Do you consider countries with lower Value Added Tax (VAT) rates more favorable for both life and business compared to countries with higher VAT rates?
On the one hand, VAT is included in the cost of goods and services, thus increasing prices at every stage, from production to the end consumer.
On the other hand, higher VAT rates can help countries maintain fiscal sustainability by generating more revenue to cover budgetary deficits or reduce the national debt. Increased VAT rates can contribute to the economic stability of a state by providing a steady source of tax revenue for the government.
Moreover, a higher VAT level enables authorities to invest in better infrastructure, facilities, and public services such as healthcare, education, transportation, and public safety.
Therewith, lower VAT rates on specific goods and services enhance affordability and accessibility, benefiting a broader range of people.
Furthermore, minimized VAT rates on socially beneficial items like energy-efficient products or renewable energy sources support environmental conservation efforts, aligning with long-term sustainability goals.
Let’s explore how different countries manage VAT and compare various aspects, including global standard rates, zero-VAT jurisdictions, countries with the lowest VAT tax, those with reduced VAT levels, and countries with the highest VAT rates.
How does VAT work? The end consumer bears the cost of VAT, but registered legal entities handle the accounting for the tax. Each business entity involved in the value chain can receive a tax credit for the VAT they have paid, which can be used to offset their VAT liability on sales.
However, the VAT rules and regulations are country-specific, as each jurisdiction has its VAT system. For instance, in the European Union (EU), traders pay VAT in the destination country when conducting business with other EU countries. In countries like Canada, businesses have the option to claim input tax credits for the GST/HST paid on business purchases.
Countries with VAT
VAT is widely implemented around the world. Initially derived from sales tax, VAT gained traction as a fairer alternative. In his publication in 1919, the German entrepreneur Carl Friedrich von Siemens observed that the burden of sales tax grew at each stage of product processing, leading to unfair competition in the business environment. The introduction of the VAT-based tax system began in France in 1958, and by the end of 1972, all member countries of the EAU Council had implemented VAT as mandated.
Over time, VAT has evolved to become the primary consumption tax, with approximately 120 countries using it by 2000.
In many countries, it is called Value Added Tax (VAT), while in countries like Canada, Australia, and India, it is known as Goods and Services Tax (GST).
As of 1 January 2023, 174 countries and territories have introduced VAT, including 37 out of the 38 member states of the OECD. At least 5 more countries are going to adopt VAT by 2025. On a global scale, VAT contributes approximately 20% of total tax revenues. 20 countries impose some form of sales tax.
What is the rate of VAT in the country of your liking? How can this VAT rate compare to other countries today?
Countries without VAT
As of the date of this article, the information about the countries that do not have VAT is as follows.
The United States does not have a national VAT or GST system, but rather sales tax systems that vary by state.
Bahrain has a 0% VAT rate and fully deductible VAT rates for certain goods and services, while the country has raised the standard VAT rate to 10%.
Bahamas has a 10% standard VAT rate. However, goods exported to customers outside the Bahamas are exempt from VAT or zero-rated.
The list of countries and territories that have not introduced VAT is as follows:
- Cayman Islands
- Guernsey, Channel Islands
- Hong Kong SAR
Regarding this list of 0% VAT tax rate by country, please note, that in the above-mentioned Caribbean countries, a duty of up to 70% is charged on imported goods.
Reduced VAT Rates
When ranking countries with the lowest VAT rates, we consider the standard VAT rates that are typically applied to goods and services, as well as the reduced and zero VAT tax rate by country.
However, reduced rates come into play in various situations. These include:
- temporary tax reductions during exceptional circumstances (e.g., during the COVID-19 pandemic) in one or many countries
- specific taxation of certain goods and services
- as measures aimed at stimulating particular sectors of the economy.
Governments often introduce reduced special VAT rates for essential items to make them more affordable. This is because VAT is included in the price paid by the end consumer. Therefore, reduced VAT rates are commonly applied in certain countries to essential goods such as medicines, foodstuffs, and children’s clothing.
A VAT rate reduction, for example, in the field of construction, can have a positive impact on the overall economic performance of the construction sector in a particular country.
Lowest VAT Tax by Country
Here is a ranking of the 16 countries with the lowest standard value-added tax (VAT) rates.
|№||Standard VAT Tax Rates||Countries and Territories|
|1||VAT rate of 4.5%||Andorra|
|2||VAT rate from 5%||Canada|
|3||VAT rate of 5%||Jersey, Channel Islands|
|4||VAT rate of5%||Oman|
|5||VAT rate of5%||Taiwan|
|6||VAT rate of5%||United Arab Emirates|
|7||VAT rate from 6%||China|
|8||VAT rate of7%||Costa Rica|
|9||VAT rate of7%||Lao PDR|
|10||VAT rate of7%||Liberia|
|11||VAT rate of7%||Liechtenstein|
|12||VAT rate of7%||Thailand|
|13||VAT rate of7%||Panama|
|14||VAT rate of7.7%||Switzerland|
|15||VAT rate of8%||Singapore|
|16||VAT rate of8%||Iran|
Considering the VAT percentage, what VAT rate would you prefer? You can hardly judge a country by its VAT rate.
