What is VAT?
How does it work?

We often notice that our clients are confused when it comes to VAT.
And no wonder – VAT, or value added tax,
can seem like a complicated concept at first glance.

VAT - What does it mean and how does it work?

VAT is a consumption tax that applies to most goods and services sold with minor exceptions that we'll describe below.

It's an indirect tax, meaning it's not paid directly by the consumer to the state, but collected by sellers throughout the distribution chain.

For example, when paying for a chocolate bar at the store for 10 lei, 20% of this already represents VAT that the store subsequently pays as taxes.

Why is VAT imposed?

VAT is a major source of revenue for governments. This taxation system helps collect funds needed for infrastructure, education, healthcare and other important public services.

How is VAT calculated?

In Moldova, as in many other countries, there are multiple VAT rates applied depending on the nature of goods and services. These different rates are established to reflect the state's economic, social and public policy objectives. The VAT rates in Moldova are:

• Standard rate: The most common is the standard rate of 20%, applicable to most goods and services sold.
• Reduced rate: There is a reduced rate of 8% that applies to certain goods and services, such as catering services, delivery of non-industrialized agricultural products, some types of medicines and medical equipment, and hotel services.
• VAT exemptions: Certain transactions are exempt from VAT, such as medical, educational, cultural services, real estate and land operations, social services, and exports of goods and services.

VAT deductibility

One of the key aspects of this system is VAT deductibility.
This mechanism works as compensation between the VAT you pay when purchasing goods or services for your business and the VAT you collect from your customers when you sell them products or services.

How does VAT deductibility work?

• Let's assume your business purchases office equipment worth 10,000 lei, plus 20% VAT, resulting in a total cost of 12,000 lei. This VAT of 2,000 lei that you paid is "deductible VAT".


• When you sell products or services, for example, consulting services worth 15,000 lei, plus 20% VAT, you collect from the client 18,000 lei. From this amount, 3,000 lei represents "collected VAT".


• At the end of the fiscal period (month), the collected VAT must be transferred to the state, but you can deduct the VAT you paid for purchases.

So, in our example, you will pay the state the difference between the collected VAT and the deductible VAT, i.e., 3,000 lei - 2,000 lei = 1,000 lei.

VAT Payer or Non-Payer?

What does it mean to be a VAT payer?

If your business exceeds a certain income threshold established by legislation in Moldova, which currently is 1,200,000 lei for the last 12 months, it's mandatory to register your company as a VAT payer.
This status involves collecting VAT from your customers and reporting it to the state periodically. Being a VAT payer, you can deduct the VAT paid for your purchases, thus reducing operational costs.
Additionally, you position yourself as a more credible and trustworthy business, opening collaboration opportunities with other companies that prefer working only with VAT payers.

The situation of VAT non-payers:

If your business does not exceed the specified threshold, you don't have to collect or report VAT. This can be advantageous for small businesses, simplifying administrative processes and reducing bureaucracy.
However, as a VAT non-payer, you cannot deduct the VAT paid on your purchases, thus turning any paid VAT into an additional cost.

Conclusion

Although it may seem complicated at first, VAT is a well-structured taxation system.
We are close to you to help you navigate all aspects related to VAT and other fiscal obligations, so you can focus on what really matters – growing your business!