What is the tax payable on?
Under the tax system, value added tax (VAT) is classified among the taxes on income, property and transactions (with the exception of import VAT). VAT operates in the same way as a general excise duty and is chargeable in principle on all public and private consumption (i.e., goods and services purchased by final consumers). In this respect, it differs from income tax and wages tax, which take into account the individual taxpayer’s ability to pay taxes.
VAT cannot have a cumulative effect, i.e., there can be no tax on tax. This is achieved by making input VAT deductible. In other words, a business can reclaim the input taxes charged by suppliers against the VAT it owes on its own turnover. Additional input taxes that may be deducted include (i) VAT paid on intra-Community acquisitions (acquisition tax), (ii) VAT payable by someone acting as recipient within the framework of the reverse charge system and (iii) import VAT paid to customs offices on imports from non-EU countries.
This can be illustrated using a schematic example that follows a product through several commercial transactions until it reaches the final consumer: Supplier A sells goods to Supplier B for 100 euros plus VAT of 19 euros (19% of 100 euros). For this transaction, Supplier A pays VAT of 19 euros to the tax office, while Supplier B deducts the same amount from her taxes as input VAT. If Supplier B sells the goods to Supplier C for 140 euros plus VAT of 26.60 euros (19% of 140 euros), Supplier B pays VAT of 26.60 euros to the tax office while Supplier C deducts this amount as input tax. If Supplier C then sells the goods to a final consumer for 200 euros plus VAT of 38 euros (19% of 200 euros), he is required to pay VAT of 38 euros to the tax office. This is the final amount retained by the tax authorities. This example shows that revenue from VAT is realized only through sale to a final consumer.
If goods spoil or for other reasons remain unsold to a final consumer, no revenue is generated for the exchequer.
Who is liable for tax?
As a tax on consumption. VAT is designed so that the cost is ultimately borne by consumers. However, it would not be technically feasible to collect VAT from consumers. For this reason, tax liability attaches to businesses realizing taxable turnover, who pass VAT on to their customers by including it in the prices they charge. Businesses usually indicate this by listing VAT separately on invoices for taxable sales, and they are required to do so on invoices to other businesses and legal persons. The same is true for the taxable supply of work and/or materials or other services connected with immovable property. VAT is classified as an indirect tax because it is collected from consumers via the intermediary of the supplier charging VAT. In practice, of course, the commercial activities of basically every business involve multiple inputs and taxable transactions. Businesses offset their input VAT against their output VAT within the framework of provisional returns submitted on a monthly or quarterly basis. For example, if a business realizes a total taxable turnover of 100,000 euros (subject to VAT at a rate of 19%) during a specific provisional return period and has paid input VAT totaling 10,200 euros on goods and services purchased during the same period, the total VAT owed by the business for that tax period is computed as follows:
- total taxable turnover: 100,000 euros
- plus 19% VAT: 19,000 euros
- less deductible input VAT: 10,200 euros
- VAT payable to the tax office: 8,800 euros
Only businesses are entitled to deduct input VAT. In order to have the right to deduct input VAT, businesses are not required to supply goods or services, be domiciled, or operate a production site in Germany. For this reason, non-resident businesses with no turnover in Germany may apply for regular input tax refunds under a special refund arrangement (specifically, the input tax refund procedure). However, input tax is deductible only if it applies to goods and services sold for use by the business.
Businesses with both (i) taxable turnover and (ii) tax-exempt turnover with no input tax deductibility must separate deductible from non-deductible input tax.
In general, liability for VAT attaches to the business. The term ‘business’ is defined by law as any person who engages independently in trade, commercial or professional activity.
The following activities are subject to VAT:
- supplies of goods and services
- imports (import VAT)
- intra-community acquisitions
At the end of each calendar year, businesses are required to submit a tax return that states their self-assessed tax liability for the elapsed calendar year. This return is equivalent to a final assessment subject to subsequent review by the tax authorities. The tax office issues an official tax assessment notice only in cases when its calculation differs from the taxpayer’s self-assessment.
Who/what is exempt from VAT?
The VAT Act provides an extensive list of VAT-exempt goods and services. One category covers turnover for which input tax remains deductible. This includes, in particular, exports to non-EU countries and intra-Community supplies; certain supplies connected to shipping and aviation; and certain supplies related to import, export and transit goods.
The second category covers turnover for which input tax may not be deducted. This includes the extension of credit; sales and rental of immovable property; services provided by doctors and other medical professionals; certain services provided by statutory social insurance funds; services provided by most hospitals and rehabilitation centers; services provided to persons in need of assistance or care; turnover realized by registered blind persons; services provided by officially recognized voluntary welfare organizations; educational services; services provided by certain theatres, orchestras, museums and zoos; and youth welfare services.
Businesses resident in Germany, in a free zone or in certain coastal water regions whose turnover (excluding VAT payable thereon) did not exceed 17,500 euros in the previous calendar year and is not expected to exceed 50,000 euros in the current calendar year (i.e., small businesses) are not required to pay VAT.
Who/what is not exempt from VAT?
Businesses whose previous year’s turnover (excluding VAT payable thereon) exceeded 17,500 euros are required, without exception, to pay tax in accordance with the general provisions. Consequently, they are entitled to deduct input tax and must issue invoices showing a separate amount for tax. The same applies to businesses whose turnover did not exceed the 17,500 euros threshold in the previous year but is expected to exceed 50,000 euros (excluding VAT payable thereon) in the current calendar year.
In cases where non-resident businesses provide taxable supplies of work and/or materials or other taxable services in Germany, VAT is generally payable by the customer if the latter is a business or legal person (this is referred to as the reverse charge system). This also applies to taxable supplies of goods as collateral by the grantor of a security interest to the secured party outside insolvency proceedings, as well as to:
- turnover that falls under the scope of the Real Property Transfer Tax Act
- certain construction services to businesses who themselves provide construction services
- supplies of gas, electricity, heat and cooling
- trade in emissions allowances
- certain sales of investment gold, industrial scrap, scrap metal and other waste
- the cleaning of buildings or parts thereof, when the recipients
- themselves provide these kinds of services
- the supply of mobile telephones as well as certain integrated circuits, if the sum of billable charges within the framework of a business transaction amounts to at least 5,000 euros
How much is the tax?
There are several different tax rates under the VAT Act: the general rate (19%), the reduced rate (7%), and special rates for farmers and foresters (5.5% and 10.7%). Most turnover is taxed at the general rate.
The reduced rate applies in particular to supplies, imports and intra-Community acquisitions of almost all foodstuffs, with the exception of beverages and food service activities. The reduced rate also applies, for example, to public transport; to sales of books, newspapers/periodicals and certain art objects; and to accommodation services.
Who collects the tax?
In terms of revenue, VAT is one of the most important taxes in Germany. VAT is administered by the Länder (States of Germany) on behalf of the Federation, and the revenue accrues jointly to the Federation and the Länder. Municipalities have also received a share of VAT revenue since 1998.