The lowest standard VAT rate can be found in Andorra, a small European state situated between Spain and France, which is not a member of the European Union. Meanwhile, a high VAT rate does not necessarily indicate a country’s wealth. For instance, Switzerland, Singapore, and the UAE are considered wealthy nations despite having some of the lowest standard VAT rates globally.
Highest VAT Rates by Country
Hungary is the highest VAT country. Its standard VAT rate is 27%. Following closely are countries with a slightly lower rate of 25%:
- the Faroe Islands.
EU VAT Rates 2023
In the European Union, there is a tax law that establishes a minimum standard VAT rate of 15%.
On average, the standard VAT rate in the EU is 21%.
Please find the current VAT rates in all EU member states in the table below:
|By Country||Reduced VAT Rates (%)||Standard VAT Rates (%)|
|Austria||10 / 13||20|
|Belgium||6 / 12||21|
|Croatia||5 / 13||25|
|Cyprus||5 / 9||19|
|Czech Republic||10 / 15||21|
|France||5,5 / 10||20|
|Greece||6 / 13||24|
|Hungary||5 / 18||27|
|Ireland||9 / 13,5||23|
|Italy||5 / 10||22|
|Latvia||5 / 12||21|
|Lithuania||5 / 9||21|
|Malta||5 / 7||18|
|Poland||5 / 8||23|
|Portugal||6 / 13||23|
|Romania||5 / 9||19|
|Slovenia||5 / 9,5||22|
|Sweden||6 / 12||25|
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Sales Tax in the USA
How much is the current VAT in the USA? Instead of VAT, the United States applies Sales Tax, which rates vary between 0 and 11.5% depending on the state.
Like VAT, Sales Tax is listed separately on the sales receipt rather than being included in the product or service price.
The following 5 states do not charge Sales Tax (i.e., the VAT rate is 0%):
- New Hampshire
Does the VAT Size Matter?
Why do countries choose to set lower or higher VAT rates? Some countries maintain low standard rates, such as Switzerland’s 7.7%, to create a favorable environment and enhance incentives for inbound assets, investments, and new businesses.
Therewith, welfare countries use high VAT rates, such as Norway’s 25%, to finance public services in healthcare, education, and transportation. Governments may also resort to higher VAT rates to quickly replenish the state budget as a last resort during or after economic downturns.
Countries may expect economic, social, and political gains from the implementation of higher VAT rates:
- Revenue generation: VAT is implemented as a means to generate income for the government and fund public services.
- Broad-based taxation: VAT is a comprehensive tax that applies to a wide range of goods and services, ensuring a broader tax base and reducing reliance on other forms of taxation.
- Fairness and equity: VAT is often seen as a more equitable form of taxation as it is based on consumption levels, ensuring that individuals and businesses contribute based on their spending.
- Combating tax evasion: VAT provides a mechanism to track and tax the value added at each stage of production and distribution, helping to minimize tax evasion and discourage illicit activities.
- Economic policy tool: VAT rates can be adjusted to influence consumer behavior, stimulate or control consumption, and promote economic growth or stability.
- International alignment: Many countries adopt VAT to align with international taxation standards and facilitate trade with other nations.
- Simplification of the tax system: VAT can streamline the tax administration process by replacing multiple indirect taxes with a single tax, reducing complexity and compliance costs.
- Encouraging formalization: VAT can incentivize businesses to operate within the formal economy by requiring tax registration and compliance, thereby reducing the size of the informal or shadow economy.
The advantages of lower VAT rates for the countries’ economies, businesses, and consumers are connected to the following benefits:
- lower vat rates increase consumer purchasing power
- lower vat rates improve the affordability of goods and services
- lower vat rates stimulate business activity
- lower vat rates enhance international competitiveness
- lower vat rates reduce tax evasion
- lower vat rates benefit vulnerable groups
- lower vat rates contribute to a simpler and more transparent tax system.
As we see, whether higher and lower VAT rates are more favorable depends on various factors and perspectives. The ‘how much is the VAT tax’ question requires consideration of many aspects besides the VAT percentage.
To compare and discuss the VAT rates of specific countries when choosing a new destination for your business or a new place of residence, you are welcome to book a private session with our expert.
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