- what is VAT and how can it be recovered?
Value Added Tax (VAT) is a form of indirect tax applied to the value added at each stage of production (primary, manufacturing, wholesale and retail), and is levied on almost all business transactions in over 130 countries around the world. VAT is is also referred to as IVA, BTW, TVA, KDV, MOMS, FPA, ALV, AFA, and GST.
Corporations may have VAT reporting obligations and / or VAT recovery opportunities, depending on their structure and tax registration.
About VAT Recovery
Learn more about VAT and how it can be recovered.
Why VAT is Recoverable
Because it is intended to impose a neutral effect on commerce, VAT is often recoverable for foreign firms conducting business in particular jurisdictions. A company's VAT refund eligibility depends on many things, including location of the company's tax residence and internal corporate structure.
VAT Recovery for Multinationals
Multinational corporations must first determine the appropriate VAT registration structure to comply with local regulations and to meet the needs of the business. Once the structure has been set, companies must establish processes to recover these funds.
For European business activity, two directives govern VAT recoverability:
- EEC 8th VAT Directive governs filings for companies that are VAT-registered in the EU, entitling them to recover VAT incurred in other EU Member States.
- EEC 13th VAT Directive governs filings (based on governmental reciprocity agreements) for companies that are not VAT-registered in an EU Member State.
Recovery in countries outside the EU will depend on specific reciprocity agreements between the countries in question. For example, recovery opportunities exist for US corporations incurring VAT in Canada, Norway, South Korea and Switzerland, among others.
VAT-Inclusive Corporate Expenses
Certain types of international corporate expenses may contain recoverable VAT expenses.
The recoverability of the expense is contingent upon the VAT reciprocity agreement between the country where the expense took place and the home country of the business incurring the expense.
In general, almost all VAT is recoverable through a local tax filing if the company incurring the expense is VAT-registered in the country where the expense was incurred. For firms with a tax residence outside of the country where the expense took place, the rules are more stringent. VAT incurred in the following expense categories is refundable (with qualifications) from Canada, South Korea, and countries in Europe.
||Diesel, gasoline, parking, rental, repairs, road tolls
||Catering, equipment, meeting rooms
||Fuel, leasing, hanger fees, repairs
||IT, telecommunications, management services, training
||Marketing, advertising, legal, translation, recruitment, secretarial, limousine, short-term office facilities, maintenance, auditors
||Equipment, samples, software, supplies (when used in-country for trade shows or sales support)
||Clinical trials, copyright fees, development, product testing
|Sales / Distribution Expenses
||Sales personnel, distribution partners, commission fees, listing costs, parts and labor warranties, technical support
||Shipping to and from VAT-refundable countries should be VAT exempt. If charged, VAT can be recovered under certain circumstances
||Charges for in-country service are generally refundable
||Booth, catering, entrance fees, services, supplies
||Costs are refundable, provided company employees are being trained
|Travel and Entertainment
||Accommodation, individual and group meals, rental car, gasoline, etc.
Common Sources of VAT Data
Evidence of VAT expense is contained in a variety of internal and external data systems. autoVAT® software can analyze the transaction data in these systems and identify recoverable VAT expenses:
- Corporate Credit Card / Travel Card
- Purchasing Card
- Accounts Payable / Purchase Order
- T&E System
- Vendor Accounts Receivable
About VAT Reporting
Learn more about VAT Reporting and how it can assist your VAT management efforts.
In-Country VAT Reporting Compliance - the Need for Automation
Regulations governing domestic VAT filings differ by country, but in-country VAT compliance generally requires that companies account for the difference between VAT paid and VAT collected. This is reported to the government in a regular filing, and verified through periodic government audits.
The effort to prepare these reports can be substantial, particularly when accounting for reimbursable employee expenses and purchasing card activity. Because these two sources of VAT expense represent a high volume of low-value expenditures, the effort expended by accounting staff to compile VAT compliance reporting is often disproportionately high as compared to the monetary value of these expenses. autoVAT® compliance reports can dramatically reduce the amount of effort required to perform this task.