Value-Added Tax (VAT)
Value-added tax (VAT) is a general consumption tax on the turnover from supplies of goods and services. Companies charge it on their sales, deduct the input VAT they have paid and remit only the difference to the tax office – economically, it is borne by the final consumer.
Value-added tax (VAT) is a general indirect consumption tax levied on the turnover a company generates from supplies of goods and other services. The business adds it to its net price, shows it openly on the invoice and collects it from the customer. It then remits this amount – reduced by the input VAT it has paid itself – to the tax office. The economic burden falls not on the company but on the final consumer; the company merely acts as a tax collector.
In everyday language, VAT is often called "sales tax" or "value-added tax". Legally, it is based in Germany on the Value-Added Tax Act (Umsatzsteuergesetz, UStG), which in turn implements the European VAT System Directive. Its core feature is the all-phase net principle with input-VAT deduction: the tax is levied at every economic stage, but the input-VAT deduction is designed so that ultimately only the value added at each stage is taxed and no tax cascade arises.
At a glance
- General consumption tax on supplies of goods and other services – borne by the final consumer
- Standard rate in Germany 19 %, reduced rate 7 % (Austria 20/10/13 %, Switzerland 8.1 %)
- All-phase net principle with input-VAT deduction – only the value added at each stage is taxed
- Companies remit only the tax liability (VAT minus input VAT) via the VAT advance return
- Legal basis: the Value-Added Tax Act (UStG), based on the EU VAT System Directive
How value-added tax (VAT) works
Every VAT charge starts with a taxable transaction: a supply of goods or another service that a business carries out domestically for consideration within the scope of its enterprise. The applicable tax rate is applied to the net consideration and the VAT is shown openly. The business owes this tax, collected from the customer, to the tax office. At the same time, it may claim the VAT that other businesses have charged it on input supplies as input VAT.
Comparing the two yields the tax liability: VAT on output sales minus deductible input VAT from incoming invoices. If input VAT exceeds output VAT, a refund claim against the tax office arises. This mechanism is transmitted electronically on a monthly or quarterly basis via the VAT advance return and summarised after the end of the year in the annual VAT return.
Input-VAT deduction and tax liability
The input-VAT deduction is the heart of the system and the reason why VAT is a pass-through item for companies. The precondition is a proper invoice with all the mandatory details required under Section 14 UStG – such as the tax number or VAT ID, a sequential invoice number, a description of the service, and separate disclosure of the net amount, tax rate and tax amount. If mandatory details are missing, the tax office can deny the input-VAT deduction. That is why the formal invoice check is a central control step in accounting.
Tax rates and special cases in the DACH region
Germany applies a standard rate of 19 % and a reduced rate of 7 %, which covers food, books, newspapers and local public transport, among other things. Austria has a standard rate of 20 % and reduced rates of 10 % and 13 %. Switzerland is considerably lower, with a standard rate of 8.1 %, a special rate for accommodation (3.8 %) and a reduced rate (2.6 %). Anyone selling across borders must store the applicable rates correctly in the ERP.
A number of special cases are relevant in practice: tax-free intra-Community supplies to businesses with a valid VAT ID, the reverse charge on certain cross-border or domestic services, and the EU-wide One-Stop-Shop procedure (OSS) for distance sales to private customers. Margin taxation in the second-hand goods trade and the small-business scheme under Section 19 UStG, under which no VAT is shown, also belong here.
Reverse charge and OSS in online retail
For retailers with EU-wide shipping to private customers, a uniform delivery threshold of EUR 10,000 in annual turnover has applied since 2021. If it is exceeded, VAT must be paid in the customer's country of destination at that country's rate. Instead of having to register separately in each country, retailers can report these transactions in bundled form via the One-Stop-Shop (OSS). To do so, the ERP must be able to distinguish the country of delivery, the customer type and the correct destination tax rate for each line item.
Why value-added tax (VAT) matters
VAT is by far one of the highest-yielding taxes and therefore central to the public budget. For companies, handling it correctly is not just a question of compliance but is directly relevant to liquidity and liability. An incorrectly disclosed or incorrectly calculated tax rate leads to back payments, interest and, in the event of an audit, considerable correction effort – under Section 14c UStG, a business even owes an overstated or unwarranted tax amount when that tax would not actually have been due.
At the same time, VAT is a liquidity factor: between collecting it from the customer and remitting it to the tax office lies a period that noticeably affects solvency. Under accrual taxation, the tax arises as soon as the invoice is issued, regardless of whether the customer has already paid. Under certain conditions, smaller companies can apply for cash-basis taxation, under which the tax only becomes due when payment is received – a noticeable advantage for liquidity planning.
Value-added tax (VAT) in the ERP system
In the ERP system, VAT is deeply embedded in master data and document flows. Every item carries a tax key, every customer a tax territory and, where applicable, a VAT ID. From the combination of item, customer, country of delivery and type of service, the system automatically determines the correct tax rate and the matching posting key. When an invoice is created, this generates a posting that books the VAT to a dedicated tax account – separately from the net turnover on the revenue account.
On the input side, the ERP posts the input VAT from supplier invoices analogously to input-VAT accounts. From both sides, the system produces the VAT advance return, which is transmitted to the tax office via the ELSTER interface. For online retail, a correct OSS representation, checking the VAT ID via the confirmation procedure and the audit-proof, GoBD-compliant archiving of invoices are decisive. How comprehensively a system maps this logic differs by product – examples can be found under "Related systems".
Distinction: VAT vs. value-added tax and input VAT
The terms Umsatzsteuer and Mehrwertsteuer refer at their core to the same tax. "Umsatzsteuer" is the statutory designation in the UStG, "Mehrwertsteuer" the colloquial term often used on receipts, which emphasises the outcome – the taxation of value added. So these are not two different taxes, but two names for the same thing.
Input VAT, by contrast, is not a separate type of tax but the same VAT viewed from another perspective: it is the VAT a company itself pays to its suppliers and reclaims from the tax office. What is output VAT for the seller is input VAT for the purchasing business. VAT should also be distinguished from direct taxes such as income tax or corporate income tax, which are levied on profit, whereas VAT applies to turnover.
Example
Example: an online retailer between purchasing, selling and the advance return
A mid-sized online retailer buys goods for EUR 10,000 net and pays EUR 1,900 in VAT on them, which is deductible input VAT for the retailer. In the same month, it sells goods for EUR 25,000 net via its shop and marketplaces, showing EUR 4,750 in VAT. The ERP books the EUR 4,750 to the VAT account and the EUR 1,900 to the input-VAT account.
The VAT advance return then results in a tax liability of EUR 2,850 (4,750 minus 1,900), which the system reports to the tax office via ELSTER and the retailer transfers. If it additionally sells to private customers in France above the EUR 10,000 threshold, the ERP assigns these transactions to the OSS procedure at the French tax rate – separately from the domestic transactions.
Frequently asked questions
Matching ERP systems
Related services
Sources
Questions about Value-Added Tax (VAT) in your ERP project?
We advise vendor-neutrally – and implement it ourselves on request.