European VAT for U.S. Companies: Cost Management and Advanced - - PowerPoint PPT Presentation

European VAT for U.S. Companies: Cost Management and Advanced Strategies

Optimizing Your VAT Position, Identifying Billing/Accounting Risks and Opportunities, and Evaluating Costs of Exemptions

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Presenting a live 110-minute teleconference with interactive Q&A Britta Eriksson, President and CEO, Euro VAT Refund, Culver City, Calif. Mark Houtzager, Principal, US VAT, New York

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European VAT of U.S. Companies: Cost Management and Advanced Strategies

Mark Houtzager, US VAT Inc. mark@us-vat.com www.theVATblog.com October 2, 2013 Daniela Treptow, Euro VAT Refund Inc. daniela.treptow@eurovat.com www.eurovat.com

Today’s Program

Introduction [Mark Houtzager] VAT and Online Services [Daniela Treptow] Selling goods online: a VAT guide. [Daniela Treptow] VAT on organizing events [Daniela Treptow] Recovery and credit of VAT paid [Mark Houtzager] Key VAT compliance issues [Mark Houtzager] Slide 8 – Slide 14 Slide 15 – Slide 18 Slide 19 – Slide 26 Slide 27 – Slide 32 Slide 33 – Slide 36 Slide 37 – Slide 49

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

INTRODUCTION TO VALUE ADDED TAX

Mark Houtzager, US VAT, Inc.

• VAT is a tax on the sales of goods or services, supplied by a

taxable person (business entity), and on imports of goods

• Originally “a simple tax”, now much more complex
• Nevertheless, VAT is a favorite revenue tool for many

governments

• In the EU: one single jurisdiction, but sometimes differences

between EU and local legislation

The basics of Value Added Tax

9

10

Average VAT Rates (2013) Africa 16% Asia Pac 10% European Union 21% Europe (Non-EU) 18% Latin America 14% Average Global Rate 17% Highest Rate 27% 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

10

11

• Principle - VAT at each stage of the sales / supply chain (“output tax”)
• Tax on almost all business transactions
• goods
• services
• inter-company changes
• licenses, royalties
• Collected from buyer on sales, or collected from importer on imports
• Vendors charge VAT based on the price of the goods or services.

The basics of Value Added Tax

11

The basics of Value Added Tax

• Principle - VAT shown on purchase invoices received from

vendors (“input tax”) - credit for business buyer

• Businesses do not normally have an on-going net VAT cost - all

VAT paid is normally reclaimable

• VAT is finally a cost by the end customer, which is a private

person

• The net balance shown as due to / reclaimable from the tax

authorities is a balance sheet item (credit or debit balance)

12

13

Distributor Supplier Total Government Revenue $60 Retailer Final consumer

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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VAT ON ONLINE SERVICES

Daniela Treptow, Euro VAT Refund Inc.

VAT on services sold Online

• Most services sold online qualify as “Electronically Supplied Services”

Samples: Online games, software, music, apps, and telecom services

• VAT has to be charged when selling to private persons within the EU

B2C

• VAT does not have to be charged when selling to companies B2B

16

VAT registration for Online sales



When selling to private persons in the EU, the US company can register in one EU country



From there, charge VAT according to the local VAT rate. Sample: 20% to British customers, 25% to Swedish customers



Declare all the VAT in the UK VAT return if registered in the UK

17

VAT return for Online sales of services

US company registers for VAT in the UK. Sells to private persons in the EU countries. UK VAT return Sales to the UK: ₤1,000 VAT 20% ₤200 Sales to Germany: ₤1,000 VAT 19% ₤190 Sales to Sweden: ₤1,000 VAT 25% ₤250 VAT due the UK tax authorities ₤640

18

SELLING GOODS ONLINE: A VAT GUIDE

Daniela Treptow, Euro VAT Refund Inc.

VAT on goods sold and shipped from the US

• Goods and products sold from website, shipped from a US warehouse

to customers world-wide

• Customer has to pay duty and local VAT to customs
• Duty is always a cost
• VAT is refundable if the customer is a company
• VAT is not refundable if the customer is a private person

20

VAT on import of goods

VAT will be assessed by customs on imports to the “VAT countries” Sample: Import to the UK Value of shipment $1,000 Duty 3% 30 (Pay to UK customs) Value for VAT $1,030 20% UK VAT*: $206 (Pay to UK customs) * VAT is usually refundable to companies - not refundable to private persons

21

To keep in mind when selling from US warehouse



State on website that the customer is responsible for the duty and local sales tax/VAT



Make sure to prepare shipping documents so that the freight forwarder does not send the invoice for duty and VAT to the US seller/vendor



Or, absorb the duty and local taxes/VAT, but add into the price



Note the difference when selling to a company versus private person

22

VAT on goods sold from website shipped from a EU warehouse

23

• Goods and products sold from website, shipped from a EU

warehouse i.e. Amazon.uk.

• US company has to register for VAT in the UK
• US company has to import goods and pay duty and import VAT
• Must charge VAT to the customers per the EU laws

VAT return for sales of goods from EU warehouse

US company registers for VAT in the UK. Sells to private persons in the EU countries through Amazon.uk UK VAT return Sales to the UK: ₤1,000 VAT 20% ₤200 Sales private persons (other EU countries): ₤1,000 VAT 20% ₤200 Sales to VAT registered companies (other EU countries): ₤1,000 VAT 0% 0 Less Import VAT paid to customs VAT 20% ₤300 VAT due the UK tax authorities ₤100 VAT is not a cost to the US merchant. It is a cost to private persons within the EU

24

To keep in mind when selling from EU warehouse



VAT registration required in the EU country where the warehouse is located



Make sure to state the prices on the local websites, i.e. Amazon.uk that includes the VAT



Budget for the VAT registration and related filings



VAT registration might be required in additional EU countries if sales are above the threshold

25

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VAT ON ORGANIZING EVENTS

Daniela Treptow, Euro VAT Refund Inc.

