Comprehensive definitions of key VAT, GST, e-invoicing, and indirect tax terms used by tax professionals worldwide.
53 terms defined across 7 categories. Each definition links to related terms and relevant VATfaqs.com news coverage.
A consumption tax levied on the value added at each stage of the supply chain. VAT is collected by businesses on behalf of the government and is ultimately borne by the final consumer. It is the most common form of indirect taxation globally, used in over 170 countries.
A value-added tax applied to the supply of goods and services. GST functions similarly to VAT but is the term used in countries such as Australia, India, Canada, New Zealand, Singapore, and Malaysia. In some jurisdictions, GST encompasses both central and state-level taxes.
The VAT paid by a business on purchases of goods and services used for its taxable business activities. Input VAT can generally be deducted from the output VAT to determine the net VAT liability payable to the tax authority.
The VAT charged by a business on its sales of goods and services. Output VAT is collected from customers and must be reported and remitted to the relevant tax authority, less any deductible input VAT.
A broad category of taxes levied on the consumption of goods and services rather than on income or wealth. VAT, GST, sales tax, and excise duties are all forms of consumption tax. The term is commonly used in Japan (consumption tax / 消費税) and other Asia-Pacific jurisdictions.
Any individual, company, or entity that is registered for or required to register for VAT because it carries out taxable economic activities. A taxable person must charge VAT on its supplies and can reclaim input VAT on its purchases.
A supply of goods or services that is subject to VAT, including those taxed at the standard rate, reduced rates, or the zero rate. Exempt supplies are not taxable supplies.
A supply of goods or services that is not subject to VAT. Businesses making exempt supplies cannot reclaim input VAT incurred on costs related to those supplies. Common exemptions include financial services, insurance, healthcare, and education.
A taxable supply on which VAT is charged at 0%. Unlike exempt supplies, businesses making zero-rated supplies can still reclaim input VAT on their purchases. Exports of goods are typically zero-rated under most VAT systems.
The default VAT rate applied to most goods and services in a given jurisdiction. Standard rates vary by country — for example, 20% in the UK, 19% in Germany, 21% in the Netherlands, and 25% in Denmark and Sweden.
A lower-than-standard VAT rate applied to specific categories of goods or services, often for social policy reasons. Common categories eligible for reduced rates include food, books, pharmaceuticals, public transport, and energy.
The percentage of VAT applied to the taxable value of a supply. Most countries have multiple VAT rates: a standard rate, one or more reduced rates, and in some cases a zero rate and super-reduced rate. The EU allows member states to set standard rates of at least 15%.
A mechanism that shifts the obligation to account for and pay VAT from the supplier to the recipient of goods or services. Commonly used in cross-border B2B transactions within the EU to simplify VAT accounting and prevent fraud. Under the reverse charge, the customer self-assesses the VAT on the purchase.
The rules that determine in which country a supply of goods or services is deemed to take place for VAT purposes. Place of supply rules determine which country has the right to levy VAT on a particular transaction and are critical for cross-border trade.
An EU simplification scheme that allows businesses to report and pay VAT on cross-border supplies of services and distance sales of goods to consumers in other EU member states through a single return filed in their country of registration, rather than registering for VAT in each destination country.
An EU VAT collection mechanism for distance sales of imported goods with a value not exceeding EUR 150. IOSS allows suppliers or marketplaces to collect VAT at the point of sale and declare it via a single monthly return, enabling goods to clear customs without VAT being charged at importation.
The sale of goods dispatched or transported by or on behalf of a supplier from one EU member state to a consumer (non-taxable person) in another member state. Under current EU rules, VAT on distance sales is due in the destination country, and can be declared via the OSS.
A facility available in some jurisdictions that allows two or more closely connected legal entities to be treated as a single taxable person for VAT purposes. Intra-group supplies are disregarded for VAT, simplifying compliance and cash-flow management within corporate groups.
A VAT grouping arrangement used in certain EU member states (notably the Netherlands and Belgium) where closely related entities are treated as a single VAT taxpayer. Similar in concept to VAT grouping but with specific national rules and conditions.
