As a business trading globally, you are probably aware of the complexity of international VAT compliance. There are several reasons why you might have the need for VAT registrations in multiple jurisdictions.
The compliance burden on your finance team can be taxing… but with so much change in the world, things could get a whole lot more complicated in the coming months.
Below is a very brief summary of the 3 key issues all businesses should be considering because of the impact they will have on global VAT compliance:
The VAT implications of the UK leaving the EU are significant, especially since no deal has yet been agreed. Whilst from a VAT perspective, there is very little clarity from the tax offices, there is clear guidance for businesses based on the assumption that the UK will be treated exactly the same as other non-EU countries from 2021.
The key areas of consideration for businesses are:
- How does Brexit impact my business from a practical import and fulfilment perspective?
- What changes will occur to my VAT compliance obligations?
- What “VAT hacks” can I consider to weather this storm?
When goods are imported into a country with a VAT regime, import VAT is charged as a percentage of the value of the imported goods. From a VAT perspective, when goods are moved between two EU member states, this is not technically an import – therefore, trade between two EU countries never results in import VAT being paid.
Once the UK is classified as non-EU, everything changes. The movement of goods from UK to the EU, or any goods coming into the UK (from the EU or otherwise) will be treated as imports and subject to VAT. Since all goods going from the UK into the EU will have VAT on them in the destination country, this creates a cash-flow impact which did not exist when the UK was part of the single market.
The shift to technology
There is a trend across global tax offices to implement new VAT legislation governed by technology. A good example is the new initiative by the UK tax office (HMRC) called Making Tax Digital (MTD). MTD requires that all VAT registered businesses in the UK submit their periodic VAT returns using HMRC-accredited software. This means that if companies don’t use an accounting system which offers an MTD submission solution, they will need to procure relevant software to integrate with their systems to ensure they are compliant.
Similar software-driven legislation has been introduced in Spain (so called “SII reporting”), Poland (through the use of SAF-T’s) and in several other countries around Europe and South America.
As businesses become increasingly digital, the use of digital record-keeping tools helps prevent businesses from making errors. This addresses the part of the tax gap that is attributable to error and failure to take reasonable care by significantly reducing the opportunity to make some types of mistake in tax returns, principally simple arithmetical and transposition errors. Additionally, forcing tax payers to submit VAT returns and other data electronically, reduces the risk of human error and fraud – thus reducing the needs for long, complex VAT audits.
It is vital that you are aware of the legislative requirements in the jurisdiction(s) where you are VAT registered to ensure that your business is ready to comply with these onerous technology requirements.
A single EU VAT return
The European Commission has proposed a series of fundamental principles and key reforms for the EU’s VAT area. This proposal aims at improving and modernising the current VAT system to avoid VAT fraud and the huge losses in government revenue due to it make life simpler for companies wanting to do business in the EU Single Market.
The Commission proposes:
- A series of fundamental principles, or “cornerstones” for a definitive VAT system;
- Four “Quick Fixes” to improve the day-to-day functioning of the current VAT system.
The proposal contains several fundamental principles or cornerstones for a definitive VAT regime.
- The principle of taxation at destination for intra-EU cross-border supplies of goods. Under this principle the VAT rate of the Member State of destination is charged.
- The confirmation that the vendor is liable in the case of an intra-EU supply of goods as a general rule, which means that the seller is responsible for charging and collecting the VAT.
- However, if the buyer is a reliable taxpayer, a so called “certified taxable person” (CTP) it is he who is liable for payment of the VAT due directly to the treasury of the Member State of destination.
- The so-called ‘One Stop Shop’ will be extended. Businesses will be able to make declarations, payments and deductions for cross-border supplies of goods through a single online portal, as is already the case for the supply of e-services. Member States will then pay the VAT to each other directly, as is already the case for the supply of e-services.
There is much for businesses to consider given the proposal, including how to become a CTP and whether you may be eligible to make use of a one-stop-shop VAT return.