All but three of the 28 OECD countries apply VAT. The most important VAT area is the EU, and the application of the tax is more sophisticated there than in other countries. VAT playing a dominant role accounting for about 60 per cent of total tax revenues on goods and services in the EU area. The European Union Value Added Tax Area is an area consisting of all the European Union member states and certain non-member states which follow the value added tax ("VAT") harmonization rules of the European Union Value Added Tax ("EU VAT"). The European Union itself does not collect the tax, but member states of the European Union are required to adopt VAT laws which comply with the EU VAT system.
A percentage of the VAT collected by member states is used to fund the European Union. As of 2007 the European Union has 27 Member States (including 2 Member States that joined the EU on 1 January 2007), most of which participate in all EU policy areas and programmes or have signed up to do so. However EU law does not always apply evenly to all of the territory of all of the Member States. Many Member States have special territories which for either historical, geographical or political reasons have differing relationships with their national governments—and consequently also the European Union—than the rest of the Member State's territory. Many of these special territories don't participate in all or any EU policy areas and programs. Some have no official relationship with the EU while others participate in EU programmes in line with the provisions of European Union directives, regulations or protocols attached to the European Union treaties.
EU VAT levied consumption tax on the consumption of goods and services in the EU VAT are. Goods are termed as imported or exported while leaving or entering the area. When an internet based reseller who belongs to one EU country make selling to a customer situated in a different EU country, the calculation of VAT percentage become very complicated. Thus VAT percentage differ country wise in different EU member states. The maximum rate in the EU is 25% & the minimum standard rate of VAT throughout the EU is 15%. Reduced rates may vary between 0 to 5% on various goods in different countries. As for example domestic fuel and power in the UK. When transactions are made across a border either the buyer pays the sales country's VAT to the seller, or it is possible to register the transaction as an inter-company sale without the collection of VA. If buyer pays the VAT then he can include it in their VAT accounts just like VAT paid locally.
When transaction is related with a private person across a border within the area, the buyer generally pays the sales country's VAT to the seller without paying any local VAT. But if the seller's annual sales of goods to the buyer's country exceed a threshold (which varies by country), the seller must instead charge VAT in the buyer's country. These are known as the distance selling rules.
Excluded areas :
- Denmark: (Faroe Islands, Greenland)
- Finland: (Åland)
- France: (overseas departments, such as Réunion and Guadeloupe)
- Germany: (Büsingen am Hochrhein, Heligoland)
- Greece: (Mount Athos)
- Italy: (some parts bordering to Switzerland, Campione d'Italia, Livigno)
- Netherlands: (Aruba, Netherlands Antilles)
- Spain: (Canary Islands, Ceuta, Melilla)
- United Kingdom: (Gibraltar, Channel Islands, British overseas territories)
There are various reasons for excluding the above areas from EU VAT. The reasons are given below :-
- They do not belong to EU (often part of "Overseas Countries and Territories").
- The areas are part for far outside Europe.
- Areas covered without any VAT or include very low VAT.
- Åland has excluded itself to allow duty free sales onboard boats.
- Enclaves inside Switzerland have a VAT union with Switzerland.
- Duty free area.
Countries not listed above do not fall in the EU VAT area and so sales to those countries should not be included on your ESL. The following are not part of the EU VAT area:
- The Channel Islands
- Mount Athos
- San Marino
- Vatican City
Areas with special rules
Sweden refuses to accept the VAT union in relation to alcohol and tobacco shipped to private persons. Sweden has introduced a law that has forbidden such trade. But in order to follow the EU law the court has explained the meaning of EU law. Swedish customs authorities levied alcohol or tobacco tax in complement with sales country's tax. Since 2003 alcohol and tobacco for personal use can be brought into Sweden without a specific limit when traveling.