What is VAT? Value added tax

The Value Added Tax (VAT) is a project that aims to  replace and unify the taxes charged to the consumer into a single tax. To be created, a tax reform must be carried out.

The idea behind the implementation of this tax is to improve transparency in how products and services are taxed, in addition to facilitating the entire tax process.

This same tax has been practiced for many years by the European Union bloc due to the ease of application and collection between countries. In Portugal it is known as Value Added Tax, under the same acronym VAT.

The project predicts that the same can happen in operations between Mercosur, since Argentina, Paraguay and Uruguay already have national VAT.

How VAT works

This tax system applies to goods and services a general purchase tax exactly proportional to the price offered, that is, a percentage applied to the price.

The added value, or “added value”, is the price that a product acquires from the beginning of its production, or also, the price that gives value to some service.

Until it reaches the final consumer, taxes only apply to the amount that has been added from one chain to another, and are not cumulative.

In the case of an industry, for example, there is the cost of production and the addition of value for sale to the retailer, which also adds value to the end customer.

Example

For example, if a product has a price of $ 100.00 for the final consumer and 20% VAT, then $ 20.00 is transferred to the government in the form of tax.

The same can be seen when considering the added value in each production chain until it reaches the final consumer.

Continuing with the example, see what the tax would look like for each price level charged in the distribution chain for this product:

LevelSale priceValue addedValue added tax
Producer$ 40.00$ 40.00$ 8.00
Wholesaler$ 65.00$ 25.00$ 5.00
Distributor$ 85.00$ 20.00$ 4.00
Retailer$ 100.00$ 15.00$ 3.00
Total = $ 20

VAT in Brazil

The list of taxes to be replaced may include some such as ICMS, IPI, IOS, Cofins, IOF, PIS / Pasep, ISS, among others. These are federal, state or municipal taxes, in exchange for VAT.

As it is the only Mercosur country that does not have it, the project to apply VAT in Brazil is constantly debated in the federal government. A version of this tax is analyzed under the name of Tax on goods and services (IBS).

The proposal analyzes how easy it is to calculate this tax, compared to those it should replace, in order to improve collection dynamics.

Furthermore, the intention is to mitigate the effects of tax evasion, as explained by the Laffer curve.