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- 1. The basics of Value Added Tax
- 2. The importance of VAT for operations outside the U.S.
- 3. Simple techniques for optimizing your VAT position
- 4. Recent developments and the potential for VAT in the U.S.
- 5. Q&A
Value Added Tax Basics Mark Houtzager Chris Walsh US VAT, Inc. - - PowerPoint PPT Presentation
Value Added Tax Basics Mark Houtzager Chris Walsh US VAT, Inc. - - PowerPoint PPT Presentation
Value Added Tax Basics Mark Houtzager Chris Walsh US VAT, Inc. Vertex, Inc. mark@us-vat.com Chris.Walsh@vertexinc.com Today s discussion 1. The basics of Value Added Tax 2. The importance of VAT for operations outside the U.S. 3. Simple
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Your presenters – Mark Houtzager
Ø Mark Houtzager, Value Added Tax consultant US VAT, Inc.
- 20 years experience, 10 years in the U.S.
- Europe (Dutch native) and Asia-Pacific (Singapore)
- PwC and Deloitte
- Started his own firm in August 2010
- Support U.S. businesses in dealing with VAT outside the U.S.
- mid-size multinationals
- companies planning on expanding overseas
- Frequent presenter, author and trainer
- Value Added Tax Blog: www.us-vat.com/blog
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Ø Chris Walsh, Chief Tax officer, International Vertex, Inc.
- An indirect tax specialist with 25 years experience,
focused primarily on Value Added Tax.
- Prior to Vertex, he held senior tax roles with
PricewaterhouseCoopers (Kenya, Ireland, and United States), Rothmans Tobacco, Foster’s Brewing Group, and HSBC.
- His work has taken him to more than 30 countries.
- Regular writer, speaker, and commentator on
- perational and strategic issues surrounding
indirect taxes.
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Your presenters – Chris Walsh
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The basics of Value Added Tax
What is VAT? Ø VAT is a tax on the supply of goods or services, supplied by a taxable person, and on imports Ø Originally “a simple tax”, now much more complex Ø Nevertheless, VAT is a favorite revenue tool for many governments Ø In the EU: one single jurisdiction, but sometimes differences between EU and local legislation
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Average VAT Rates (2011) Africa 16% Asia Pac 10% European Union 21% Europe (Non-EU) 18% Latin America 14% Average Global Rate 17% Highest Rate 25% Lowest Rate 5%
Sales taxes Existing VAT systems EU VAT system Future VAT system General consumption taxes GST system Considering VAT system No GST/VAT System or no consumption taxes Future GST system
The basics of Value Added Tax
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China – no longer the death penalty for VAT fraud Argentina – VAT refunds difficult to
- btain
Mexico – sophisticated VAT system with
- pportunities
India – separate tax systems integrated Australia – latest major economy to embrace VAT NZ - pioneered VAT, now an example for new VAT jurisdictions Nigeria, other countries working together on VAT Japan – consumption tax is different Russia – VAT + withholding Italy, Spain, Greece – VAT refunds difficult to
- btain
Ghana – violent riots over launch
- f VAT
The Netherlands – many simplifications UK – source of much case law Canada – operating GST and HST systems USA – tax reform: VAT? Brazil – complex and taxpayer unfriendly VAT system
The basics of Value Added Tax
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European Union (EU)
- 27 member states
- No internal borders
(somewhat similar to U.S.)
- VAT is centrally
coordinated - “VAT Directive”
- European Court of
Justice
The basics of Value Added Tax
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The basics of Value Added Tax
Output Tax (Accounts Receivable) Ø Principle - VAT at each stage of the supply chain (“output tax”) Ø Tax on all business transactions
- goods
- services
- inter-company changes
- licenses, royalties
Ø Collected from buyer on sales, or collected from importer on imports Ø Vendors charge VAT based on the price of the goods or services.
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The basics of Value Added Tax
Input Tax (Accounts Payable) Ø Principle - VAT shown on purchase invoices received from vendors (“input tax”) - credit for business buyer Ø Businesses do not normally have an on-going net VAT cost - all VAT paid is normally reclaimable Ø VAT is finally borne by the end customer, a private individual purchasing goods or services Ø The net balance shown as due to / reclaimable from the tax authorities is a balance sheet item (credit or debit balance)
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The basics of Value Added Tax
How VAT is calculated
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Here are some examples. Normally, VAT is applied as a percentage
- f the tax-exclusive value.
It may also be calculated out of a tax-inclusive value.
