VAT Fundamentals for U.S. Companies

Transcription

1 Presenting a live 110 minute teleconference with interactive Q&A VAT Fundamentals for U.S. Companies Buying or Selling in the European Union Ensuring VAT and U.S. Use Tax Compliance on Goods and Services Transactions THURSDAY, JUNE 28, pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Britta Eriksson, President and CEO, Euro VAT Refund Inc.,, Culver City, Calif. Mark Houtzager, Principal, US VAT Inc., New York Chris Walsh, Chief Tax Officer, International, Vertex Inc., Berwyn, Pa. Bobby Bui, Senior Manager, State and Local Tax, KPMG, Houston For this program, attendees must listen to the audio over the telephone. Please refer to the instructions ed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at ext. 10.

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5 VAT Fundamentals for U.S. Companies Buying or Selling in the European Union Seminar June 28, 2012 Britta Eriksson, Euro VAT Refund Inc. Mark Houtzager, US VAT Inc. Chris Walsh, Vertex Inc. Bobby Bui, KPMG

6 Today s Program VAT Basics Slide 7 Slide 14 [Britta Eriksson] VAT In Europe [Britta Eriksson and Mark Houtzager] Slide 15 Slide 28 VAT Issues In The Supply Chain [Mark Houtzager] Expected VAT Developments In The Near Future [Chris Walsh] Importance Of Global Tax Management [Chris Walsh] Use Tax Issues In The U.S. For Overseas Purchases [Bobby Bui] Slide 29 Slide 38 Slide 39 Slide 40 Slide 41 Slide 46 Slide 47 Slide 55

7 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. 7

8 Britta Eriksson, Euro VAT Refund Inc. VAT BASICS

9 U.S. Sales Tax Assessed only on goods, not to services generally Only paid by the end user (business or private person) Is a cost to the business when it has to be paid U.S. is almost the only country in the world that has sales tax instead of VAT. 9

10 Value-Added Tax Consumption tax is added to most goods and services in all levels of the production and distribution chain. Implemented tax in most countries in the world except the U.S. Is almost never a cost to the business Is a cost to the private person 10

11 Samples Of VAT Names And Rates Australia GST 10% Canada GST 5% China VAT 17% France TVA 19.6% Germany MWST 19% UK VAT 20% Most EU countries are around 20% 11

12 How VAT Works Almost all companies: 1. Collect VAT on all sales invoices 2. Pay VAT on all purchase invoices 3. Declare the difference to the VAT authorities 4. Pay VAT on the value that is added VAT is accounted for on a balance account and is usually not a cost. 12

13 VAT On Transactions: Sample The UK Purchase from UK vendor 50,000 VAT 20%* 10,000 Paid to UK vendor 60,000 Sale to UK customer 100,000 VAT 20%* 20,000 Total collected 120,000 * VAT is not considered a cost or revenue: Accounted for on balance account 13

14 VAT Declaration To The Tax Authorities And Margin VAT declaration: Collected VAT 20,000 Less paid VAT -10,000 Due the tax authorities 10,000 Margin: Revenue from customer 100,000 Less cost 50,000 Margin 50,

15 Bi Britta Eriksson, Euro VAT Refund Inc. Mark Houtzager, US VAT Inc. VAT IN EUROPE

16 VAT In The EU 27 member states No internal borders (somewhat similar to U.S.) VAT is centrally coordinated - VAT directive Rules still vary from country to country. A foreign company can register for VAT with no establishment. 16

17 VAT In The EU (Cont.) VAT rates VAT comes in different rates. Typically, VAT jurisdictions have a standard rate, a lower rate and a zero rate. The average VAT rate in the European Union is about 20%. Rates of up to 25% (Denmark, Sweden) and 27% (Hungary) are common. Lower rates are for basic necessities (food, clothing). The zero rate often applies when goods or services leave the country. There are exceptions. 17

18 VAT In The EU (Cont.) When is VAT charged? VAT is charged on most goods and services sold to any customer within the seller s own EU country. Example: UK companies charges 20% UK VAT on most goods and services to all UK customers. VAT is not charged on certain sales: - VAT exempt or zero-rate products, i.e. financial services - Sales to companies located in other EU countries or outside the EU (reverse charge). There are exceptions. 18

19 VAT In The EU (Cont.) VAT reverse charges Supply is taxable for VAT VAT is not levied from supplier but rather from buyer (business) Buyer self-assesses VAT Buyer reports on VAT return, claims the reverse-charged VAT as input tax on the same VAT return - no cash outlay in most countries Typical supplies covered: International services Intra-EU supplies of goods Certain domestic supplies (varies by country) 19

