Lowest VAT Rate in the World (2025 Updated Guide)
Value Added Tax (VAT), or Goods and Services Tax (GST), is a widespread consumption tax applied in over 170 countries. While many nations impose VAT rates ranging from 15% to 25%, some countries have chosen significantly lower rates — either as a way to stimulate economic growth or support affordability. This guide explores which countries have the lowest VAT rates in the world, why they matter, and what the implications are for consumers, businesses, and governments.
What is VAT?
VAT is a tax imposed on the value added to goods and services at each stage of production or distribution. It is typically paid by the final consumer but collected and remitted by businesses throughout the supply chain. It’s considered a neutral and efficient form of taxation, which is why it’s so widely adopted.
Global Average VAT Rate
As of 2025, the average global standard VAT rate is around 15–20%. In the European Union, it’s approximately 21%. Africa and Asia average around 15%, while some Gulf countries are lower due to recent implementations.
Countries With the Lowest VAT Rates (2025)
| Country | VAT/GST Rate | Region | Year Introduced |
|---|---|---|---|
| Bhutan | 0% (Sales Tax model) | Asia | No VAT |
| Brunei | 0% | Asia | No VAT |
| United Arab Emirates | 5% | Middle East | 2018 |
| Saudi Arabia | 5% (until 2020), now 15% | Middle East | 2018 |
| Switzerland | 7.7% | Europe | 1995 |
| Canada | 5% GST (federal) + provincial rates | North America | 1991 |
| Malaysia | 6% SST (replaced GST) | Asia | 2015 (replaced in 2018) |
| Japan | 10% | Asia | 1989 |
Which Country Has the Absolute Lowest VAT Rate?
Technically, Bhutan and Brunei have the lowest rates — 0% — as they do not operate a VAT or GST system. Among countries that have VAT/GST laws, the **United Arab Emirates (UAE)** and **Canada** offer the lowest federal rates (5%).
United Arab Emirates: 5%
Applied on most goods and services, with exceptions like healthcare and education.
Why Do Some Countries Have Low VAT Rates?
Several reasons may explain low VAT rates:
- Oil-rich economies like UAE and Brunei use revenue from petroleum exports instead of taxes.
- Developing nations may avoid high VAT rates to ease cost-of-living burdens.
- Tourism-based economies sometimes keep VAT low to remain attractive.
Benefits of Low VAT Rates
- Lower consumer prices
- Stimulates spending and domestic demand
- Helps small businesses operate with lower costs
- Attracts foreign investment and digital businesses
Challenges of Low VAT Rates
- Less government revenue for public services
- Higher dependence on oil, mining, or foreign aid
- Limited fiscal policy options during economic crises
Case Study: United Arab Emirates (5%)
Introduced in 2018, UAE’s 5% VAT rate remains one of the lowest globally. It is applied broadly, but with exemptions for healthcare, education, and basic groceries. Despite its low rate, the country has raised billions in revenue while keeping consumer prices relatively stable.
Case Study: Switzerland (7.7%)
Switzerland’s VAT rate is the lowest in Europe. The standard rate is 7.7%, with reduced rates of 2.5% for food and 3.7% for accommodation. Its strong economic infrastructure and reliance on other taxes allow it to sustain this low rate.
How Low VAT Rates Impact Businesses
- Encourages cash-based small businesses to register
- Boosts product competitiveness (especially exports)
- Reduces pricing pressure on startups
- Low collection costs for governments
Should All Countries Lower Their VAT Rates?
Not necessarily. Each country has its own economic model. While low VAT rates can be helpful in some cases, they may not provide sufficient government revenue in others, especially for developing nations reliant on taxation for infrastructure and health spending.
FAQs About Lowest VAT Rates
Which country has 0% VAT?
Bhutan, Brunei, and some island nations like the Bahamas operate without a VAT or GST system.
Is the UAE still at 5% VAT?
Yes, as of 2025, the VAT rate in the UAE remains at 5%.
Can a country survive without VAT?
Yes, but only if it has alternative revenue sources such as oil, tourism, or other taxes.
Is VAT lower in the USA?
The United States does not use VAT. It operates with state-level **sales tax**, which varies between 0% and 10% depending on the state.
Which European country has the lowest VAT?
Switzerland (7.7%) and Luxembourg (16%) have the lowest VAT rates in Europe.
Conclusion
The lowest VAT rates in the world reflect a country’s economic strategy, resources, and fiscal goals. Countries like UAE and Switzerland prove that it’s possible to maintain low VAT rates while remaining economically stable. However, these models are not universally applicable. For businesses, understanding VAT globally helps in planning international expansion, setting product prices, and staying compliant. For consumers, it explains why prices differ across borders — and how tax policy shapes purchasing power.