Understanding VAT
October 22, 2025
Understanding VAT and the impact it has on a global business is key to staying compliant. Value Added Tax (VAT) and Goods and Services Tax (GST) are indirect tax systems that require businesses to charge tax on sales, unless an exemption or relief applies, while allowing recovery of VAT/GST paid on purchases directly related to those taxable sales.
VAT is a transaction-based consumption tax charged at each stage of the supply chain. Although VAT/GST is collected throughout production and distribution, eligible businesses typically recover the tax they incur, meaning the system effectively taxes the value added (margin) at each stage. The final VAT/GST cost is borne by the end consumer.
Understanding VAT and GST and how they work in practice
VAT and GST operate on similar principles globally, but their application depends on where a supply is deemed to take place and the nature of what is being supplied. This makes VAT a technically complex area of tax compliance.
Rules differ depending on whether a business supplies:
- Goods or services
- Business-to-business (B2B) or business-to-consumer (B2C) transactions
- Digital services, financial services, or land and property
For example, land and property-related supplies can create VAT registration and reporting obligations in the country where the property is located, regardless of where the supplier is established.
Understanding VAT exemptions and recovery restrictions
VAT systems include specific exemptions, which are often narrowly defined and vary by jurisdiction. Exempt supplies can significantly affect a business’s ability to recover VAT on costs.
This creates complexity in determining whether VAT incurred is:
- Fully recoverable
- Partially recoverable
- Irrecoverable and therefore a direct cost to the business
Correct classification is critical, as errors can lead to overpaid tax, under-recovery, or penalties following tax authority reviews.
International VAT differences and local variations
Although VAT is built on common principles, local implementation varies significantly.
- Within some countries, VAT/GST systems differ by state or region (for example, Brazil)
- Across the European Union, VAT operates under a common framework, yet each of the 27 EU member states applies its own rules, rates, and administrative practices
- Outside the EU, VAT and GST regimes can differ substantially in scope, compliance requirements, and enforcement
As a result, VAT compliance must be assessed on a country–by-country basis.
Understanding VAT on cross-border and digital supplies
VAT and GST obligations can arise even when a business has no physical presence in the country where customers are located.
For example, businesses supplying:
- Digital content
- Streaming services
- Downloaded software or website-based services
Private individuals may be required to register for VAT/GST and account for tax in the customer’s country of residence. Since 2021, many jurisdictions have expanded and tightened digital VAT rules, and enforcement has increased significantly through 2024 and 2025.
Why understanding VAT planning matters for international businesses
Whenever a business trades internationally, it should review the applicable VAT/GST systems and seek specialist advice to ensure:
- Registration obligations are identified early
- Correct VAT treatment is applied to supplies
- Recovery opportunities are maximised
- Compliance risks and penalties are avoided
VAT errors often arise not from negligence, but from misunderstanding local rules or failing to coordinate advice across multiple jurisdictions.
VAT support through the Kreston Global network
Kreston has VAT specialists across its global network of firms in 110 countries, enabling coordinated, local expertise supported by international oversight. Connect with us on social media here.
Whether you are expanding overseas, supplying digital services, managing complex exemptions, or reviewing existing VAT arrangements, we would be pleased to discuss your business issues and requirements and provide practical, commercially focused VAT support.
Further reading
2024 EU VAT Regulations January update: What is the real impact on gig economy digital platforms?
The impact of 2024 EU VAT Regulations on the gig economy hit the headlines this week as consumers reacted to the 1 January update.
VAT in the digital age
Understand the potential impact on businesses and the fight against VAT fraud, along with considerations for readiness in the digital VAT landscape. Stay informed about the proposed changes and their implications for cross-border transactions and e-commerce sellers.
Frequently Asked Questions about VAT
VAT (Value Added Tax) is a consumption tax charged on goods and services at each stage of the supply chain. Businesses collect VAT on sales and may recover VAT paid on related purchases, with the final cost borne by the consumer.
VAT and GST operate on similar principles, taxing the value added at each stage of supply. The terminology and detailed rules vary by country, but both systems are forms of indirect tax on consumption.
A business may need to register for VAT if it exceeds a local registration threshold, makes taxable supplies in a country, or supplies certain goods or services (such as digital services) to customers in that jurisdiction, even without a physical presence.
Yes, VAT can apply to both goods and services. The rules differ depending on the nature of the supply, the location of the supplier and customer, and whether the transaction is business-to-business or business-to-consumer.
VAT exemptions apply to specific types of supplies defined by law. Exempt supplies usually prevent businesses from recovering VAT on related costs, which can increase the overall tax burden if not managed correctly.
VAT incurred on business expenses may be fully, partly, or not recoverable depending on the type of supply made and local VAT rules. Recovery restrictions commonly apply where exempt supplies are involved.
Yes. Although VAT systems share common principles, rules, rates, exemptions, and administrative requirements vary between countries and, in some cases, within regions or states of the same country.
VAT can apply to cross-border transactions, including supplies made by businesses that are not established in the customer’s country. The place of supply rules determine where VAT is due.
In many countries, VAT applies to digital services such as streaming, downloads, and online content. Businesses may be required to register and account for VAT in the customer’s country of residence.
Incorrect VAT treatment can result in penalties, interest, and irrecoverable tax costs. Proper VAT planning helps businesses remain compliant, manage cash flow, and reduce tax risk when operating internationally.
