The 27 EU Member States have a harmonized VAT system, and the non-EU countries follow similar principles. Rates are high, from 15 percent to 25 percent, and there is little margin for error. Savage penalties for mistakes and non-compliance abound, so getting it wrong is costly in terms of both profitability and cash flow. The cost-benefit of a cross border business transaction should always take into account any potential VAT impact.
U.S. companies will encounter European VAT when undertaking these very common activities:
- importing goods into Europe for onward sale;
- holding an inventory of goods in a European location;
- selling electronically delivered software, games or music to individuals in the EU;
- operating a local sales and marketing subsidiary; and
- importing evaluation units for demonstration and subsequent sale.
All of these situations give rise to a need for the business to register for VAT, and to make sure the business is compliant with VAT regulations. Follow these seven easy steps to avoid the most common VAT problems.
#1 – Understand VAT 101. Businesses are supposed to be VAT tax collectors, not tax payers. The simple objective is for your company to pay over VAT collected from customers, and get a refund of any VAT paid to vendors or on imports. When your business pays a VAT, it should usually be recoverable, if the rules are followed.
#2 - Get a VAT Registration. Never do business in Europe without one. VAT registration gives your business EU VAT privileges and ensures you don’t get stuck with irrecoverable VAT on purchases and on imports. It costs very little to register, and although there is a compliance cost of keeping VAT records and filing VAT returns, it is much less than the cost of getting it wrong.
#3 – Avoid being an importer into Europe if at all possible. Get your customer or reseller to do it and you will avoid many issues. Too often, companies talk themselves into this avoidable situation--mostly to please the customer and "take care of the VAT"--without realizing what it really means.
#4 – If you must be an importer, always do so in your own name with your own VAT number. If you don’t use your company’s name and VAT number, you will be non-compliant and the 15-25 percent VAT paid may not ever be recoverable, resulting in an immediate hit to your bottom line.
#5 – Use EU cash flow benefits and minimize compliance. Register for VAT in just one EU country, clear goods through customs in that one import country, and move those goods from there on to any customer in another EU country. This will keep your VAT registrations to a minimum and ensure that you pay import VAT only on goods that are staying in the import country. Additionally, customers outside the import country are neither charged VAT nor involved in customs formalities. Use this approach for evaluation units too.
#6 – Know the local rules. While EU VAT rules are broadly the same, each EU member state has some local variations. For example, in the UK, vendors of cell phones and computer chips have a different VAT regime than the rest of the trading community: France doesn’t permit non-resident businesses to register for VAT except in limited circumstances; Ireland offers cash flow benefits for exporters and foreign businesses; Luxembourg is good for hi-tech B2C businesses; and Italy and Spain have very tough compliance regimes and very high penalties.
#7 – Take informed advice and save $000’s. Ignorance isn’t bliss. VAT problems are very difficult and time consuming to fix retroactively. But there is good news--VAT is entirely manageable when dealt with proactively beforehand.
Larry Harding is the founder and president of Annapolis-based High Street Partners, an advisory firm that offers cross-border accounting, finance and HR-related services to companies doing business internationally.
Roger Bevan is an international VAT consultant based in the UK. He was a big 4 VAT partner for more than 10 years and has more than 30 years’ experience on global VAT issues.