Value-Added Tax (VAT) & Your Supply Chain: Q&A
Yesterday's webinar VAT & Your Supply Chain: Getting it Right in a Global Economy encouraged a lot of discussion. There were several interesting questions from attendees for HSP's VAT expert Nick Hart; here are some of the highlights, and answers:
We shipped a piece of demo equipment to the U.K., but are not registered for U.K. VAT. We were charged a 20 percent import VAT on products we do not intend to sell, and that may ultimately be shipped back to the U.S. How do we get a refund for the amounts paid?
If you are importing something into a country that you intend to export, import VAT relief is often available, particularly if the export is planned within two years of the original importation. A freight agent can set it up properly, so that either you (1) don’t pay VAT up front or (2) you pay VAT but can get it refunded, in accordance with how the temporary import VAT relief is structured in that country.
If you have already incurred the import VAT in the EU, you may have the potential opportunity to recover it through a refund under the 13th Directive depending on the country and what documentation you hold to support the recovery position.
We are a U.S. company that buys booth space at several large European trade shows each year and sends U.S.-based employees to attend those trade shows. Under this condition, is there any opportunity to reclaim VAT paid as part of paying for the various trade show expenses?
Yes. This is one of the most common types of costs that can be reclaimed from the EU under the 13th Directive. The opportunity to lodge a claim does depend on the EU country however, as some do not offer the facility.
Can you describe the 8th/13th Directives?
They are references to EU VAT legislation and they allow member states to implement a VAT refund system for nonresident companies who incur VAT in those member states.The 8th Directive allows EU-based, VAT-registered companies to lodge VAT refund claims for VAT incurred in other EU member states.The 13th Directive allows non EU-based businesses to lodge VAT refund claims for VAT incurred in some of the 27 EU member states. Not all EU countries allow this and it depends on whether there are reciprocal arrangements in place with that country.
Can you please provide insight on how the concept of a self-assessment of taxes works? I know that this is available in Colombia and Venezuela.
The self-assessment of VAT, more commonly referred to as reverse charge, is generally applicable where services are being provided to a business customer, from a supplier based outside of the country where the customer is established. It is a simplification procedure really designed to prevent the need for the supplier to register for VAT in the country where the supplies are being made, by making the customer, or recipient of the services, responsible for accounting for any VAT due through a reverse VAT charge. For a fully taxable company, any VAT accounted for under the reverse charge is going to be recoverable at the same time, subject to local rules.
We are paying VAT in costs of a subsidiary that is a cost-plus entity when the entity invoices the parent it does with VAT, is this recoverable?
If the subsidiary is charging VAT on its intercompany supplies to its overseas parent company, then there might be the opportunity to recover this VAT depending on which country the subsidiary is operating in, and in the country where the parent is based. One other point that may need to be considered is whether the local subsidiary is correct to charge this VAT in the first place. It also might be an indicator that the parent company is making local supplies and it may also have an obligation to register and account for VAT locally.
If a parent company is in the U.S. with a subsidiary in the U.K., where the U.K. company is using supplies of service from U.S. parent, should VAT be charged between companies?
The VAT treatment to be applied will depend on the nature of the services being supplied. It might be that the reverse charge, or VAT self-assessment will apply, in which case the supplying entity does not have to charge VAT. This really does depend on what type of services are being supplied, as VAT rules differ from one type of service to another.
If a U.S. company that has been selling electronically supplied services (ESS) to Europe forms an EU entity and a subsidiary of that EU entity registers for VAT, could the EU entity or subsidiary be subject to penalties and fees for back VAT taxes that were not paid by its U.S. parent company in the time prior to VAT registration?
It is unlikely that a local entity would suffer penalties and interest charges in relation to its parent company failing to declare VAT at the correct time. This is because the subsidiary and the parent are different entities and the local subsidiary is only responsible for its own VAT accounting. However in some cases, if fraud is suspected by the tax authorities, then they may widen their net by considering the VAT compliance history of all group companies who are making supplies in that particular country.
Our company sells software B2B through a wholly owned subsidiary in Germany. The subsidiary owns the IP for a software product we will be selling worldwide here in the U.S. There is a reseller agreement in place between the parent and the subsidiary. What are the VAT implications?
Under these circumstances, you would expect there to be a supply of software services from the German subsidiary to the U.S. parent which, on the face of it, is outside the scope of German VAT. The onward supply of software services by the U.S. parent would generally take place where the recipient of those supplies is established. If the recipient is a VAT-registered business in its own country, then the general position is that the recipient would self-assess any VAT due under the local reverse charge provisions, if they are available in that country. If they are not, then the U.S. supplier may need to register for local VAT in that country where the supplies are made.
If you are providing free samples to a customer (medical device) for trial, does VAT need to be paid on these devices? If so, would it be at the suppliers cost or at list price?
There are some ‘deemed’ supply rules that relate to the provision of samples that may need to be considered depending on in which country they are being provided. Also, if the devices are imported into the customer’s country of establishment, then import VAT will be incurred which can either be incurred by the supplier or customer.
The value of an import for VAT purposes is generally taken to be the sales value although some other factors need to be taken into consideration. For example, in the U.K. there are six different ways of valuing an import, depending on the specific circumstances. The value for deemed supply purposes, if applicable, tends to be cost price if VAT needs to be brought to account, in accordance with local rules.
Can you clarify who owes VAT when a manufacturer in the EU imports component parts from non-EU countries, then ships finished goods within or outside of the EU?
This is a potentially complex question, but in summary, the manufacturer will incur import VAT when the component parts are shipped to the EU (assuming that it is importer of record).
When it supplies its finished goods, the VAT treatment depends on where the goods will be sent in order to fulfill a supply. If they are supplied in the same country as the manufacturing and the goods do not leave that country, then local VAT will need to be charged by the supplier.
If the goods are to be shipped outside of that EU country to elsewhere in the EU, or exported to outside of the EU, then the supplies are deemed to take in the country where the goods are located when they are assigned to the supply. However, there are intra-EU and export reliefs available and the supplies maybe subject to 0 percent VAT if specific conditions are met.