Value added tax (VAT)

Value added tax (VAT) is payable on the sales of goods and services in the conduct of business, which takes place in Finland. VAT is a general consumption tax which means that it is paid from the consumption of a product and paid by the end users. On the other hand, VAT is an indirect tax which means that the end users don’t pay the tax to the state, but that the tax is collected by businesses selling goods or services and who are considered to be VAT liable. VAT is a self-assessed tax. Taxpayer needs to calculate and pay the amount of tax independently and usually monthly.

As a counterbalance to VAT liability there’s a broad deduction right. In most cases, taxpayer has the right to deduct VAT included in the purchases made for the taxable business. This aims at avoiding multiple taxation in the sales chain. However, there are many exemptions related to both taxation of a sale and right to deduct. It is important to be aware of what is taxable sales and what can be deducted. In addition, applicable tax rate needs to be known. Because VAT is harmonized taxation in the EU, one needs to take into account also the requirements of EU law.

VAT is payable on the sales of goods and services for consideration, unless a special provision is applied

As a rule, VAT is payable on the sales of goods and services for consideration. Usually, the consideration is money but it can also be anything else with a monetary value. If the received payment doesn’t have a direct and immediate connection with a supplied product, VAT Act is not applied to the supply. Typically, capital investments and payments of damages are considered to be these kinds of payments. VAT Act includes also a group of exceptions from the taxability of a sale. E.g. health and medical care services, social welfare and educational services and financial and insurance services are considered to be non-taxable as defined in the VAT Act. Here should be noted that the seller of non-taxable goods or services is not entitled to deduct VAT included in the purchases related to these non-taxable sales. There are many interpretative questions as to what extent the non-taxability extends to.

The seller is usually tax liable

According to the main rule, the seller of goods or services is tax liable. However, in some cases the buyer is tax liable. This kind of a situation may arise when the seller of a taxable product is a foreigner, but reverse charge procedure can also be applied to a domestic business transaction. This reverse charge is applied e.g. to construction services when the buyer is a business operator selling construction services.

Deduction right acts as a counterbalance to tax liability

Nature of the VAT system includes broad possibility to deduct VAT included in the purchases related to taxable business. Respectively, if the purchases are related to non-taxable activities or activities outside the scope of VAT Act, normally there is no deduction right. Therefore, taxpayer needs to recognize, what part of the purchases are related to taxable and what part to non-taxable activities. In some cases, the acquired services or goods are related to both taxable and non-taxable activities. Then also the VAT of the purchase needs to be divided into deductible and non-deductible part as precisely as possible, which isn’t always unambiguous. One also needs to be especially careful in group situations, because a company can only deduct VAT included in the purchases related to its own business. The expenses need to be charged on the correct company.

Our experts will help you

As you can see above, there are many questions of interpretation related to VAT of which our tax and financial experts have a solid experience. E.g. related to real estate and real estate business there are many special rules.

The number of issues that need to be taken into account increases significantly in a cross-border situation. Even though VAT is harmonized taxation in the EU, even the business inside the EU is affected by different application models and interpretations of the VAT system. When a company outside the EU is involved, the questions of interpretation are even more complex.

Our experts help you with any kind of questions related to VAT. We will find out the necessary obligations and make the necessary registrations and reports. We estimate tax efficiency of the chosen business model in its entirety and help to optimate the VAT cash flow, which will release working capital and lighten the balance sheet. In addition, we assist financial administration by organizing custom-built training and guidance, by consulting businesses related to questions concerning VAT deductions and VAT refund and by helping businesses in different tax audit, appeal and advance ruling processes.