By Larry Harding & Roger
Bevan, High Street Partners (Published February 11, 2008)
As we help American high tech companies deal with VAT (value added
tax) problems in the UK and continental Europe, the hit movie Groundhog
Day often comes to mind. Just as Bill Murray’s character,
Phil Connors, found himself repeating the same experiences day-in
and day-out, we find companies - whether first-timers or well established
entities - falling into the same avoidable traps. These include
an assumption that VAT works just like US sales tax (it doesn’t),
a belief that VAT doesn’t apply to non-European businesses
(it does), or a failure to acknowledge that VAT is an inescapable
part of doing business in Europe. Sometimes, it is all of the above.
The 27 EU Member States have a harmonized VAT system, and the non-EU
countries follow similar principles. Rates are high, from 15% to
25%, and there is little margin for error. Savage penalties for
mistakes and non-compliance abound, so getting it wrong is costly
in terms of both profitability and cash flow. The cost-benefit of
a cross border business transaction should always take into account
any potential VAT impact.
U.S. companies will encounter European VAT when undertaking these
very common activities:
- importing goods into Europe for onward sale
- holding an inventory of goods in a European location
- selling electronically delivered software, games or music to
individuals in the EU
- operating a local sales and marketing subsidiary
- importing evaluation units for demonstration and subsequent sale
All of these situations give rise to a need for the business to
register for VAT, and to make sure the business is compliant with
VAT regulations. Follow these seven easy steps to avoid the most
common VAT problems.
#1 – Understand VAT 101. Businesses are supposed to be VAT
tax collectors, not tax payers. The simple 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. When your business pays
a VAT, it should usually be recoverable, if the rules are followed.
#2 - Get a VAT Registration. Never do business in Europe without
one. VAT registration gives your business EU VAT privileges and
ensures you don’t get stuck with irrecoverable VAT on purchases
and on imports. It costs very little to register, and although there
is a compliance cost of keeping VAT records and filing VAT returns,
it is much less than the cost of getting it wrong.
#3 – Avoid being an importer into Europe if at all possible.
Get your customer or reseller to do it and you will avoid many issues.
Too often, companies talk themselves into this avoidable situation
– mostly to please the customer and “take care of the
VAT” - without realizing what it really means.
#4 – If you must be an importer, always do so in your own
name with your own VAT number. If you don’t use your company’s
name and VAT number, you will be non-compliant and the 15-25% VAT
paid may not ever be recoverable, resulting in an immediate hit
to your bottom line.
#5 – Use EU cash flow benefits and minimize compliance. Register
for VAT in just one EU country, clear goods through customs in that
one import country, and move those goods from there on to any customer
in another EU country. This will keep your VAT registrations to
a minimum and ensure that you pay import VAT only on goods that
are staying in the import country. Additionally, customers outside
the import country are neither charged VAT nor involved in customs
formalities. Use this approach for evaluation units too.
#6 – Know the local rules. While EU VAT rules are broadly
the same, each EU member state has some local variations. For example,
in the UK, vendors of cell phones and computer chips have a different
VAT regime than the rest of the trading community: France doesn’t
permit non-resident businesses to register for VAT except in limited
circumstances; Ireland offers cash flow benefits for exporters and
foreign businesses; Luxembourg is good for hi-tech B2C businesses;
and Italy and Spain have very tough compliance regimes and very
high penalties.
#7 – Take informed advice and save $000’s. Ignorance
isn’t bliss. VAT problems are very difficult and time consuming
to fix retroactively. But there is good news – VAT is entirely
manageable when dealt with proactively beforehand.
Roger Bevan is an international VAT consultant based in the UK.
He was a big 4 VAT partner for more than 10 years and has more than
30 years’ experience on global VAT issues.
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