By Larry Harding
European Value-Added Tax (VAT) can pose a number of problems for U.S. companies unfamiliar with the procedures involved, but taking control of your company’s VAT has never been more important.
The New Year brought about a number of important VAT changes related to such issues as European Community (EC) sales listings and time/place of supply rules, making now the right time to examine your VAT structure and put in place operating procedures that will enable you to maximize VAT recovery and avoid penalties for noncompliance.
While not exhaustive, the following information is intended to give a working knowledge of the processes and deadlines involved with making a VAT reclaim. If your company operates in Europe, you are doubtless aware that VAT is an inescapable part of doing business there. The 27 European Union (EU) member states have a harmonized VAT system and non-EU countries follow similar principles. Rates are high, ranging from 15 to 25 percent, and there is little margin for error.
Contrary to popular – if misguided – belief, VAT does not work like sales tax in the U.S. So, if you are operating in overseas markets to sell a product or service, it is a good idea to remember that businesses are supposed to be VAT tax collectors, not tax payers. VAT is an end-user tax, and businesses are not intended to serve as end users. The objective is for your company to pay over VAT collected from customers and get a refund of any VAT paid to vendors or on imports. The first vital consideration, therefore, is to determine whether your business requires a VAT registration in any of the EU countries.
Assuming that your business is not required in its own right to be VAT registered in Europe, the good news is that EC legislation allows for VAT recovery on certain expenses incurred by a business, if you follow the rules. For example, you can usually reclaim expenditures on trade shows; it may be possible to reclaim VAT charged by your European suppliers; and even VAT on hotel accommodations, meals, and rental cars for the European travel of your U.S. employees.
The bad news is that none of the EU countries is particularly motivated to make successful VAT reclaims easy or straightforward, so proper registration, timely filing, and good documentation will make a critical difference to your success.
Please be aware, however, that if a U.S. business already is registered or even liable to register for VAT in the EC, then the VAT reclaim program which is outlined below is not available. If the U.S. business makes a VAT reclaim in such circumstances, it will get rejected at best – and at worst will raise an inquiry by the foreign tax authority.
Also, in some circumstances VAT can be avoided completely. For example, using a Carnet, an international customs document, for goods can help keep VAT leakage to a minimum.
Under EU law, any company that has a tax identification number in the overseas country is eligible to recover certain VAT charged on the vast majority of goods and services supplied by parties in one of the EU member states. U.S. companies can recover VAT on business expenditures incurred in the EU under the EC 13th Directive.
As the monies can be significant, it is important to understand the rules and deadlines for making these claims because they vary. For example, most EU countries allow for VAT recovery only in the “current” claim period. For claims in EU countries other than the UK, the relevant period is the calendar year, while the Netherlands and Belgium allow for some backdating. Norway and Switzerland (both non-EU countries) follow calendar-year filing. In the UK, however, VAT reclaim for invoices dated between July 1, 2009, and June 30, 2010, for example, must be submitted before December 31, 2010.
Required VAT reclaim documentation is thorough and claims are frequently rejected for failure to follow procedure. Here is a brief primer of some of the requirements for U.S. claimants:
- Original EU supplier invoices, without annotation – These invoices must clearly state the following: date of charge, known as the tax point date; supplier’s name, address, and VAT number (very important); net VAT incurred at both the standard and reduced VAT rates where relevant; gross value of the invoice in the local currency of the country where the invoice is issued; recipient business’s name; recipient business’s address. When making a 13th Directive reclaim for hotel, restaurant, or travel expenses, you’ll need to provide more than simple receipts. Also, understand that VAT recovery programs for specific travel expenses vary from country to country. Eligible hotel and restaurant bills are considered as EU supply invoices, and, as such, need to show the supplier’s VAT number and address, and the claimant’s full employee address information (both personal and, for hotel bills, the U.S. company name and address). It is good practice to instruct your employees to request this information up front.
- Valid U.S. certificate of taxable status (IRS Form 6166) – This certificate is obtained from the Department of Treasury by submitting Form 8802 (a process which can take up to three months). The 6166 must be issued or dated within the last 12 months, and each EU country claim will require a separate Form 6166, one for each country per application.
- Signed power of attorney (POA) – Also known as a “Letter of Authority,” this gives the approval from the U.S. company claimant for the third-party to act on its behalf with respect to communication and processing the actual VAT refund. This is a mandatory requirement imposed by various VAT authorities. POA forms are country-specific, prepared in the local language, and tailored per claimant. POA rules also vary by country regarding necessary signatures, notarizations, or advanced authentication processes.
- Signed application claim form – This form is required for each country for which a claim is being submitted. Issued once the claim has been processed, these forms differ from country to country.
Given the varying rules, documentation procedures, and deadlines, it is no wonder so many U.S. companies leave money on the table by failing to properly file for VAT recovery. Don’t be one of them this year. Seek proper advice and adopt a quarterly or twice-yearly filing practice.
About the author:
Larry Harding founded High Street Partners in 2003, and currently serves as its president. High Street Partners provides international business services, including accounting, tax, compliance, HR, payroll, and bookkeeping, to public and private companies, top-tier universities, non-profits, and government contractors operating in foreign markets.