Are You Paying VAT (Value Added Tax) You Don’t Owe? Don’t Leave Money on the Table
By Nick Hart, Director, VAT Advisory Services
If you’re an American business, there’s a good chance you’re not familiar with the particulars of Value Added Tax. But if you’re an American business with overseas operations, there’s a good chance you need to be. One hundred fifty countries collect VAT or Goods and Services Taxes, and they account for approximately one-third of tax revenue in those countries. So, if your company is conducting business overseas, VAT and similar taxes likely constitute a significant portion of your tax bill. But VAT can be complicated, especially for those unfamiliar with the scope of the tax, and many businesses pay unnecessary VAT or fail to pursue the full reimbursements to which they’re entitled.
Don’t Pay VAT You Don’t Owe
To avoid leaving money on the table when expanding overseas, build awareness of your VAT obligations into your planning process. You’re always better off minimizing your tax exposure from the get-go, rather than scrambling to recover unnecessary tax payments or change existing arrangements after realizing you’re paying too much. You may be able to recover erroneous VAT expenditures, but this usually requires adequate documentation, along with time and resources.
The circumstances under which you’re exempt from VAT may surprise you. If you’re supplying a for-profit business in a foreign country that’s VAT registered, for example, be aware of the likely opportunity to shift the VAT burden onto them. And you’re not liable for import VAT when shipping goods between EU member states, although the intra-community is a taxable event. And in some cases, you can recover VAT expenses related to research and development. Businesses that don’t understand foreign tax codes frequently set up relationships with their vendors in ways that incur unnecessary VAT expenses.
Do Pay VAT You Do Owe
The flipside of this warning is that you should ensure from the get-go that you’re collecting and paying all VAT for which you’re liable. Failing to do so is another common pitfall of businesses that lack experience navigating VAT regimes.
For example, if you’re a U.S. business without any direct overseas presence, you still may incur VAT liability through an overseas supply chain. If your business typically supplies other businesses but begins selling to academic institutions, nonprofits or individuals, you should be prepared to begin paying VAT on those sales.
Late VAT payments come with penalties and interest. They can also subject your organization to greater government scrutiny. In extreme cases, directors can be personally prosecuted for an organization’s failure to fulfill its VAT obligations.
Your VAT exposure can be complex, even Byzantine, if you’re operating across multiple jurisdictions. To complicate matters further, the details of tax codes change regularly, and court decisions frequently affect the on-the-ground implementation of tax rules. Sailing between the Scylla of over-paying taxes and the Charybdis of failing to fulfill your full VAT obligations can be treacherous. When in doubt, look to an experienced navigator.
Want to know more? View the Radius VAT Webinar here