VAT when organizing events in the EU: Fees are charged

General rules:



VAT registration is required if there is an attendee fee charged to attend meeting/conference/tradeshow



VAT has to be charged to the attendees



Refundable to businesses in most cases



VAT charged from EU vendors can now be reclaimed

28

VAT when organizing events in the EU: No Fees are charged

General rules:



If no fees will be charged to the attendees, no VAT registration is required



VAT incurred on most of the invoices can be reclaimed



Generally most of the western EU countries refund VAT to North American companies



VAT is generally not refundable from the southern and eastern EU countries

29

To keep in mind when organizing event in the EU



Important to research the local VAT rules at the planning stage:

• Is registration required?
• Can the VAT be reclaimed?



Check if local event planner is beneficial for VAT



Budget in the cost for the VAT registration and filings

30

VAT on events in the rest of the world



VAT incurred on these costs cannot be reclaimed



Sometimes not possible to arrange event without contracting with local event planner/partner

31

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RECOVERY AND CREDIT OF VAT PAID

Mark Houtzager, US VAT Inc.

Recovery of VAT Paid

• Registered taxpayers may reclaim VAT paid (input VAT) on

each period’s VAT return filing

• Recovery is subject to formal rules (e.g., correct invoicing,

VAT registration verification)

• Restrictions – Most countries have a “blocking order”

identifying expenditures on which input VAT is not recoverable or may be restricted. Examples include: ― Entertainment expenses ― Company car charges ― Hotel bills

34

Partially Exempt Businesses

• Some businesses are “partially exempt,” meaning they can
• nly reclaim part of their input VAT

. Examples include: ― Banks, insurance companies and other financial institutions ― Schools and colleges ― Hospitals and medical facilities ― Charities ― Casinos

35

Recovery of VAT Paid

• How – For non-resident businesses that are not registered for VAT

, input VAT incurred in another country may be claimed using: ― 8th VAT Directive procedure (if the claimant is an EU company) ― 13th VAT Directive procedure (if the claimant is a non-EU company)

• Issues

― Be aware of time limits – Must submit IRS Form 6166 ― Some countries will not make VAT refunds to US companies ― 2010 legislative changes

• Delays – 8th and 13th Directive claims usually involve long delays in

repayment – anything from 6 months to 6 years!

• Electronic invoicing

36

KEY VAT COMPLIANCE ISSUES FOR U.S. BUSINESSES

Mark Houtzager, US VAT Inc.

38

(Assume all sales are local)

$ million VAT @20% Non-U.S. sales (local) 100 20 Cost of goods sold

• 50

10 Salary costs

• 10

Expenses

• 15

3 Profit 25 Total cash VAT throughput 33 Corporate income tax (30%) 7.5 Net VAT payable 7

VAT affects all non-U.S. sales, purchases and imports. The total VAT amount that must be managed is between 30% and 45% of gross non-U.S. sales.

39

VAT reports must be filed by registered businesses. Residency is not always required. The VAT return is the backbone of VAT filings:

• Monthly
• Quarterly
• Yearly

Also, in the EU:

• Filings of sales of goods and services to another EU

country

• Filings of purchases of goods and services to another EU

country

• Statistical filings

40

Audit reports, worksheets and business documents on which the VAT filings are based are equally important. They support:

• The output tax, based on invoices sent
• The input tax, based on invoices received
• Reverse charges, on accounts payable and receivable
• Status of the customer (business/individual)
• Application of zero-rating of exports
• Reduced rates
• Blocked VAT on certain expenses

Don’t underestimate the impact of VAT on your organization.

41

Key compliance issues: 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!) 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

42

Weak Coordination Lack of coordinated knowledge about or awareness of the company’s VAT position means nobody has the “big picture” Business Model Changes Changing business models are altering companies’ VAT footprints and these changes often go unrecognized

43

How do businesses respond?

• Sarbanes-Oxley reviews
• Work with auditors to improve visibility of VAT
• Review of duties and responsibilities
• Develop VAT manuals, procedures, process

documents

44

• VAT compliance automation
• Bolt-ons like Vertex or Thomson Reuters, Avalara,

Taxware etc.

• Upgrades of ERP functionality
• For example Oracle e-business tax suite
• VAT compliance outsourcing

PricewaterhouseCoopers LLP

Examples:

• Why is my VAT less than expected this month?
• What are my total sales in a given jurisdiction?
• Have we applied EU simplifications where possible?
• What is my VAT on inter-company transactions?

45

PricewaterhouseCoopers LLP

Examples: When do I need to register in a new country?

• Establish thresholds, monitor business flows. Set up a

system that allows for advance notifications. How much non-recoverable input VAT have I incurred to date?

• Monitor and identify non-recoverable VAT. As your

budgeted amount is reached, and you are alerted to this fact, it may allow you to adjust future budget numbers.

46

PricewaterhouseCoopers LLP

Track potential VAT costs of new legal entities and new business operations:

• A merger or acquisition could result in new VAT costs. Set

up alerts to track the actual VAT activity on transactions for given entities.

• Newly developed business or new sales channels may

create additional tax challenges (for example, initiating B2C sales in a B2B business). Track significant sales (for example, greater than $100,000) to ensure tax treatment is in the best interest of the business.

47

PricewaterhouseCoopers LLP

VAT reporting must not only focus on the immediate goal of a correct VAT return. Accessing other reports that are readily available within your

• rganization provides many more tools to manage your global

VAT exposure, limit liabilities and improve cash flow.

48

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