Example 1: an EU company sells to EU customers

A computer manufacturer (Company 2) sells a computer to one of its customers. The computer is worth $10,000 and therefore, if the VAT rate is 20%, Company 2 charges the customer $12,000 ($10,000 for the computer and $2,000 VAT).

Company 2 has bought $8,000 worth of computer equipment from one of its suppliers (Company 1) in the same accounting period. On this transaction, Company 2 paid a total amount of $9,600 ($8,000 for the equipment and $1,600 VAT) to Company 1. Because companies can deduct VAT paid from VAT received, Company 2 is only required to pay $2,000 - $1,600 = $400 VAT to the tax authority.  

The tax authority receives two sums, one from each party involved: it receives $1,600 from Company 1 (the supplier) and $400 VAT from Company 2 (the computer manufacturer). This adds up to a total of $2,000 of VAT, which is the correct amount of VAT due on the sale of the computer.

Note that although the VAT is collected and remitted by the businesses in the supply chain, the end customer ultimately pays the VAT. Specifically, he has paid an amount of $12,000 for a computer worth $10,000.

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• VAT Introduction
• What is VAT ?
• US Export and EU Import
• Example: Sale within EU
• Example: US Export to EU
• History of VAT in the EU