Why is international VAT deductibility open to cash losses? How VATCalc plugs the cash leaks
Urban VAT Myth? VAT is intended to be “neutral” in that businesses are able to reclaim any VAT that they pay on goods or services.
So why do many business complain they lose large amounts of input VAT paid which they cannot recover through their VAT returns? There is a bunch of reasons we analysis below from complexity of calculations to countries manipulating deductibility % to give subsidies.
But in the meantime, listen to me explain how our VAT Auditor tool has automated the problem away. Whether you’re worried about your suppliers’ errors and missing them in your Accounts Payable process, or local deductibility rules, we’ve digitised the life out of it.
And look out for help from Oliver & Hardy
Contact us to learn how to automate deductibility and plug the cash losses
Getting cross-border VAT calculations right is hard – for you and your supplier / customer
So let’s start by looking at some of the components of the complexity. What makes getting the VAT right on a transaction, and therefore ensuring the right deduction is being made? Firstly, the elements of getting the VAT right –if these are wrong, you won’t be allowed a deduction!
- What is the taxable supply – type of goods or services according to the VAT definitions?
- Place of supply – under which county’s VAT rules is the transaction?
- Exemption? Should you be charging any VAT at all?
- Rate – each countries rules are getting more complex especially following the new EU VAT rate freedoms this year?
- Who’s obligation to pay – this flips regularly depending on issues like the local country reverse charge rules or registration thresholds?
And there’s plenty more beyond just the calculation:
- VAT invoice disclosures – each country has varying requirements, and missing certain sensitive ones can disqualify the deduction.
- Right to deduct – each country has certain rights to vary the % of input VAT that may be deducted, often reflecting social and business investment priorities.
- Fraud risks – which mean tax authorities place lots of additional checks and disclosures on businesses which are linked to their right to deduct.
Contact us to learn how to automate deductibility and plug the cash losses
EU states protect deductibility sovereignty
Just looking at the EU 27 member states, there is still significant varyations in the right to deduct input VAT by businesses. Whilst the European Commission spends huge amounts of time on the rules for what is taxable, the freedom for what is deductible still is relatively flexible and states still have a lot of competences.
This makes understanding the same transactions from country-to-country much harder, leaving businesses open to fines, penalties or no right to deduct input VAT.
And think about the side effect of this for other simplifications. Think about the hesitancy over the extension of the OSS return to other cross-border transactions, which could be a huge boon. This is being held up by fears of many states that other countries will not properly understand or let alone police their deductibility rules on input VAT.
EU member states hold deduction discretion still in many areas of spend:
- Private use of company assets
- % deduction of expenses such as entertainment for clients and employees
- Adjustment rules
- Temporary economic measures e.g. COVID or anti-inflation measures
Contact us to learn how to automate deductibility and plug the cash losses