* VAT Fraction
€450 x 20% = €90 (Total price = €540) €540 x 16.66%* = €90
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The basics of Value Added Tax
Distributor Supplier Total Government Revenue $60 Retailer Final consumer
The VAT system - assume 20% VAT Goods sold to distributor for $100+$20 VAT $20 remitted Product sold to Retailer $200+ $40 VAT Product sold to consumer for $300+$60 VAT $20 remitted ($40 VAT - $20 credit) $20 remitted ($60 VAT - $40 credit)
Consumer has the tax burden of $60 VAT
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The basics of Value Added Tax
VAT rates Ø VAT comes in different rates: typically, VAT jurisdictions have a standard rate, a lower rate and a zero-rate Ø The average VAT rate in the European Union is about 21%. Ø Rates up to 25% (Denmark, Sweden) are common. Ø The lowest standard VAT rate is in Taiwan: 5% Ø Lower rates are for basic necessities (food, clothing) Ø The zero-rate applies when goods or services leave the country
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The basics of Value Added Tax
VAT exemptions Ø Always defined by law Ø Applied to a limited range of defined supplies: think financial services, health care, education Ø Exempt supplies do not allow for the right to credit VAT on purchases - it is not always beneficial to provide exempt supplies!
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The basics of Value Added Tax
VAT reverse charges Ø Supply is taxable for VAT Ø VAT is not levied from supplier, but from buyer (business) Ø Buyer self-assesses VAT Ø Buyer reports on VAT return, claims the reverse charged VAT as input tax on the same VAT return - no cash outlay in most countries Ø Typical supplies covered:
- international services
- intra-EU supplies of goods
- certain domestic supplies (varies by country)
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The basics of Value Added Tax
VAT reverse charges Example 1: Cross-border supply of goods in the EU Ø German company ships goods to a French business Ø German seller applies zero-rate Ø French buyer to self-assess French VAT Example 2: Consulting services in the EU Ø UK company provides consulting services to an Irish company Ø No VAT on UK consultant’s invoices Ø Irish buyer to self-assess VAT
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The basics of Value Added Tax
VAT reverse charges Ø Example 3: International services Ø UK business downloads software from a U.S. software provider Ø No VAT due by U.S. software provider, because the place of the supply is the UK Ø UK business to self-assess UK VAT
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The basics of Value Added Tax
Invoices Ø Invoices are the backbone of any VAT system Ø Input tax: Vendor invoices establish the amount of input tax recoverable for the buyer Ø Output tax: Invoiced determine the VAT liability Ø Very strict requirements on the content and the layout of the invoices
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Input ¡VAT ¡5 ¡ Output ¡VAT ¡20 ¡ Input ¡VAT ¡5 ¡ Input ¡VAT ¡5 ¡ Output ¡VAT ¡10 ¡ Input ¡VAT ¡10 ¡ Output ¡VAT ¡15 ¡ Input ¡VAT ¡15 ¡ Output ¡VAT ¡18 ¡ Input ¡VAT ¡18 ¡
Plus ¡Logis/cs ¡ Plus ¡Finance ¡Company ¡ Plus ¡Inter-‑Company ¡Charges ¡
TOTAL ¡VAT ¡IN ¡THE ¡CHAIN ¡FOR ¡ ¡
= ¡121 ¡
Retailer ¡
Middleman ¡ Distributor ¡ Prime ¡Product ¡ Manufacturer ¡ $100 ¡ $90 ¡ $75 ¡ Component ¡ Manufacturer ¡ $50 ¡ Component ¡ Manufacturer ¡ $25 ¡ Raw ¡materials ¡ Supplier ¡ Raw ¡materials ¡ Supplier ¡ $25 ¡ $25 ¡
The importance of VAT
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The importance of VAT
Ø Training - Minimize errors at the point of manual data entry.
- As VAT flow through is generally very high even though the
net VAT payable may be small, a 1% data entry error can result in a very significant over or under payment of VAT. Ø Improve indirect tax global governance and controls
- data integrity testing
- document storage
Ø Electronic Invoicing
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The importance of VAT
Ø Generally, a VAT audit for a midsize company can take weeks if not months. Ø If adequate processes are being put in place, in some countries authorities will provide sign-off and only do remote and/or limited
- audits. This will have a positive effect on your resource
requirements. Ø The economic downturn hits governments hard
- Increase of audit activities (tackle fraud)
- Delay VAT cash refunds
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The importance of VAT
Ø VAT is not a simple tax - the determination is complex Ø Day-to-day VAT filings and compliance Ø strategic multi-country, regional or global approach Ø Involve VAT in:
- business development
- ERP implementations
- restructuring
- supply chain management
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The importance of VAT
Example of the impact of VAT on a distribution model
- A manufacturer wanted to simplify European operations
- Multiple points of entry into the EU required multiple EU VAT
registrations
- Manufacturer was required to keep inventory in Europe, pay import
VAT in various countries, incl. Italy, Spain
- Countries delayed refunds of VAT incurred on imports and costs
Ø Proposed solution
- Use the Netherlands as distribution hub
- Dutch importer can declare import VAT on the VAT return and
recover this at the same time (see reverse charge)
- Cash flow costs removed, import VAT is no longer an issue
- No more VAT costs and compliance challenges - solution saved the
European operations
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The importance of VAT
Ø Project:
- Brief question on VAT issues regarding A-B-C deliveries in the EU
Ø Value:
- Based on data provided develop an umbrella view of European
business
- Identify VAT simplifications available
Ø Benefits:
- Significant savings from compliance costs e.g., reduced VAT
