Value Added Tax (VAT): Rates, Mechanism & Compliance

Indirect Tax: Value Added Tax (VAT)

Value Added is the difference between the value of goods produced and the cost of raw materials and other intermediate goods used to produce them. VAT is the tax on this added value. It is an indirect tax levied on consumption and taxes the following:

• the supply of goods and services provided by employers and professionals;
• intra-Community acquisitions of goods (European Union);
• imports of goods made by entrepreneurs, professionals or individuals.

Not all transactions involve the payment of VAT; some are exempt, such as education or health services. In the case of this tax, businesses and professionals "support it" when they pay for goods and services (purchases and expenses) and it has an impact when they charge for a product or provide services.

Function and Economic Incidence

The function performed is as an intermediary between suppliers and customers: businesses act as collectors and remit to the public treasury the difference between what they charged and what they paid. So, who really supports the tax is the ultimate consumer, who cannot deduct VAT.

How VAT Operates

The operation of this tax is the following: Output VAT - Input VAT = VAT to income or VAT to return. (when sold) (when purchased) (a ranch) (by doing)

VAT Rates

The rates are different: there are three types:

• Super-reduced rate: 4% applies to basic necessities;
• Reduced rate: 7% applies to food in general, housing, and trip transport;
• General rate: 16% applies to other goods and services.

Tax Collection and Payments

Output VAT is normally higher than input VAT, which involves the differences payable to the tax agency. When the input VAT is higher than the VAT repercutido, the amount is to be accounted for in subsequent quarterly assessments for companies. To successfully manage VAT payment and collection requires complying with a series of formal legal requirements and obligations.

Documentation and Books

Businesses must keep invoices and documents received from suppliers and creditors. Companies must maintain the following books:

• book of records of invoices (issued);
• billing records;
• book of invoices received.

Filing Obligations

Entrepreneurs who are taxpayers are required to:

• keep bills and present a detailed account of all invoices issued and received;
• declare each of the first three quarters in an official form authorized to that effect (the model 300);
• provide a summary of year-round operations.