The standard way to implement a VAT is to say a business owes some percentage on the price of the product minus all taxes previously paid on the good. If VAT rates were 10%, an orange juice maker would pay 10% of the $5 per gallon price ($0.50) minus taxes previously paid by the orange farmer (maybe $0.20). In this example, the orange juice maker would have a $0.30 tax liability. Each business has a strong incentive for its suppliers to pay their taxes, allowing VAT rates to be higher with less tax evasion than a retail sales tax.
from:
http://en.wikipedia.org/wiki/Value_added_tax