VAT is a tax on goods and services which is designed to be borne by the ultimate consumer. The laws and principles of VAT are governed by the various EU VAT directives. As a condition of membership to the EU all EU member states must incorporate these VAT directives into their national legislation. However the VAT rates applicable and registration limits are at the countries own discretion. Please note that VAT systems in countries outside the EU may differ from VAT systems in EU member states.
VAT is a multi stage tax which is chargeable in all points along the chain of supply. As VAT was designed to be a consumer tax and not a tax on businesses, the entitlement to cross border refunds was born. These cross border refund procedures (8th & 13th VAT directives) were designed so no EU country could discriminate unfairly against businesses whose operations were based in another EU member state and as such establish a level playing field.
As businesses became increasingly more international, Organizations were incurring ‘’foreign” VAT in a country where it was not established and as such was unable to offset foreign VAT against its own national VAT liability’.
As this is a form of double taxation these VAT directives were implemented so a business established in another EU country or outside the EU, which are not carrying on a taxable supply which would require VAT registration are entitled to receive a refund of VAT incurred in that EU country.
A mutual refund system was implemented for 1st January 1981 for EU businesses and 1st January 1988 for non EU businesses.