The value added tax (VAT) was created by a law of 1954 on the basis of the work of a senior French official. At that time, companies were subject to taxes on their turnover, or their production, and could not be reimbursed for the tax on their own purchases, especially their investments. This “cascade” taxation, on each company intervening between the first producer and the consumer, had the disadvantage of penalizing the sectors in which many companies successively intervene, compared to those where large companies are integrated from upstream to ‘downstream.

 What Was the Objective?

  • The objective was then to replace these taxes on the turnover of companies by the tax on their value added. The last general tax on turnover, the “social solidarity contribution of companies”, was to disappear in 2017 but it was maintained for large companies.
  • VAT was adopted by almost all OECD countries, the United States being a notable exception, and more particularly by the European Union, in 1967, where its implementation is harmonized by directives.
  • This sheet presents the main legal characteristics of VAT, its budgetary and economic issues as well as elements of international comparison.

The main legal characteristics

The basic principles

All persons, natural or legal, independently carrying out economic activities of trade, production of goods or provision of services are “subject to VAT”. However, legal persons governed by public law, such as local authorities, are not liable for their activities carried out in the general interest. At present the business calculator happens to be the most effective solution for proper VAT calculation.

  • Taxable persons must apply VAT to the price excluding tax (HT) of their products and charge their customers an “all taxes included (TTC)” price. They are “liable for VAT” which they must deduct from their customers on behalf of the State and remit to it the following month.

Taxable persons pay the VAT invoiced by their suppliers on their current purchases of goods and services, but they can deduct it the following month from the VAT due to the State on their own sales. They can also deduct the VAT paid on their purchases of goods and services intended to be incorporated into fixed assets. The investment of companies, individual or in the form of companies, therefore does not bear VAT. As a result, they only pay the State VAT on the difference between the amount of their sales and that of their purchases, which corresponds to their added value (net of investments), hence the name tax on added value.

According to the Experts

Exports are exempt from VAT, but exporting companies, if they are liable, can deduct VAT paid on their purchases. Imports are subject to VAT, at the same rate as identical goods and services produced in France, and the importer must pay it to the State. A company which has paid VAT on its imports can then deduct it from the VAT on its sales which it must remit to the State.