What Is a Tax or VAT Number and Why Do You Need One?

Tax and Value Added Tax (VAT) numbers are important components of financial administration, serving as unique identifiers for individuals and businesses within tax systems. These numbers ensure compliance with tax laws, facilitate financial transactions, and enable governments to track tax obligations and payments. They allow tax authorities to monitor economic activity, whether it involves income, employment, or the sale of goods and services.

Understanding Tax Identification Numbers

A Tax Identification Number (TIN) is a unique nine-digit number assigned by tax authorities to individuals and entities for tax purposes. In the United States, the Internal Revenue Service (IRS) uses TINs to administer tax laws, track tax obligations, and process filings. TINs identify individuals for income tax filings, employment, and opening bank accounts, as well as businesses for various federal tax requirements.

For individuals, the most common TIN is the Social Security Number (SSN), issued by the Social Security Administration (SSA) to U.S. citizens, permanent residents, and some temporary residents. The SSN has evolved into a universal identifier used for employment, obtaining credit, and accessing government services. Another individual TIN is the Individual Taxpayer Identification Number (ITIN), issued by the IRS to non-resident and resident aliens, their spouses, and dependents who are not eligible for an SSN but have U.S. tax filing or reporting requirements. ITINs are nine-digit numbers that always begin with the number “9” and are formatted similarly to an SSN.

Businesses primarily use an Employer Identification Number (EIN), a nine-digit number assigned by the IRS. An EIN identifies employers, corporations, partnerships, and other entities for tax purposes, including payroll tax obligations and federal tax filings.

Understanding Value Added Tax Identification Numbers

Value Added Tax (VAT) Identification Numbers are distinct identifiers used in countries that implement a VAT system, a consumption tax levied on goods and services at each stage of production and distribution. Unlike general Tax Identification Numbers (TINs), VAT numbers are primarily used by businesses registered to collect and remit VAT. They facilitate VAT collection, reporting, and cross-border transactions, especially within economic blocs such as the European Union.

A VAT number enables businesses to charge VAT on their sales, report the VAT collected, and reclaim VAT paid on their business purchases (input VAT). This system ensures VAT is accounted for throughout the supply chain. For international trade, particularly within the EU, VAT numbers help businesses trade without double taxation and verify the tax status of trading partners through systems like the VAT Information Exchange System (VIES). The format of a VAT number typically includes a country code prefix followed by a series of numbers and sometimes letters, with the exact structure varying by country.

Obtaining a Tax or VAT Number

Obtaining a Tax Identification Number (TIN) or a Value Added Tax (VAT) number involves specific application processes and documentation requirements, which vary depending on the type of number and the entity applying. For individuals seeking a Social Security Number (SSN), applicants generally complete Form SS-5 and provide documentation proving their age, identity, and U.S. citizenship or immigration status. The application and issuance of an SSN card are free of charge.

Individuals who require an Individual Taxpayer Identification Number (ITIN) complete IRS Form W-7, “Application for IRS Individual Taxpayer Identification Number,” and submit it with a completed federal income tax return (Form 1040). This application requires documentation substantiating foreign status and true identity, which must be original documents or certified copies and current. Acceptable documents often include a passport, national identification card, or birth certificate. Processing time for an ITIN can range from 7 to 14 weeks, potentially longer during peak tax season.

Businesses applying for an Employer Identification Number (EIN) can do so online, by fax, or by mail using Form SS-4, “Application for Employer Identification Number.” The online application often provides an EIN immediately upon verification. The application requires information such as the business name, legal structure (e.g., sole proprietorship, LLC), the responsible party’s name and TIN, and the reason for applying. There is no fee to obtain an EIN directly from the IRS.

For a VAT number, businesses register with the relevant tax authority in countries with a VAT system. Registration is often required when a business exceeds a certain turnover threshold within that country, though specific thresholds vary by jurisdiction. The application process usually involves providing details about the company, such as its certificate of incorporation, articles of association, and proof of taxable transactions. Some countries may also require a VAT certificate from the business’s home country. Obtaining a VAT number can take several weeks, with processing times in European countries often ranging from four to six weeks once a correct application is submitted.

Practical Use of Tax and VAT Numbers

Once obtained, Tax Identification Numbers (TINs) and Value Added Tax (VAT) numbers serve distinct and ongoing practical purposes in financial and tax-related activities. For individuals, the Social Security Number (SSN) is used on federal and state tax returns, for employment purposes to report wages, and when opening financial accounts like bank accounts. It also helps build a credit history and access certain government benefits. Similarly, an Individual Taxpayer Identification Number (ITIN) is used by those without an SSN to fulfill U.S. tax filing obligations, being entered in the SSN field on tax forms.

Businesses use their Employer Identification Number (EIN) for federal tax filings, including income tax returns, payroll tax forms, and excise tax documents. The EIN is also used for hiring employees, opening business bank accounts, and applying for business licenses and permits. When issuing invoices, businesses include their EIN, especially for services or goods subject to federal reporting requirements.

For businesses operating in VAT-implementing countries, the VAT number is used for daily operations. It must be displayed on invoices issued to customers, facilitating the transparent application and collection of VAT. Businesses use their VAT number when submitting VAT declarations, which are periodic reports detailing VAT collected on sales (output VAT) and VAT paid on purchases (input VAT). This number also helps reclaim input VAT, allowing businesses to recover the tax paid on eligible expenses. For business-to-business (B2B) transactions, particularly across international borders within economic unions like the EU, the VAT number enables the proper application of VAT rules, such as the reverse charge mechanism, and is often verified through official databases like VIES to confirm the validity of trading partners.