Replace All Federal Taxes on Income with the Fair Tax Act , HR 25
How the VAT Works
All,
It is helpful for FairTax-ers to understand the workings of the European-style Value Added Tax ("VAT") because the FairTax has often been compared to it. Below is my translation of an e-mail I received from an attorney friend of mine in Mannheim, Germany, Roland Altherr, in reply to some questions I asked him about the German VAT. Attorney Altherr provides excellent insight into the subject matter, both as to his practice and generally. You will note that, for reasons he explains, the terms "VAT" and "turnover tax" are used interchangeably in his remarks.
PS: If you ever have the need or the occasion to refer anyone, Attorney Altherr specializes in German and European labor and employment law.
~Jim
Attorney Altherr wrote:
Dear Jim,
...
To the subject:
1.
The VAT - officially - the turnover tax - is addressed in the Turnover Tax Law ("Umsatzsteuergesetz"). You will find this at www.gesetze-im-internet.de, there under Gesetze/Verordnungen and there under Umsatzsteuergesetz = UStG. Have fun!
There each paragraph must be called up individually. It is simpler to search under www.google.de under Umsatzsteuergesetz 2009. There is a scrollable version. This version is more readable.
The statute, as with all tax statutes, is not simple. ...
2.
Turnover tax is due when a business, domestically for compensation, furnishes goods or other value (including services, leasing, etc.). UStG Section 1, Para 1.
Special rules apply to foreign sales and EU sales, etc.
Sales and services between private persons are not covered by the Turnover Tax Law, and the compensation is not subject to the VAT. When a private person sells his car, there is no Turnover Tax due.
3.
VAT is due on attorneys’ fees also. The same applies for other services (IT-support, elevator maintenance, motor vehicle repair, commercial leases as distinguished from private leases, etc.).
4.
When I as an attorney spend five hours at a net rate of , E200.00 per hour, I bill E1,000.00, net, plus 19% VAT = E1,190.00 gross. The client has to pay me this amount.
Theoretically I have to turn the entire VAT of E190.00 over to the government.
I may, however, deduct the VAT that I myself paid to other businesses, namely the VAT on my rent, on all my office supplies, on all services that I received from businesses.
If I earned fees for a month in the amount of E10,000.00 net, there is VAT due on them of E1,900.00.
If I used services and, for example, paid E1,100.00 VAT for them, I can deduct this VAT as so-called previously-paid tax, and only have to send the government the difference in the amount of E800.00 for the month in question. UStG Section 15.
When a manufacturer assembles a machine, he can deduct the VAT on the raw materials from his VAT return as previously-paid tax.
If a businessman does not sell his final product, or sells it under cost, he has a refund claim against the government for the month in question (more previously-paid tax than turnover tax due for his own value added).
5.
When we represent businesses, they can claim the turnover tax on our fees also as previously-paid taxes.
When we represent a private person, he must pay the turnover tax because he cannot claim it as previously-paid tax.
6.
As to disbursements, it depends. Some disbursements are not subject to turnover tax, some are subject to the tax.
Court costs: not subject to turnover tax.
Witness fees: not subject to turnover tax.
Residency registration fees, commercial register fees, business register fees: not subject to turnover tax.
Translation costs: subject to turnover tax.
Travel costs: subject to turnover tax.
Out of office costs: subject to turnover tax.
On our bills, we either charge telephone costs at a flat fee per matter of E20.00, or we itemize them.
There is a special rule for photocopying costs which I do not know. We do not charge our clients for photocopying. These are included in the fee.
Disbursements do not play a major role in practice. When we need, for example, a report from an outside expert, we are not the party ordering it, rather, our client is the party who retains the expert. The expert then bills the client directly.
If, as an exception to our practice, we retain or pay the expert, we bill the costs of the expert, with his VAT, directly to the client. We do not bill another VAT of our own on top of it.
7.
Things we buy for the law office are generally subject to VAT. There is an exception when the office, for example, buys a valuable antique cabinet from a private person. This however is a case that practically never happens.
Our customers (businesses or private persons) generally pay the entire VAT on our fees. The things we buy for our law office are included in the fee, however only as to the net amount without VAT, because we can deduct the VAT on those things as previously paid tax. We do not need to charge these through to the clients in order to cover our costs.
