The world of value-added tax is a rapidly changing environment. The European Union recently overhauled its VAT system, made even more complicated by myriad austerity programs that have sent rates climbing. In Asia, India is set to announce changes from its sales tax system to a goods and services tax (GST) or VAT operating at a federal level. Ontario and British Columbia are complicating the Canadian landscape by moving to the “simplified” harmonized sales tax (HST). From the perspective of a U.S. multinational, this article explores three primary challenges that all companies face when managing their VAT liabilities: personnel and resources, system support, and the direct and opportunity costs arising from day-to-day compliance.
Models of Managing VAT
VAT is pretty much everywhere outside the United States. Governments like it because it is cheap and quick to collect, and so it is in the front line of government deficit reduction programs. If you are a multinational working in over 20 countries, the chances are you will have to manage VAT in almost all of those. Putting the right tax team together that can support your company’s VAT needs is an essential first step. We have seen various models in practice.
Some companies do without specialist VAT resources completely; they rely on their finance team, on their systems and on outside advisors. There is nothing wrong with this strategy but it lends itself to being very resource and advisor intensive in bursts when issues or crises arise. Also, management needs to realize there is little day-to-day sophisticated management of the tax at any level. If your company operates like this, then there are probably plenty of opportunities for error just because of the inherent complexity of the VAT system and the fact that company information technology tends not to be able to handle that level of complexity — especially through IT created based on a U.S. model. But errors can cut both ways; this is a source of opportunity as well as risk. Some simple IT testing can help spot where errors are arising.
Other companies centralize VAT management on a global or area basis. This effectively creates an in-house advisor able to educate the business and spot and deal with the biggest issues arising. It’s a good model for a big group, but of course it leaves, often, the finance team or local admin to get on with doing the job once the issues have been identified.
Lastly, some groups have large VAT teams. We can think of a number of large multinationals where responsibility for VAT resides in a global VAT manager with extensive responsibilities for both compliance and in-house advisory work. In some jurisdictions, the majority of the tax team can be VAT related — especially for groups dealing in the BRIC (Brazil, Russia, India and China) economies.
Putting together the right team with the right skill set for your organization can take various forms, and no one size fits all. It all depends on your specific requirements. It is, however, crucial that you have access to the right resources to manage all the issues that come up for your company worldwide.
VAT Support Systems
Your systems must be able to manage the VAT requirements, as well as be flexible enough to adjust to new requirements in an instant. Below is a common VAT to-do list that the IT organization in an average multinational corporation sooner or later will get involved in:
- Provide input into the Sarbanes-Oxley Act (SOX) process with auditors.
- Follow a monthly compliance calendar, preparing and filing VAT returns and other returns associated with indirect tax (Intrastat, European Sales List, etc.).
- Review systems testing in countries A, B and C.
- Update VAT requirements in systems, and provide support for accounts receivable and accounts payable teams, the tax department, and sales and marketing teams.
- Create reports for VAT refund opportunities from activities in countries X, Y and Z.
- Work with a logistics team regarding a new supply chain. Make this work day to day and ensure appropriate VAT codes are allocated to each transactional step.
- Work with the tax department to ensure updates are made to systems on a timely basis. Continue to handle entities with multiple VAT registrations in the enterprise resource planning system.
While the above list is hardly rocket science, we are of the view that many U.S. businesses struggle with the impact of VAT on systems and how IT needs to support it. IT systems not only need to support these tasks, they also need to be localized since VAT is becoming more regional or country specific. Finally, systems need to be flexible enough to adapt easily to rate changes or structure changes.
Costs of Compliance
The cost of compliance is high, and U.S.-listed companies forced to do SOX audits generally cover VAT as part of this exercise. We have found this to be a live issue for the big audit firms that sometimes take either an overly cautious or a perfunctory approach to the subject. VAT is a transactional tax charged at high rates and it can have a major impact on the correctness of financial reporting if there are systemic weaknesses in VAT process and systems. A good look at VAT accounting process should also be part of exercises more fundamental to the SOX audit itself; if a company has good processes around sales and cost of sales, then this will probably be reflected in the VAT attaching to those two key items in the financial statements. Covering VAT for SOX is an additional validation of the sales and cost of sales processes; it has value beyond just tax.
There is a cost for staying compliant, and penalties for not being compliant can be significant. However, there is also an upside to managing VAT effectively, as VAT cash outlay can be a big opportunity cost.
As mentioned earlier, in the last two years, many European Union countries have increased their standard VAT rates. The bar chart shows the current rates for some of them.
Given that standard rates across Europe range between 15 percent and 25 percent, Luxembourg has attracted many companies with its standard VAT rate of 15 percent. The benefits are mostly enjoyed by companies that provide telecommunication and electronic services, like web hosting or supply of news, movies, news, software, etc. When these companies provide services to consumers in Europe, they can apply the Luxembourg rate of 15 percent instead of the local rate. For example, in Sweden, where the rate is 25 percent, a consumer can save 10 percent VAT, making it very attractive for these companies to do business from Luxembourg.
Alvarez & Marsal Taxand Says:
With regular legislative change and fluctuating VAT rates, achieving VAT compliance is a real challenge. Yet with more vigilant authorities worldwide, it is increasingly important to get your VAT compliance right. It is important for businesses to understand their supply chain processes, accounting practices and VAT rules globally. Know the ins and outs of filing returns, and use software to automate the process. VAT will soon become the tax that will impact most businesses for most of their transactions — it needs your attention.
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The information contained herein is of a general nature and based on authorities that are subject to change. Readers are reminded that they should not consider this publication to be a recommendation to undertake any tax position, nor consider the information contained herein to be complete. Before any item or treatment is reported or excluded from reporting on tax returns, financial statements or any other document, for any reason, readers should thoroughly evaluate their specific facts and circumstances, and obtain the advice and assistance of qualified tax advisors. The information reported in this publication may not continue to apply to a reader's situation as a result of changing laws and associated authoritative literature, and readers are reminded to consult with their tax or other professional advisors before determining if any information contained herein remains applicable to their facts and circumstances.
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