist, stated that a consumption tax aimed at end-consumers may be a relatively simple way for the government to handle a gross turnover tax and sales taxes.

Countries began to adopt the concept shortly after World War I. Germany and France were the first to implement it, and its popularity among national and local governments has grown since then.

According to the OECD, 166 of the world’s 199 countries have implemented the tax in some form or another. The United States is the major exception in the West.

How did this tax come about?

The value added tax (VAT) is a continental concept. Maurice Lauré, a French tax official, invented the tax in 1954, despite the fact that a tax that covered every stage of the manufacturing process had been proposed in Germany a century before. VAT was introduced in the United Kingdom in November 1974 as part of the cost of joining the Common Market.

It is the most important source of governmental finance in France, accounting for roughly 45 percent of total state revenues. In 1968, West Germany became the first Western European country to apply VAT, and most other Western European countries followed suit. Many African, Asian, and South American countries have followed suit. Although the United States as a whole has not implemented a value added tax, Michigan has.

The Purchase Tax, the UK’s prior consumption tax, was levied at varied rates depending on the perceived “luxury” of an item. Initially, the VAT rate in the United Kingdom was fixed at 10%. The regular rate was slashed to 8% almost immediately, while a higher tax of 12.5 percent was added for gasoline and certain luxury goods. By the end of the decade, both rates had been “harmonized” at 15%, and VAT remained at that level until John Major’s government moved it up to 17.5 percent in the 1991–92 tax year. It’s been there for the better part of two decades.

VAT is a cost-effective taxation tool for governments, but it is also a source of frustration and even capital loss for businesses and organizations. Especially in international business.

Here are the top three reasons why international business is so difficult:

  1. Despite efforts to harmonize, such as those made by the European Union, large discrepancies across countries still exist. Various tax rates, deadlines, and reporting processes can rapidly become confusing, particularly for small businesses lacking the resources of a full-time accounts payable department.
  2. Keeping track of new regulations takes time and expertise. The EU court of justice and commission, as well as every national and local body, are all concerned about the changing regulatory landscape.
  3. On a regular basis, new restrictions cause confusion. Uncertainties arise when new laws and regulations are introduced, notwithstanding all available sources, such as taxation levels and precedents.

The fundamental concept of VAT for businesses is simple to grasp. When goods and services cross borders, things can get complicated.

The essential tenet of international VAT is that domestic laws apply in the country where the turnover was generated.

Several moves forward have been taken in the EU to standardize legislation. The VAT action plan, the commission’s most recent move, was announced in 2016.

International VAT numbers, or VATINs, are necessary for cross-border buyers and sellers.

Since its inception, the VAT world has been in continuous motion, with no sign of a return to normalcy anytime soon. International harmonization efforts, with fraud prevention as one of the key aims, are currently the main engine of development. However, one goal is to make it easier for businesses to do business across borders.