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 techniques for optimizing your VAT position 4. Recent developments and the potential for VAT in the U.S. 5. Q&A 2 2

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 3 3

Your presenters – Chris Walsh 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 operational and strategic issues surrounding indirect taxes. 4 4

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 5 5

The basics of Value Added Tax Average VAT Rates (2011) Africa 16% Asia Pac 10% European Union 21% Europe (Non-EU) 18% Latin America 14% Sales taxes GST system Average Global Rate 17% Existing VAT systems Considering VAT system Highest Rate 25% EU VAT system No GST/VAT System or no consumption taxes Future VAT system Future GST system Lowest Rate 5% General consumption taxes 6

The basics of Value Added Tax UK – source of much Italy, Spain, Greece – Canada – operating GST The Netherlands – case law VAT refunds difficult to and HST systems many simplifications obtain Russia – VAT + withholding USA – tax reform: VAT? China – no longer the death penalty for VAT fraud Mexico – sophisticated VAT system with Japan – consumption opportunities tax is different Brazil – complex and taxpayer unfriendly VAT India – separate tax system systems integrated Argentina – VAT NZ - pioneered VAT, now refunds difficult to Nigeria, other Ghana – violent an example for new VAT Australia – latest obtain countries working riots over launch jurisdictions major economy to of VAT together on VAT embrace VAT 7

The basics of Value Added Tax European Union (EU) • 27 member states • No internal borders (somewhat similar to U.S.) • VAT is centrally coordinated - “ VAT Directive ” • European Court of Justice 8

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. 9 9

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) 10 10

The basics of Value Added Tax How VAT is calculated Here are some examples. Normally, VAT is applied as a percentage of the tax-exclusive value. € 450 x 20% = € 90 (Total price = € 540) It may also be calculated out of a tax-inclusive value. € 540 x 16.66%* = € 90 * VAT Fraction 11 11

The basics of Value Added Tax The VAT system - Product sold to Retailer $200+ assume 20% VAT Distributor $40 VAT Goods sold to distributor for $100+$20 VAT $20 remitted ($40 VAT - $20 credit) Total $20 remitted Government Supplier Retailer Revenue $20 remitted $60 ($60 VAT - $40 credit) Product sold to Final Consumer has the tax burden of $60 VAT consumer consumer for $300+$60 VAT 12

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 13 13

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! 14 14

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) 15 15

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 16 16

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 17 17

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 18 18

The importance of VAT = ¡121 ¡ TOTAL ¡VAT ¡IN ¡THE ¡CHAIN ¡FOR ¡ ¡ Input ¡VAT ¡ 10 ¡ Input ¡VAT ¡ 18 ¡ Component ¡ Output ¡VAT ¡ 20 ¡ Manufacturer ¡ Input ¡VAT ¡ 5 ¡ Output ¡VAT ¡ 10 ¡ $25 ¡ Output ¡VAT ¡ 18 ¡ Component ¡ Prime ¡Product ¡ Retailer ¡ Middleman ¡ Distributor ¡ Manufacturer ¡ Manufacturer ¡ $50 ¡ $75 ¡ $90 ¡ $100 ¡ Input ¡VAT ¡ 5 ¡ $25 ¡ Input ¡VAT ¡ 5 ¡ $25 ¡ Input ¡VAT ¡ 15 ¡ Plus ¡Logis/cs ¡ Plus ¡Finance ¡Company ¡ Raw ¡materials ¡ Raw ¡materials ¡ Output ¡VAT ¡ 15 ¡ Supplier ¡ Supplier ¡ Plus ¡Inter-­‑Company ¡Charges ¡ 19

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 20 20

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 21 21

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 22 22