Understanding Value Added Tax (VAT): Transactions and Accrual
Value Added Tax (VAT): Nature and Characteristics
Act 37 of 1992, Article 1: VAT is an indirect tax on consumption, applicable to:
- a) Supply of goods and services by businesses or professionals.
- b) Acquisition of goods.
- c) Importation of goods.
Characteristics: Indirect, Real, Target-based, Pluriphasic, Instant Accrual.
Pluriphasic: Levied on all supplies of goods and services in the production and commercialization chain. However, through deductions, it’s taxed only on the value added at each stage. Deductions are crucial, allowing businesses to deduct taxes paid on purchases, ensuring tax is only on the value added.
Instant Accrual with Periodic Reporting: Tax is levied each time a business or professional makes a supply or provides a service. For management ease, reporting is generally quarterly, covering all taxable transactions in that period.
Scope of VAT
VAT taxes the movement of goods in business transactions, aiming to tax consumption or expenditure. Consumption and expenditure are indicators of the taxpayer’s ability to pay.
Taxable Transactions
To tax consumption broadly, VAT law defines three taxable events:
1. Supply of Goods and Services
Delivery of Goods: Transfer of goods allowing disposal of tangible assets. Specific operations are considered supplies of goods, e.g., construction work with materials (value > 20%), hire-purchase, installment sales, free asset transfers.
Provision of Services: Defined negatively as any taxable transaction not a supply of goods or import. Includes independent professions, property leases, use/enjoyment transfers, transport, insurance, loans, and credits (autoconsumo).
Entrepreneurs and Professionals: Individuals and entities conducting business or professional activities. Commercial companies are always considered entrepreneurs.
Onerous Transactions: Transactions for consideration, including certain transactions without consideration.
Business Activities: Involve self-management of production factors or personnel to produce or distribute goods/services.
2. Intra-Community Acquisitions
Acquisition of goods by a taxable person from a business in another EU country. The purchaser pays VAT, as the supply is exempt in the origin country.
3. Imports
Entry of goods from non-EU territories (including Canary Islands, Ceuta, Melilla) into mainland Spain and Balearic Islands, regardless of the importer’s status.
Non-Taxable Cases
Certain cases are not considered taxable events, including:
- Transfer of an entire business’s assets (specific cases).
- Exempt transactions of low economic importance (e.g., samples without commercial value).
- Supply of goods/services by public authorities.
- Supply of money as compensation or payment.
Accrual
Chargeable Event:
- Supply of goods and intra-community acquisitions: When goods are made available.
- Provision of services: When services are rendered.
- Imports: When import duties accrue under customs law.
Specific requirements apply to certain operations.
Territorial Scope
VAT applies in mainland Spain and the Balearic Islands, excluding the Canary Islands, Ceuta, and Melilla (subject to special regimes).
Criteria for Determining Taxable Transactions:
- Supply of goods: Where goods are made available to the purchaser.
- Provision of services: Where the supplier has established their economic activity (with exceptions).
- Intra-community acquisitions: Where the dispatch or transport to the purchaser ends.