Non-resident businesses are sometimes entitled to cross-border VAT recovery on costs incurred in certain jurisdictions. However, the cross-border VAT recovery process is cumbersome and complicated so millions of euros go unclaimed every year.
What are the principles of cross-border VAT recovery?
In order to encourage international trade, the EU created special mechanisms that allow businesses to recover VAT from overseas countries. In other words, if you are not established in an EU country but you have incurred VAT there for business purposes, there is a special claim you can submit in order to have the VAT refunded.
Which countries allow foreign VAT recovery?
All EU member states allow for foreign VAT recovery. Although, some may have reciprocity laws that inhibit non-European countries from claiming VAT if they do not have reciprocal VAT provisions. For example, Germany applies the laws of reciprocity. And countries like South Africa and China cannot claim VAT from Germany because they do not offer the same foreign VAT recovery provision.
In addition, countries outside of the EU that allow for VAT (or indirect tax) recovery include: South Korea, Canada, Australia (registration needed), New Zealand (registration needed), Japan (registration needed), UAE, Switzerland, Norway, Iceland, United Kingdom (no longer part of EU).
What legislation governs VAT recovery?
The EU operates two directives. One directive is for EU businesses known as the ‘EU refund mechanism’ (formerly the 8th directive) and the other is for non-EU business known as the ‘13th Directive’. There are certain requirements that a business must fulfil to be able to reclaim using these schemes.
Who can claim foreign VAT?
- EU Businesses Claiming VAT from EU Countries: VAT-registered businesses in an EU member state are eligible to recover VAT on business costs from the EU under the EU VAT Refund Directive.
- Non-EU Businesses Claiming VAT from EU countries: VAT-registered businesses outside of the European Union are eligible to recover VAT on business costs from the EU under the 13th Directive.
What expenses are claimable?
VAT can be recovered on both Travel & Entertainment costs as well as foreign Accounts Payable (A/P) expenses. Interestingly, VAT on A/P expenses often make up to 70% of VAT refund values.
Claimable expense types:
- Car rental.
- Conferences, trade-shows, exhibitions.
- Hotels and accommodation.
- Training courses/Seminars.
- Foreign office expenses.
- Public transport.
- A/P invoices.
- Tooling costs.
- Imports shipped DDP.
To explore more international VAT Recovery Rates, expense types and reciprocity rules, you can visit our sister company, VAT IT’s international VAT Rates Guide.
How to Recover Your Foreign VAT?
The foreign VAT reclaim process is incredibly cumbersome and difficult. To expand, it involves searching through your expense data and original invoices (if you’re a non-European business) to find claimable VAT. Furthermore, you must compile correct documentation for each country. Furthermore, the requirements for correct invoice formats are complicated and vary from country to country. For these reasons, we highly recommend outsourcing the task to specialists.
Our sister company vatit.com are the world-leading specialists in this field and are able to provide the best support service and technology to maximise your VAT recovery.