Value Added Tax ("EU VAT") is the system of value added tax ("VAT") adopted by member states in the European Union Value Added Tax Area. European Directive defining the right to recover VAT for VAT-registered companies established in the EU in countries in which they do not perform taxable operations (sales of goods, deliveries, storage, sales of services, etc.). The minimum standard rate of VAT throughout the EU is 15%, although reduced rates of VAT, as low as 5% or 0%, are applied in various states on various sorts of supply.
The European Commission suggests a proposal in 2004 with a view to improve matters for recasting the existing legislation (the Sixth Directive) ensuring that its provisions are presented in a clearer and more lucid manner. Two years later - after extensive discussion and redrafting an amended proposal for a new VAT Directive was finally adopted by the European Council on 28 November 2006. The new Directive, which has repealed and replaced the Sixth Directive, came into force with effect from 1 January 2007 by a single consolidated (and renumbered) text, Council Directive 2006/112/EC or the VAT directive.
It was the main basis of the system of value added tax in the European Union. The 6th Directive characterized the EU VAT as harmonization of the member states' general tax on the consumption of goods and services. The 6th Directive defined a taxable transaction within the EU VAT scheme as a transaction involving the supply of goods, the supply of service and the importation of goods.
The EC Sixth Directive enables businesses to recover VAT on business expenditure incurred in their member state of VAT registration.
Why is the 6th Directive important ?
- Basic framework of VAT.
- Compulsory for EU member states.
- Binding interpretation by European Court of Justice.
- Adoption by EU applicant states.