A simplification measure for chain transactions involving three parties in three different EU member states, where goods are shipped directly from the first to the last party. Triangulation allows the intermediary to avoid registering for VAT in the country of arrival of the goods.
VAT charged on goods imported into a country from outside its VAT territory. Import VAT is typically collected at customs and may be reclaimable as input VAT by registered businesses. Some countries offer deferred or postponed import VAT accounting to improve cash flow.
A mechanism that allows businesses to account for import VAT on their VAT return rather than paying it at the point of importation. This improves cash flow by eliminating the need to pay import VAT upfront and then reclaim it later. Used in the UK, Ireland, and several other jurisdictions.
The electronic exchange of invoice documents between a supplier and a buyer in a structured data format that allows automatic processing. E-invoicing is distinct from sending PDF invoices by email — true e-invoicing requires structured data (such as XML or UBL) that can be processed by systems without manual intervention. Mandatory e-invoicing is being adopted globally as a compliance tool.
A major EU legislative initiative aimed at modernising the EU VAT system through mandatory e-invoicing and digital reporting requirements. ViDA has three pillars: (1) digital reporting requirements based on e-invoicing for intra-EU B2B transactions, (2) updated platform economy VAT rules, and (3) a single EU-wide VAT registration via an enhanced OSS.
Pan-European Public Procurement Online — an international framework and network that enables standardised electronic document exchange, including e-invoicing. Peppol provides a set of technical specifications (BIS) and a network of access points through which invoices and other business documents can be exchanged securely across borders.
A category of tax compliance models where transactional data (typically invoices) is reported to the tax authority in real time or near-real time, often before or at the point the transaction is completed. CTC models include clearance systems (pre-clearance of invoices), real-time reporting, and centralised exchange platforms.
An international standard for the electronic exchange of accounting and tax data between organisations and tax authorities, developed by the OECD. SAF-T requires businesses to submit standardised data files covering general ledger, accounts receivable, accounts payable, and inventory data. Used in Portugal, Norway, Poland, Lithuania, and other countries.
A digital tax compliance requirement where businesses must report transaction data to the tax authority at or near the point of transaction, rather than in periodic returns. Countries implementing real-time reporting include Spain (SII), Hungary (RTIR), India (e-Way Bills), and Turkey (e-Fatura).
An e-invoicing compliance model where invoices must be submitted to and approved (cleared) by the tax authority or its designated platform before they can be sent to the buyer. Countries using clearance models include Italy (SDI), Saudi Arabia (ZATCA), and Brazil (NF-e).
An OASIS standard for business documents defined in XML, widely used for e-invoicing. UBL 2.1 is the basis for the Peppol BIS Billing 3.0 standard and is mandated or recommended in many e-invoicing frameworks worldwide.
Spain's real-time VAT reporting system that requires large businesses to submit invoice records to the Spanish tax authority (AEAT) within four calendar days of issuance or receipt. SII has been mandatory for large taxpayers in Spain since July 2017.
Italy's centralised e-invoicing clearance platform operated by the Italian Revenue Agency. All B2B and B2C invoices in Italy must be transmitted through SDI in XML format (FatturaPA). SDI validates the invoice and delivers it to the recipient, making Italy the first EU country to mandate universal e-invoicing.
Obligations imposed by tax authorities for businesses to submit transactional or accounting data electronically, usually in a prescribed format. DRR encompasses e-invoicing mandates, SAF-T submissions, real-time reporting systems, and periodic digital VAT returns.
The process by which a business registers with a tax authority to become a taxable person for VAT purposes. Registration is required when a business exceeds the registration threshold or makes taxable supplies. Once registered, the business must charge VAT, file returns, and is issued a VAT identification number.
The turnover level above which a business is required to register for VAT. Thresholds vary by country — for example, GBP 90,000 in the UK (from April 2024), EUR 10,000 for EU distance sales, and zero in some countries (no threshold). Some jurisdictions allow voluntary registration below the threshold.
A periodic declaration submitted to the tax authority showing the VAT collected on sales (output VAT), VAT paid on purchases (input VAT), and the net amount payable or refundable. Filing frequencies vary by country and business size — typically monthly, quarterly, or annually.
