What is VAT How does it work

How does the sales tax system work?

The German sales tax law has its origins in 1916. This year, for the first time, there was a legal basis for taxing sales of goods. Since then, the sales tax has undergone some changes, but an important turning point took place on 01/01/1968. From this point on, the all-phase net sales tax with input tax deduction took effect, which is still valid today. A systematic basis of the current sales tax law is that each economic level is only taxed with the respective value added tax.
 

Regulations in the EU

Since 1993 there have been no sales tax limits in the European internal market. They are no longer available. Companies that do business with each other within the EU internal market and can present a VAT identification number do their business without any VAT. This is indicated separately on the invoices and in the advance VAT return these sales belong in a very specific line that is expressly reserved for EU internal market transactions.

How high is the sales tax revenue in Germany?

Sales tax is extremely important as a source of income for the federal and state governments. In 2016, a value of more than 217 billion euros was recorded, with import sales tax already included in this amount. This share is a little more than 30% in relation to the total tax revenue in Germany. No wonder that tax auditors pay close attention to sales tax. Sales tax special auditors created a so-called additional result of over 1.7 billion euros in 2016. Such an additional result is achieved, for example, by estimating higher sales across the board in a tax audit because the bookkeeping is not correct. A good reason for you to do your financial accounting meticulously or to have it done by a tax advisor.
 

What is the legal basis for sales tax?

In Germany, the Value Added Tax Act (UStG) applies in conjunction with the Value Added Tax Implementation Ordinance (UStDV). The UStDV is practically the manual for the UStG, because it lists many example cases and possible solutions that should help with the practical implementation in everyday business.

Within the EU, sales tax is a so-called harmonized tax. This means that every country uses a directive that is binding. The major directive with the designation 2006/112 / EG is the basis for all member states and is called the Value Added Tax System Directive. It has been in force in all EU member states since July 1, 2011, including Germany.
 

The system of sales tax in Germany

the federal, state and local governments share the sales tax revenue according to a fixed formula. Because sales tax covers economic traffic processes, it is classified in the group of traffic taxes. As mentioned at the beginning, it is an all-phase sales tax with input tax deduction, in which only the respective value added tax is taxed. This is done by companies claiming input tax on the goods and services they buy and at the same time paying sales tax on sales. The company is therefore only charged with the difference between sales tax and input tax.

Example:

A furniture store buys a table for 200 euros net. This accounts for 38 euros input tax. The furniture store sells the table for EUR 300 net, on which EUR 57 VAT is charged. In the advance VAT return, there is therefore an amount of 38 euros in the column for deductible input tax amounts and 57 euros for VAT received. The furniture store pays 57 euros - 38 euros = 19 euros sales tax to the tax office.

The sales tax is called indirect Tax denotes because the entrepreneur - in our example the owner of the furniture shop - pays the sales tax to the tax office, but the buyer of the product bears the entire payment burden. Tax debtors (furniture dealers) and economic owners (customers) fall apart.
 

Examination scheme to clarify VAT transactions

When it comes to reporting sales to the tax office, entrepreneurs need to know exactly how to classify sales. Is the turnover taxable or not? What is the tax rate? These and other questions can be answered in the following steps.
 

  1. Is the turnover taxable or not?

First of all, it must be determined whether there is any taxable turnover that is possibly taxable or tax-free. The definition for this can be found in Section 1 (1) of the UStG.

A taxable turnover is a delivery or other service that an entrepreneur in Germany carries out for remuneration within the framework of his company. "

This is the rule and in practice means, for example, that the furniture store sells a table to a customer or that a guest in a restaurant orders and pays for a meal. Of course, there are many special regulations that affect, for example, the importation of goods or intra-community acquisitions.

But we want to stick to the rule that an entrepreneur in Germany sells goods to a customer in Germany. One such process is controllable and everything that is taxable is either taxable or tax-free.

The next step is to check whether there is tax-exempt or taxable sales. There is information about this in § 4 UStG. Postage stamps or the services of a family doctor, for example, are tax-free. The legislature has drawn up certain rules because, for socio-political reasons, it generally does not want to tax some services.