registration requirements
- Mitigate risks (penalties) involved by extensive compliance
requirements
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The importance of VAT
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Transactional
- Acquisitions
- Disposals
- Mergers
- Financing transactions
- Tax driven cross border transactions
- Internal reorganizations
Operational
- New business ventures
- New operating models
- Operating in new locations
- New supply chain and delivery model
- Impact of technological developments (e.g.,
internet trading)
Compliance
- Lack of proper management
- Weak accounting records or controls
- Data integrity issues
- Insufficient resources
- Systems changes
- Legislative changes
- Revenue investigations
- Country-specific local practices
Financial Accounting
- Changes in legislation
- Changes in accounting systems
- Changes in accounting policies
Management
- Changes in personnel – both in tax and in the business
- Experienced tax people leaving – and information
being in their heads and not properly documented
- New / inexperienced resources
Reputational
- Revenue authority audit / raid / investigation
- Press coverage
- Court hearings / legal actions
- Political developments
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The importance of VAT
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VAT Risk Management Key compliance issues: Ø Invisibility – VAT is invisible in most accounting structures – it does not appear in the P&L or Balance Sheet (or even the chart of accounts in many cases!) Ø Lack of Responsibility – Lack of responsibility for the company’s global VAT position means that nobody is actively managing the tax at a global level
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The importance of VAT
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Ø Weak Coordination – Lack of coordinated knowledge about or awareness of the company’s VAT position means nobody has the “big picture” Ø Business Model Changes – Changing business models are altering companies’ VAT footprints and these changes often go unrecognized
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Optimize your VAT position
Three recommendations
- 1. Keep oversight
- 2. Communicate across the organization
- 3. Improve your VAT refunds and supply chain
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Optimize your VAT position
Keep oversight Ø Use ‘dashboard’ functionality in ERP systems to review filing position
- VAT returns
- Various other filings, such as sales listings, statistical
returns(“Intrastat”)
- Consider VAT ‘bolt-ons’ (Vertex, ADP Taxware, Sabrix)
Ø Keep ‘fighting fires’, but also consider long-term VAT strategy
- Current VAT issues in Country A may become issues in Country B if
distribution arrangements are similar
- ERP implementations, acquisitions, business restructuring etc. are
excellent opportunities to start thinking about a comprehensive VAT strategy
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Optimize your VAT position
Communicate Ø Maintain on-going communication with various stakeholders:
- sales
- business development
- tax
- logistics
- finance
Ø Decide who has global responsibility for VAT; recruit VAT manager
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Optimize your VAT position
Make money - optimize VAT refunds Ø Opportunity for U.S. multinationals to reclaim VAT on foreign
- expenses. (hotel, travel, inter-company changes, import VAT)
Ø Available in a number of EU countries and a few non-EU countries (Switzerland, Norway, Turkey and Australia) Ø Refunds in Spain, Poland, Italy and other EU countries are difficult
- r impossible.
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Optimize your VAT position
Make money - optimize VAT refunds Ø Deadlines (generally June 30 after the calendar year in which the VAT has been incurred, but not for the UK) Ø Original hard-copy invoices required Ø Sophisticated data-analysis tools are useful - no VAT cost should remain unconsidered Ø Let me know if you want to optimize your VAT refunds
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Optimize your VAT position
Make money - optimize supply chain Ø Inward processing relief, simplifications
- This may create cash-flow and even absolute cash savings for
companies that operate across regions
- Customs duty benefits
Ø Bad debt relief
- If a customer doesn’t pay, the output VAT can be recovered
- Very simple and straight-forward opportunity, but often
- verlooked. Does not require a credit invoice.
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Recent developments
Ø VAT rates increasing across the EU
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Greece Slovakia Latvia Switzerland Poland UK Portugal Italy (first to 21%, now to 23%?) Hungary (27%!) More to follow
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Recent developments
Reverse charges expanded in the EU Ø Most cross-border services from January 1, 2010 taxable at the place of the recipient Ø Events, conference services: reverse charge from January 1, 2011 Ø Updates: see www.us-vat.com/blog and sign up for the monthly VAT newsletter
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Recent developments
VAT as a partial solution for the U.S. budget deficit? Ø Congress is considering an overhaul of the income tax code to lower rates and raise revenues Ø They are reviewing all options, including VAT Ø A VAT was recommended by the Bipartisan Policy Center, but a Presidential Commission did not suggest a VAT Ø My take: a VAT only works in the U.S. when accompanied by substantial corporate and individual income tax cuts - a move from taxation of income to taxation of consumption. Political acceptance will be a major challenge.
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