20 VAT In The EU (Cont.) VAT reverse charges (Cont.) Example 1: Cross-border supply of goods in the EU German company sells and ships goods to a French company. German company does not charge German VAT. French buyer must self-assess French VAT. Example 2: Consulting services in the EU UK company provides consulting services to an Irish company. UK company does not charge UK VAT. Irish buyer must self-assess VAT. 20

21 VAT In The EU (Cont.) VAT reverse charges (Cont.) Example 3: International services to EU companies UK business downloads software from a U.S. software provider. U.S. company does not have to charge UK VAT. UK business is to self-assess UK VAT and deduct it at the same time. The VAT will not be a cost to the company. 21

22 VAT In The EU (Cont.) VAT where reverse charge does not apply Example 4: International services to EU private persons UK private person downloads software from a U.S. software provider. U.S. company must register for VAT in one of the EU countries U.S. company must charge VAT of the customer s s country to the private person. Private person cannot deduct the VAT. The final price will include VAT (UK VAT is 20%) and will be a cost to private person. 22

23 VAT In The EU (Cont.) U.S. company sometimes must register for VAT in the EU Examples of reasons for the VAT registration: Acts as the importer of goods and sells to EU customers Ships to fulfillment warehouses and sells to EU customers Purchases goods from EU vendors, and ships and sell to EU customer Sells software to private persons in the EU Organizes i a conference or tradeshow in the EU 23

24 VAT In The EU (Cont.) VAT registration for US company means: Sample Germany: 1. Register for VAT in Germany 2. Pay 19% VAT on goods imported or purchased from Germany 3. Charge 19% VAT to the customers in Germany. 4. File VAT returns to the German tax authorities Benefits: In the end, the VAT will not be a cost to the U.S. company or to the EU customers. 24

25 VAT In The EU (Cont.) Import VAT on shipment from the U.S. Value of shipment 100,000 Duty 3% Value for VAT * 103,000 3,000 (pay to German customs) 19% German VAT 19,570 (pay to German customs) * The value includes a few additional fees. 25

26 VAT In The EU (Cont.) Sales to German and EU business customers Sales to German customers 120,000 19% VAT 22,800 Collected from German customers 142,800 Sales to UK customers 50,000 0% VAT 0 (reversed charge) Collected from UK customers 50,000 26

27 VAT In The EU (Cont.) VAT declaration VAT collected from the German customers 22,800 VAT collected from the UK customers 0 Less VAT paid in import -19,570 Due the German tax authorities 3,230 27

28 VAT In The EU (Cont.) Try to register in a VAT-friendly EU country Western EU and Scandinavia are easiest to work with. Southern and Eastern EU countries are more costly and difficult. 28

29 Mark Houtzager, US VAT Inc. VAT ISSUES IN THE SUPPLY CHAIN

30 VAT And The Supply Chain Assume VAT = 20% VAT in the supply chain: 106 Output VAT 10 Input VAT 10 Input VAT 18 Output VAT 18 Output VAT 20 Raw materials supplier $50 Prime product manufacturer $75 Middleman $90 Distributor $100 Retailer Input VAT 15 Output VAT 15 30

31 VAT And The Supply Chain (Cont.) (Assume all sales are local) $ million Non-U.S. Sales (Local) Cost Of Goods Sold Salary Costs -10 Expenses Profit 25 Total VAT Throughput Under Management 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

32 VAT And The Supply Chain (Cont.) VAT compliance cost $500 - $1,500 per filing. A VAT audit for a mid-size i company can take weeks, if not months. The economic downturn continues to hit governments hard: Rate increases across the board Increase in audit activities (tackle fraud) Delay of VAT cash refunds More country specific changes mean more exceptions in your accounting system. 32

33 Optimize Your VAT Position Four recommendations: 1. Keep oversight 2. Communicate across the organization 3. Improve your VAT refunds and supply chain 4. Be aware of updates that are relevant for your organization and follow vat.com/blog 33

34 Optimize Your VAT Position (Cont.) Keep oversight Use dashboard functionality in ERP systems to review filing position VAT returns Various other filings, such as sales listings, statistical returns( intrastat ) Consider VAT bolt-ons (Vertex, ADP Taxware, Sabrix) Consider long-term VAT strategy Current VAT issues in Country A may become issues in Country B, if distribution arrangements are similar. ERP implementations, acquisitions, business restructuring, etc. are excellent opportunities to start thinking about a comprehensive VAT strategy. 34

