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Mastercard Worldwide

While VAT recovery is a complex and cumbersome process, it can add significantlyto a company’s bottom line.

One of the hidden expenses of conducting international business is the value-added tax, or VAT. In many countries a value-added tax is levied on each business in the supply chain, calculated as a percentage of the sales price at each stage of production. Sellers are required to calculate the tax owed on each sale and remit that sum to their local tax authority.

To avoid double taxation on final consumption, businesses are generally permitted to recover value-added tax on the materials and services they buy to enable their own sale of goods or services. In countries where the VAT is used, both domestic and foreign buyers may claim VAT reimbursement.

Most travel and entertainment (T&E) expenses are eligible for VAT recovery. Since T&E expense is a significant cost of conducting global business, particularly for large multinational companies, recovering the VAT on those expenses can have a major positive impact on a company’s bottom line. According to Meridian, one of the leading provid-ers of VAT recovery services, it is estimated that more than 5 billion euros of foreign VAT is not recovered each year by businesses in the 25 EU member states alone.

The financial potential in VAT recovery is illustrated in Figure 1. In this hypothetical scenario, a multinational with $100 million in annual T&E expense can expect to recover $2.25 million per year in VAT expense.

VAT Recovery: Easier Said Than Done

Because of the significant potential savings, VAT recovery seems like it ought to be a standard practice for all companies doing business in countries where the VAT is used. For companies based in countries with the VAT, domestic recovery is fairly straightforward. Outside the location of the company’s headquarters, however, VAT recovery is a cumbersome and complex process that requires both an understanding of myriad local tax rules and regulations and substantial resources to handle the processing of claims. The sheer number of regulations and requirements has prevented many companies from being able to seize the VAT recovery opportunity in monetary terms, so they have not been able to make a case for putting the necessary structures and processes in place. As a result, some companies — even large multinationals – do not bother to pursue recovery at all.

VAT recovery rules and requirements vary greatly across markets on a variety of dimensions, such as:

• The basic VAT tax rate;
• The percentage of the VAT that is recoverable – can vary based on type of expense (e.g., hotel vs. air travel; meals for entertainment vs. personal meals);
• The specific evidential data requirements for VAT claims:
  • To make VAT claims, businesses must demonstrate that they, and not the employee in question, incurred and were the beneficiaries of the specific expense. If an employee pays with cash or a personal credit card, this becomes more difficult to prove. By using a corporate card for as many expenses as possible, companies can ensure that charges will automatically meet this requirement.
  • In most jurisdictions, invoices must be in original form and must include certain details, including supplier VAT registration number; purchaser name and business address; and applicable tax rate. Some jurisdictions allow simplified invoices for some types of expenses, such as those under a certain amount or those in some categories.
• The form and language in which documentation must be submitted.

In addition, all of these rules and requirements are constantly being revisited and adjusted by local tax authorities. Within the European Union, individual countries have their own VAT recovery rates, rules and requirements, but they are also subject to EU Tax Commission rulings. For example, businesses that are established in one EU member state and purchase services in another member state may be able to reclaim VAT charged in the second state under the provisions of the Eighth VAT Directive (Directive 79/1072/EC). A similar directive, the Thirteenth VAT Directive (Directive 86/560/EC), allows businesses established outside the EU to recover VAT under certain circumstances.

The European Tax Commission recognizes the need to simplify and standardize the VAT reclaim process across the EU. In 2004, the commission fielded a survey of 700 large companies to help understand the pain points and opportunities associated with the VAT reimbursement process. Among other conclusions, the study found that the complexity of repayment and refund requirements in EU member states is especially high for buyers from outside the country’s borders. An estimated 86.1 percent of large companies incurring VAT costs in foreign countries reported difficulties coping with procedures for refunds. In fact, the complexity or time requirements associated with claims were such that an estimated 53.5 percent of large companies had chosen not to request a refund. The estimates furthermore indicate that 14.2 percent of small and 9.9 percent of large companies had chosen not to engage in VAT-taxable activities in foreign jurisdictions because of VAT compliance requirements. In response to these findings, the commission has expressed a commitment to VAT reform. This will take time to achieve, however, and during the interim, companies stand to profit from recovering as much VAT as practicable.

To maximize VAT recovery, companies must be able to stay on top of this vast array of detailed and frequently changing rules and requirements. They must also educate their employees to submit original invoices that comply with specific local market rules for T&E reimbursement, which is a constant challenge. According to Meridian, companies are typically missing invoices for about 20 percent of their expense reporting, and another 50 percent of expense invoices are missing the data necessary to qualify for reimbursement.

VAT Recovery Services: Mitigating the Pain

Some companies handle VAT recovery on their own, and some retain VAT recovery services to manage the process for a percentage of the amount recovered. Corporate card programs are also increasingly vital to businesses seeking to recover VAT expense, because corporate cards can help substantiate the legitimacy of expenses as business-related and because requirements on invoices paid with corporate cards are relatively relaxed.

VAT recovery providers help companies work through the intricacies of the process by carefully monitoring local rules, helping companies understand and communicate T&E invoice requirements, bringing invoices into compliance so they can be submitted for reimbursement and managing the claims process and paperwork.

Now VAT recovery providers are beginning to team with global payment companies to strengthen their services and add more value to the VAT recovery process. Corporate card providers can help clients size their potential VAT recovery and pinpoint expenses likely to be eligible for reclaim. Then VAT recovery providers can take the payment data, overlay VAT eligibility requirements and normalize invoices for processing. These new partnerships promise to make VAT recovery easier and more profitable than ever before.

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