If a taxable service is not listed in § 4 UstG, then it is not tax-free, but taxable. When that is resolved, then move on to the next step.

 

  1. What is the assessment base on which the sales tax is calculated?

When the tax base is mentioned in tax law, it is always the net value. The net value is also referred to as remuneration. The remuneration comprises the pure value of the goods or services. Our table in the furniture store costs 357 euros, the net value of the goods is 300 euros, sales tax is 57 euros.
 

  1. Does the turnover have to be provided with 7% or 19%?

The legislature has provided two tax rates: 7% and 19%. The reduced tax rate of 7% includes numerous services in the fields of sports and culture. Tickets for the cinema or theater, newspapers and books are taxed at 7%. Local public transport such as buses and trains or trams and taxi rides fall into the 7% category if the journey does not go further than 50 km.

Goods that cover basic needs are usually also taxed at 7%. However, the definition of the basic requirement is not that easy. What is food and what are other consumer goods? The legislature has drawn up extensive lists showing everything that is taxed at 7%. It is undisputed that the following products are taxed at 7%:

  • loaf

  • butter

  • milk

  • Potatoes

  • Apples

And now it's getting illogical: Soy milk, apple juice and biscuits are taxed at 19%, while luxury foods such as quail eggs, truffles and frogs' legs are taxed at 7%. Nobody can explain that. The only way to get comprehensive information is to have a look at Appendix 2 to Section 12 of the Sales Tax Act. Appendix 2 lists all products and items that can be obtained at the reduced tax rate of 7%. If you do not provide services, but rather deliver goods, you should take a look at the list and rule out that you are delivering at the reduced tax rate.

Tip: If you are not sure which tax rate is correct, opt for the full tax rate, which is currently 19%. You are on the safe side, because an auditor will not be criticized if you collect too much sales tax and pay it to the tax office. It is of course also possible to call the tax office and ask specific questions. It is even better to have the tax rates confirmed in writing so that, in case of doubt, there are no disadvantages for you. Tax advisors can also help with the clarification.

 

  1. When does sales tax arise?

The question of when the sales tax arises is about the point in time at which the entrepreneur owes the sales tax. Let's get back to our furniture dealer and his table. Assuming the furniture retailer sells the table on October 5th, sales tax arises on the last day of the month, i.e. October 31st. The prerequisite for this is that he submits a monthly VAT return. For quarterly payers, the last day of the quarter applies analogously; for annual figures, the last day of the year is the point in time at which the sales tax arises.
 

  1. Who owes the tax?

The company that provides a service issues an invoice with sales tax. The company is liable for tax. The same applies if a sole proprietorship renders a service and writes the invoice.

There are exceptions to this rule that are not considered here. (Keyword reversal of tax liability according to § 13 b UstG)
 

  1. What input tax can be claimed?

Using the example of our furniture dealer, it is easy to explain how high the deductible input tax is according to Section 15 UStG. He paid 200 euros plus 38 euros input tax for the table. He can claim the 38 euro input tax at the tax office. This is an input tax claim against the tax office.
 

  1. Does sales tax have to be paid or does the entrepreneur get input tax back?

For the sake of simplicity, the advance VAT return summarizes all input tax and VAT amounts for a pre-notification period. As part of the bookkeeping, the individual amounts are recorded and the corresponding values ​​are entered in the form for the advance VAT return. The numbers are offset against each other and there is either a sales tax liability or a sales tax payment burden.


Overview: This is how the sales tax system works

 

Sales

 

 

Taxable domestically?

 

No. The test chain ends here. In the advance VAT return there is an extra line for sales that are not taxable in Germany. The value is to be entered here

Yes

 

 

Is the turnover tax-free?

 

 

Yes. The test chain ends here. There is an extra line for this in the advance VAT return. The value is to be entered here.

 

No

 

 

 

Determination of the assessment base for taxable sales

 

 

 

 

Classification as to whether 7% or 19% are to be applied.

 

 

 

 

Net values ​​are entered in the respective line (19% or 7%) of the form. The sales tax is calculated automatically

 

 

 

 

The input tax is entered in the corresponding line and deducted

 

 

 

 

This results in a sales tax liability or a claim for reimbursement against the tax office.