35 Optimize Your VAT Position (Cont.) Communicate Maintain ongoing communication with various stakeholders: Sales Business development Tax Logistics Finance Decide who has global responsibility for VAT; recruit VAT manager 35

36 Optimize Your VAT Position (Cont.) Make money - optimize VAT refunds Opportunity for U.S. multi-nationals to reclaim VAT on foreign expenses (hotel, travel, inter-company changes, import VAT) Available in a number of EU countries and a few non-eu countries Refunds in Spain, Greece, Italy and some other EU countries are difficult or impossible. 36

37 Optimize Your VAT Position (Cont.) Make money - optimize VAT refunds (Cont.) Deadlines (generally June 30 after the calendar year in which the VAT has been incurred, but not for the UK) Original hard-copy invoices required Sophisticated data-analysis tools are useful. No VAT cost should remain unconsidered. Let me know if you want to optimize your VAT refunds 37

38 Optimize Your VAT Position (Cont.) Make money - optimize the supply chain Optimize use of reverse charges and other simplifications Cash flow and compliance cost savings for companies that operate across regions Bad debt relief If a customer doesn t pay, the output VAT paid to the government can be reclaimed. Very simple and straightforward opportunity, but often overlooked; does not require a credit invoice 38

39 Chris Walsh, Vertex Inc. EXPECTED VAT DEVELOPMENTS IN THE NEAR FUTURE

40 What Is Happening In The World Of VAT? China is piloting the expansion of its VAT system and phasing out its business tax. India is redesigning its direct and indirect tax systems. A new dual GST system is on its way. Europe is seeking VAT simplification. Green paper outputs, EU invoicing directive Japan is doubling its consumption tax rate. Gulf CooperationCouncilmember Council countries are introducing GSTs. Malaysia is introducing a GST. 40

41 Chris Walsh, Vertex Inc. IMPORTANCE OF GLOBAL TAX MANAGEMENT

42 Why Manage VAT? Indirect taxes have assumed a higher profile. Rates have risen and globalization has continued, increasing the tax throughput in MNCs. Increased percentage of government revenue coming from indirect taxes such as VAT, so greater focus and more audits in this area Introduction of VAT/GST or major reforms in many countries adds uncertainty and complexity. Promotion by OECD, IMF, World Bank, etc. Global shift away from direct taxes to indirect taxes resource shift may be required? 42

43 Corporate Governance: Risk Management Sarbanes Oxley applies to VAT in the same way as it applies to other taxes. Best practices 404 attestations (U.S.) Senioraccountingofficerattestations officer attestations (UK) Interest and penalties for non compliance Risk can arise due to internal or external factors. Operational, compliance, supply chain, financial accounting, reputational risks 43

44 Corporate Governance: Transparency Demands for greater transparency and disclosure Tax authorities Regulators Legislators Investors Tax justice campaigners Media Each has a different agenda/viewpoint. 44

45 Compliance Need for global, internal networks and effective communications VAT awareness and appropriate registration are key to avoiding major problems. Automation and outsourcing should be considered when there is no internal resource. 45

46 VAT Management Challenges Doing more with less Availability of tax data for reporting Financial systems require constant updating with accurate, timely tax data. More than 13,000 taxing jurisdictions globally for transaction taxes Uncertainty due to legislative and policy changes (GAAR, SAAR), case law, etc. Connecting VAT with corporate changes in supply chain management, M&Aactivity, transferpricing, etc. 46

47 Bobby Bui, KPMG USE TAX ISSUES IN THE U.S. FOR OVERSEAS PURCHASES

48 Agenda For This Section Use tax issues in the U.S. for overseas imports Importation of new vs. used equipment Sales tax credits for use tax paid Use tax base Audit considerations 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 48 ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.

49 Importation Of Equipment Into The U.S. 45 states and the District of Columbia impose a sales tax. All states imposing a sales tax also impose a corresponding use tax. All jurisdictions imposing a use tax give the taxpayer credit for sales tax paid to another state. Importing NEW Equipment into the U.S. Assumption foreign seller will not be charging U.S. taxes, creating a use tax obligation for the purchaser Issues: Does this transaction get processed in the same manner as other purchase transactions (i.e., reviewed by AP and accrue use tax where no sales tax was charged)? Is there an applicable exemption (e.g., manufacturing)? Is the jurisdiction where the equipment is received the same as where it will be used? Which party bears the cost of freight/delivery? 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 49 ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.

