VAT: Impact, Deduction, and Value Added Tax Explained

Posted on Sep 29, 2024 in Economy

VAT

1) Impact Mechanism

According to Article 88 of the VAT Act, the taxable person must pass the tax on to the recipient. Thus, we have a relationship between the impacted and the repercutidor.

The impact structure is as follows:

  1. Taxable Event: The law defines a taxable event as the delivery of goods or the provision of services by an employer in their business within Spanish territory.
  2. Taxpayer: The standard defines a taxpayer as the employer who performs the delivery or provides the service.
  3. Accrual: The standard refers to accrual as the point in time when the impact is born. In assets, it’s at the time of availability; in services, at the time of conduct or performance; and in successive chain operations, such as a lease, at any time of price enforcement.
  4. Basis and Tax Rate: The basis is the consideration of the operation, including pricing, commissions, insurance, and transportation, minus discounts. The tax rate is the percentage applied to the basis. The general rate is 18%, the reduced rate is 8%, and the super-reduced rate is 4%.
  5. Execution: The impact’s execution is formalized through the issuance of invoices delivered to the purchaser. The general rule is to separate the base allocation, type, and amount of tax from the transaction price.

2) Tax Deduction Mechanism

The tax deduction mechanism creates a radically different position for the recipient of the transaction compared to the end-user employer. The employer recipient of the supply, service, or import of goods can deduct the taxes charged on the purchase of goods and services, including both capital goods and consumer goods.

The basis of the deduction is to remain neutral to maintain competitive effects between firms in the market.

The main condition is that the acquired property is dedicated to the nature of the business, i.e., the company’s activity. The result achieved is that the employer’s assets are harmless.

3) Periodic Fee

Every employer, at the end of the settlement period, must submit a self-assessment to collect the sum of the fees charged on supplies, services, and intra-community transactions. On the other hand, they must also account for the amount of taxes charged on deliveries, services, intra-community acquisitions, and imports of goods.

4) Value Added

What is the value added in sales?

Value added is the increase in the value of goods through production or distribution activities. For example, if a company’s sales amount to 1,500 and the amount of purchases and expenses is 800 and 200 respectively, what is the value added in selling for the company? It would be 500 (Sales – Purchases – Costs). What is the tax to be paid? We must take three steps:

  1. VAT charged on sales: 18% of 1500 = 270
  2. VAT on purchases and expenses: 18% of 800 = 144, 18% of 200 = 36, 144 + 36 = 180
  3. VAT payment to the Treasury (which is the output VAT on sales less VAT on purchases and expenses): 270 – 180 = 90. This is the amount to be paid to the Treasury.

What is the relationship between the tax and value added?

Calculate 18% of 500 = 90. The number to enter is equivalent to that resulting from applying the tax rate on the value added in the sale, hence the name of the tax.

5) Final Consumer and Collection

Imagine a good that is sold horizontally three times. The first contractor sells it for 100, the second buys it for 150, and the third buys it for 300. This means an asset is sold on three occasions. At each stage, VAT must be calculated.

What collection does the Treasury get?

18 + 9 + 27 = 54

What VAT is paid by the end consumer?

The amount paid by the consumer as tax is equal to the sum of the tax shares paid into the treasury for the entire production cycle of the goods (manufacturing, wholesale, retail, end-user).

The Treasury receives the final consumer’s tax in proportion to the value added at each stage, with each employer making a payment to the Treasury proportional to the value added in their sale.

From a tax standpoint, how is the employer positioned?

Neutral, only from the standpoint of the entrepreneur!

6) Taxable Events

VAT law imposes three taxable events within the conceptual field of the company:

  1. Supply of goods and services: Including intra-community supplies and exports to third countries alongside domestic supplies. From the employer’s standpoint, it’s important to distinguish between deliveries and supplies.
  2. Intra-community acquisitions: Acquisitions of any goods from Member States of the European Union.
  3. Imports of goods: Refers to the acquisition of goods from third countries, i.e., non-members of the European Union.

However, the rules on tax deduction and management or application are common to all three.