I hope I could help you with this discussion.
Many greetings,
Roland
It is helpful for FairTax-ers to understand the workings of the European-style Value Added Tax ("VAT") because the FairTax has often been compared to it. Below is my translation of an e-mail I received from an attorney friend of mine in Mannheim, Germany, Roland Altherr, in reply to some questions I asked him about the German VAT. Attorney Altherr provides excellent insight into the subject matter, both as to his practice and generally. You will note that, for reasons he explains, the terms "VAT" and "turnover tax" are used interchangeably in his remarks.
PS: If you ever have the need or the occasion to refer anyone, Attorney Altherr specializes in German and European labor and employment law.
~Jim
Attorney Altherr wrote:
Dear Jim,
...
To the subject:
1.
The VAT - officially - the turnover tax - is addressed in the Turnover Tax Law ("Umsatzsteuergesetz"). You will find this at www.gesetze-im-internet.de, there under Gesetze/Verordnungen and there under Umsatzsteuergesetz = UStG. Have fun!
There each paragraph must be called up individually. It is simpler to search under www.google.de under Umsatzsteuergesetz 2009. There is a scrollable version. This version is more readable.
The statute, as with all tax statutes, is not simple. ...
2.
Turnover tax is due when a business, domestically for compensation, furnishes goods or other value (including services, leasing, etc.). UStG Section 1, Para 1.
Special rules apply to foreign sales and EU sales, etc.
Sales and services between private persons are not covered by the Turnover Tax Law, and the compensation is not subject to the VAT. When a private person sells his car, there is no Turnover Tax due.
3.
VAT is due on attorneys’ fees also. The same applies for other services (IT-support, elevator maintenance, motor vehicle repair, commercial leases as distinguished from private leases, etc.).
4.
When I as an attorney spend five hours at a net rate of , E200.00 per hour, I bill E1,000.00, net, plus 19% VAT = E1,190.00 gross. The client has to pay me this amount.
Theoretically I have to turn the entire VAT of E190.00 over to the government.
I may, however, deduct the VAT that I myself paid to other businesses, namely the VAT on my rent, on all my office supplies, on all services that I received from businesses.
If I earned fees for a month in the amount of E10,000.00 net, there is VAT due on them of E1,900.00.
If I used services and, for example, paid E1,100.00 VAT for them, I can deduct this VAT as so-called previously-paid tax, and only have to send the government the difference in the amount of E800.00 for the month in question. UStG Section 15.
When a manufacturer assembles a machine, he can deduct the VAT on the raw materials from his VAT return as previously-paid tax.
If a businessman does not sell his final product, or sells it under cost, he has a refund claim against the government for the month in question (more previously-paid tax than turnover tax due for his own value added).
5.
When we represent businesses, they can claim the turnover tax on our fees also as previously-paid taxes.
When we represent a private person, he must pay the turnover tax because he cannot claim it as previously-paid tax.
6.
As to disbursements, it depends. Some disbursements are not subject to turnover tax, some are subject to the tax.
Court costs: not subject to turnover tax.
Witness fees: not subject to turnover tax.
Residency registration fees, commercial register fees, business register fees: not subject to turnover tax.
Translation costs: subject to turnover tax.
Travel costs: subject to turnover tax.
Out of office costs: subject to turnover tax.
On our bills, we either charge telephone costs at a flat fee per matter of E20.00, or we itemize them.
There is a special rule for photocopying costs which I do not know. We do not charge our clients for photocopying. These are included in the fee.
Disbursements do not play a major role in practice. When we need, for example, a report from an outside expert, we are not the party ordering it, rather, our client is the party who retains the expert. The expert then bills the client directly.
If, as an exception to our practice, we retain or pay the expert, we bill the costs of the expert, with his VAT, directly to the client. We do not bill another VAT of our own on top of it.
7.
Things we buy for the law office are generally subject to VAT. There is an exception when the office, for example, buys a valuable antique cabinet from a private person. This however is a case that practically never happens.
Our customers (businesses or private persons) generally pay the entire VAT on our fees. The things we buy for our law office are included in the fee, however only as to the net amount without VAT, because we can deduct the VAT on those things as previously paid tax. We do not need to charge these through to the clients in order to cover our costs.
I hope I could help you with this discussion.
Many greetings,
Roland
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