50 Importation Of Equipment Into The U.S. (Cont.) Importing USED equipment into the U.S. Assumption foreign VAT was paid, if applicable, and equipment was previously used by either taxpayer or an affiliate prior to importation into the U.S. Issues: How is the transaction booked (e.g., inter-company charge, journal entry) to move the assets from overseas to the U.S.? How long was the equipment used outside the U.S. prior to bringing it into the country? A number of states (e.g., Florida, Texas) provide for a use tax exemption on equipment used for a period of time prior to importation into the state. Was there a change in ownership (i.e., transfer of equipment from E.U. affiliate to U.S. affiliate)? Was VAT previously paid on the equipment? 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 50 ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.

51 Sales Tax Credits Against Use Tax States t statutes t t do not provide a sales tax credit for VAT paid. States generally allow for credits for sales tax paid against use tax incurred. 45 states and the District of Columbia allow for credit Credit: Texas will allow as a credit against Texas use tax due, any combined amounts of legally imposed sales or use taxes paid on the same property to another state or any subdivision of another state. Tex. Admin. Code Statutes generally require reciprocity (other state grants a corresponding credit) and specifically identify sales tax paid, to offset use tax. Reciprocity: No credit will be allowed for taxes paid on tangible personal property in any state which does not give credit for taxes paid on similar property in Alabama. The Commissioner of Revenue shall require such proof of payment of tax to another state as he deems to be necessary and proper. Alabama Statute is specific to taxes paid to another state and finds that foreign countries are not states, per the requirements Foreign jurisdictions also do not have any type of reciprocal agreement for sales taxes paid in the U.S. Therefore, absent an exemption, importation of previously used equipment may incur additional U.S. state sales tax in addition to VAT already paid KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 51 ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.

52 Sales Tax Credits Against Use Tax (Cont.) State guidance on lack of VAT credits against use tax liability Virginia Public Document Ruling No (May 11, 2000) Credit may only be allowed for a similar tax paid to another state. Illinois Dept. of Rev. General Information Letter ST GIL (Dec. 31, 2007) Illinois does not provide any credit for foreign taxes that may be incurred to a customer in another country. Maryland Revenews, Spring 2000 (March 1, 2000) Maryland allows a use tax credit for sales taxes paid to another state, but foreign value-added taxes (VATs) do not qualify for the credit. New York Advisory Opinion TSB-A-99(2)S (Jan. 19, 1999) A sales or use tax was not legally due or paid to any other state or jurisdiction within any other state, within the meaning and intent of the exemption provided in Sect. 1118(7)(a) ), where the tax was imposed by a foreign country. North Carolina FAQs About Use Tax (March 7, 2007) May not claim a credit for sales tax or value-added tax paid to another country 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 52 ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.

53 Use Tax Base What is tax base? Tax base is the amount subject to tax, including certain separately stated charges. States vary on their definition of tax base for both use tax purposes (e.g., original purchase price, FMV, value of in-state use). In Texas, sales price or receipts mean the total t amount for which h a taxable item is sold, leased, or rented; or valued in money; without a deduction for the cost of: The taxable item sold, leased or rented The materials used, labor or service employed, interest, losses or other expenses The transportation or installation of tangible personal property Transportation incident to the performance of a taxable service. Tex. Tax Code Ann (a)(1)-(4) 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 53 ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.

54 Use Tax Base (Cont.) For imported property, determination of whether the follow charges are subject to use tax as part of the tax base Shipping/freight charges/handling charges Installation Foreign taxes paid on acquisition of property Import duties For new equipment purchased from a vendor, must consider whether any of these charges may be excluded from the amounts subject to use tax For used equipment, must consider whether tax is based on the original purchase price, current FMV or some other value 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 54 ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.

55 Audit Considerations Import transactions under audit Similar to use tax imposed on purchases from remote vendors that lack nexus with the customer s state, foreign vendors are not likely to charge sales tax on the invoice. Generally, use tax audits would encompass all purchases, including those from overseas vendors. Area of exposure can include importation of used equipment. Does the company have sufficient controls in place to review imported purchases for use tax accruals? What about documentation on inter-company transfers of assets/redeployment of used assets? For purchases, is the company able to identify if VAT was paid on the purchase as well, and whether that was a proper p tax charge from the vendor? 2012 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative 55 ( KPMG International ), a Swiss entity. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity.