Value-added tax (VAT) is a consumption tax charged on most goods and services at each stage of production and distribution, with each business reclaiming the VAT it paid on its own purchases. The final consumer bears the full tax, while each business in the chain remits only the tax on the value it added.
Most countries use a VAT or its close cousin, the goods and services tax (GST). The United States is a notable exception: it has no federal VAT and relies on state and local sales taxes instead. This article is educational information, not tax advice. Rates and rules change, so confirm current requirements with the relevant tax authority.
How does VAT work?
The European Commission describes VAT as a tax "charged as a percentage of the sales price and collected fractionally at every stage of production and distribution." Each registered business does two things:
- Charges output VAT on its taxable sales.
- Reclaims input VAT it paid on business purchases.
It pays the difference to the tax authority on its VAT return. If input VAT is higher than output VAT, as it often is for exporters, the business can usually claim a refund.
A worked example
Here is a simplified supply chain at a hypothetical 20% VAT rate:
| Stage | Sale price (before VAT) | VAT charged | VAT reclaimed | VAT paid to the authority |
|---|---|---|---|---|
| Supplier sells materials to a manufacturer | €100 | €20 | €0 | €20 |
| Manufacturer sells the product to a retailer | €300 | €60 | €20 | €40 |
| Retailer sells the product to a consumer | €500 | €100 | €60 | €40 |
| Total | €100 |
The authority collects €100 in total, exactly 20% of the €500 final price, but it collects it in pieces from each business. The consumer can't reclaim anything, so the consumer bears the whole €100. This is why the Commission calls VAT "borne by the final consumer, not by businesses."
VAT rates
Each country sets its own VAT rates, usually a standard rate plus one or more reduced rates for items such as food, books or medicine. In the EU, the standard rate cannot be less than 15% and reduced rates cannot be less than 5%, according to the EU's Your Europe guidance. Some supplies are zero-rated or exempt, which are different things: a zero-rated supply still lets the seller reclaim input VAT, while an exempt supply generally does not.
Look up current rates in our VAT rates by country table, or work out the tax on a price with the VAT calculator.
VAT vs. sales tax
VAT and US sales tax are both taxes on consumption, but they are collected differently:
- VAT is collected at every stage of the supply chain, and businesses reclaim what they pay.
- Sales tax is generally collected once, on the final retail sale, and business buyers avoid it with a resale or exemption certificate rather than reclaiming it.
VAT is also usually included in the shelf price in consumer markets, while US sales tax is added at checkout. For the full comparison, see VAT vs. sales tax.
VAT vs. GST
GST works the same way as VAT; the name is the main difference. Australia, New Zealand, India, Singapore and Canada call their value-added tax a GST, and Canada layers provincial taxes on top of it. See the GST glossary entry and our Canada sales tax guide.
Who has to register for VAT?
A business generally registers for VAT in a country when it makes taxable sales there above a threshold. Thresholds vary widely, and many countries set no threshold for non-resident businesses. For example:
- European Union. The €10,000 threshold for cross-border sales to consumers applies only to businesses established in the EU. A non-EU business selling digital services to EU consumers generally owes VAT from its first sale and can report it through the non-Union One Stop Shop.
- United Kingdom. UK businesses register once taxable turnover passes £90,000, but HMRC says a business based outside the UK must register if it supplies goods or services to the UK, or expects to in the next 30 days. See When to register for VAT.
Once registered, the business receives a VAT number. See What is a VAT number? for formats by country, the reverse charge and OSS and IOSS basics.
Do US businesses have to pay VAT?
A US business doesn't pay VAT at home, but it can owe VAT abroad. Common triggers include:
- Selling SaaS, apps, streaming or other digital services to consumers in the EU, UK or other VAT countries.
- Shipping goods to consumers abroad, particularly low-value parcels. The EU's Import One Stop Shop (IOSS) covers consignments of €150 or less, and the UK requires sellers to charge VAT at the point of sale on goods of £135 or less sold directly to consumers.
- Storing inventory in a foreign warehouse or fulfilment centre.
Sales to foreign businesses are often handled by the customer under the reverse charge, so the US seller may not need to register. That depends on the country and what is sold. For the US-specific questions, see Do US companies have a VAT number?. US businesses that paid VAT on travel or expenses abroad can sometimes recover it; see VAT refunds for US businesses.
VAT invoices and returns
VAT countries expect more formal paperwork than most US states:
- Invoices. A VAT invoice usually needs the seller's VAT number, a sequential invoice number, the rate and amount of VAT, and for B2B sales the customer's details and VAT number. A reverse-charge sale needs a note saying so.
- Returns. Registered businesses file returns monthly, quarterly or annually, reporting output VAT, input VAT and the net amount due.
- Records. Authorities expect you to keep invoices and evidence of customer location for years, and some countries require e-invoicing or real-time reporting.
Rules differ by country. Our country guides for the European Union, the United Kingdom, Germany and 100+ other countries cover local rates, thresholds and filing schedules.
Let Kintsugi handle VAT for you
Kintsugi registers and files VAT for you in 100+ countries, alongside US sales tax. Start free to see where your sales may create VAT obligations, or book a demo to talk through registration and filing.
Frequently asked questions
What does VAT stand for?
VAT stands for value-added tax. It is a consumption tax charged at each stage of production and distribution on the value added at that stage, with the final consumer bearing the full cost.
Who pays VAT?
The final consumer pays VAT as part of the price. Businesses collect it and pay it to the tax authority, but registered businesses generally reclaim the VAT they pay on their own purchases, so it isn't a cost to them.
Is VAT the same as sales tax?
No. Both tax consumption, but VAT is collected at every stage of the supply chain with credits for tax already paid, while US sales tax is generally collected once on the final retail sale. See VAT vs. sales tax.
Does the US have a VAT?
No. The United States has no federal VAT. It uses state and local sales and use taxes instead, which vary by state. US businesses can still owe VAT in other countries where they sell.
Can businesses get VAT back?
Registered businesses generally reclaim input VAT on business purchases through their VAT returns. Businesses that aren't registered in a country may be able to claim refunds through that country's refund procedure. See VAT refunds for US businesses.
What is a VAT number?
A VAT number is the identifier a country issues to a business registered for VAT. It appears on invoices and returns. See What is a VAT number? for formats by country.