A unique identification number assigned to a VAT-registered business by a tax authority. In the EU, VAT numbers follow a standardised format with a two-letter country prefix followed by digits (e.g., DE123456789 for Germany, GB123456789 for the UK). VAT numbers are used on invoices and can be validated through the VIES system.
An EU electronic system that allows businesses and tax authorities to verify the validity of VAT identification numbers of companies registered in EU member states. VIES is operated by the European Commission and is essential for confirming that cross-border B2B supplies qualify for zero-rating.
The process by which a business reclaims input VAT incurred on purchases related to its taxable activities. VAT recovery can occur through regular VAT returns (deducting input VAT from output VAT) or through specific refund mechanisms for non-resident businesses (such as the EU 13th Directive or 8th Directive refund schemes).
The difference between the expected VAT revenue (based on the tax base and applicable rates) and the actual VAT revenue collected by a government. The VAT gap reflects revenue lost due to fraud, evasion, insolvencies, avoidance, and errors. The European Commission publishes annual VAT gap reports for EU member states.
A type of VAT fraud that exploits the zero-rating of intra-EU supplies. A fraudulent business (the "missing trader") imports goods VAT-free from another EU member state, sells them with VAT charged to a domestic buyer, and then disappears without remitting the VAT to the tax authority. Also known as "carousel fraud" when goods are traded in a circular chain.
An entity appointed by a non-resident business to fulfil its VAT obligations in a country where it does not have a fixed establishment. Tax representatives are required in some EU member states and are jointly liable for the VAT obligations of the business they represent.
A locally established entity that acts on behalf of a non-resident business for VAT compliance purposes. In certain EU countries (e.g., France, Italy, Portugal, Poland), a fiscal representative is mandatory for businesses established outside the EU that are required to register for VAT.
Council Directive 2006/112/EC, the principal legislation governing the common EU VAT system. The VAT Directive sets out the rules on taxable transactions, place of supply, VAT rates, exemptions, deductions, and administrative obligations that all EU member states must transpose into national law.
A statistical reporting system used within the EU to collect data on the movement of goods between member states. Businesses exceeding specified thresholds must submit monthly Intrastat declarations detailing their dispatches and arrivals of goods.
A periodic report that VAT-registered businesses in the EU must submit listing all their intra-Community supplies of goods and services to VAT-registered customers in other EU member states. ESLs help tax authorities cross-check that supplies are correctly reported across borders.
A mechanism under EU Directive 2008/9/EC that allows businesses established in one EU member state to reclaim VAT incurred in another EU member state without needing to register for VAT there. Claims are submitted electronically through the home country tax authority.
A VAT refund scheme under EU Directive 86/560/EEC that allows businesses established outside the EU to reclaim VAT incurred in EU member states. The process and conditions vary by member state, and reciprocity agreements may be required.
A special VAT accounting method where VAT is calculated only on the profit margin (the difference between the selling price and the purchase price) rather than on the full selling price. Used for second-hand goods, works of art, antiques, and collectors' items.
A simplified VAT accounting scheme available to small businesses in some jurisdictions (notably the UK). Under the flat rate scheme, businesses pay a fixed percentage of their gross turnover as VAT, rather than calculating the difference between output and input VAT.
A VAT accounting method where VAT is accounted for based on the dates of payments received and made, rather than the dates of invoices. This helps businesses with cash-flow management as they do not have to pay VAT on invoices they have issued but not yet been paid for.
A special VAT scheme for travel agents and tour operators in the EU. Under TOMS, VAT is calculated on the margin between the price charged to the traveller and the cost of bought-in travel services, with special place of supply rules applying.
VAT rules that deem online marketplaces and platforms as the supplier for certain transactions for VAT purposes. Under these rules, platforms must collect and remit VAT on sales made through them by third-party sellers, particularly for distance sales of imported goods and supplies by non-EU sellers to EU consumers.
This glossary is maintained by the editorial team at VATfaqs.com and covers the most commonly used terms in Value Added Tax (VAT), Goods and Services Tax (GST), e-invoicing, and indirect tax compliance. Definitions are written for tax professionals and are regularly reviewed for accuracy. For the latest VAT news and regulatory updates, visit our news feed or subscribe to our daily digest.