The value added tax (French VAT or TVA) (hereinafter referred to as “VAT”) was instituted in 1955 and is the principal form of indirect taxation in France; in 2007, it generated approximately 49 percent of all French tax receipts. The rules applicable to French VAT are notably governed by European Union law. Although subject to certain territorial limitations, the scope of the VAT is very broad: it covers all transactions involving an “economic activity,” which term is deemed to include not only industrial, commercial and agricultural activities, but also the rendering of professional services and other activities which are classified as civil.
The VAT is a non-cumulative tax imposed on each of the taxable transactions necessary for the production, distribution or delivery of goods and services. In theory, each taxpayer must invoice to his customers and pay to the tax authorities VAT on the value of the taxable goods and services he sells or renders. Bbut inasmuch as a taxpayer may take as a credit the amount of VAT invoiced to him and paid to the tax authorities by the person from whom he purchased the goods or services, each taxpayer pays VAT only on the value that he adds to the goods or services he subsequently sells or renders.
Thus, the burden of VAT is not borne by producers or suppliers of taxable goods or services, but rather by the ultimate consumers thereof. For example, if X sells a taxable good to Y for 10 euros, X must invoice to Y and pay to the tax authorities 1.96 euros of VAT if the applicable VAT rate is 19.6 percent. Y will therefore pay 11.96 euros to X and X will remit 1.96 euros to the tax authorities. If Y then sells the same good to Z for 30 euros, Z will pay 35.88 euros to Y, of which 5.88 euros is VAT; inasmuch as the tax credit system permits Y to claim a credit corresponding to the VAT invoiced to him by X, or 1.96 euros, Y must remit 5.88 euros minus 1.96 euros, or 3.92 euros, to the tax authorities. The 3.92 euros invoiced to Z and remitted by Y to the tax authorities represents VAT on the value added to the goods in question by Y.
Although producers or suppliers of taxable goods and services do not bear the ultimate burden of VAT, they are, as a result of the VAT credit system, obligated to disburse the amount of the tax payable on goods and services they purchase or receive yet may only claim a countervailing VAT credit at a later point in time. The tax credit system also requires producers and suppliers to maintain a detailed accounting system in order to keep an accurate record of VAT imposed on and VAT credits generated by their products and services. Where, however, this detailed accounting system is too cumbersome for certain taxpayers, VAT is assessed pursuant to alternative methods.