While your business travel has possibly been placed "on hold" or impacted due to COVID-19, now is the perfect time to improve key elements of your travel and expense (T&E) program in preparation for the recovery of business travel in the near future. If your travel program includes any international travel, one key area of focus should be regarding the reclaiming of goods and services taxes, such as VAT and GST. Each year companies leave billions of dollars of unclaimed goods and services taxes on the table when it comes to travel expenses. Without a doubt, this area represents a valuable source of hard dollar savings for your company!
Is your business failing to reclaim thousands of dollars in VAT?
In a globalized, digital world – characterized by fast-moving markets, changing business models, and the increasing prevalence of transaction-based taxes – keeping pace with global indirect tax can be a challenge. In this blog, SAP Concur specialists and Deloitte Tax LLP (“Deloitte Tax”) explain how VAT impacts employee expenses, as well as discuss certain planning that may be available to assist taxpayers in recovering the VAT that’s incurred.
What is VAT?
VAT stands for value-added tax, which is also known in some countries as a goods and services tax (GST), and operates in the same or similar way. It is a consumption tax levied in more than 160 countries, excluding the U.S. – the largest economy in the world that does not levy a VAT.
How does VAT impact me?
Like sales tax, VAT is ultimately borne by the final consumer on purchases bought within the relevant country. However, unlike sales tax, VAT is applicable throughout the entire supply chain (not just at the end) and is the responsibility of each business within that supply chain to collect VAT from customers and remit it to the relevant tax authorities. Each business in the supply chain can usually recover the VAT that they are charged with if they are making what the VAT world calls onward “taxable sales.” It is worth noting that VAT incurred in relation to exempt sales, for example, financial services and some land-related transactions, are often not recoverable.
Companies also often forget about VAT incurred on employee expenses. In fact, during a recent SAP Concur webinar, nearly two-thirds of U.S. participants reported that they had failed to reclaim VAT from U.S. travelers. When traveling outside of the U.S., your employees most likely pay VAT on a portion of their business travel and expenses (T&E). Many businesses take this as a cost of business, however, because of the complexity in implementing the proper processes to manage capturing recoverable VAT and separating it out from the VAT that is not recoverable. Although, this VAT on T&E can usually be recovered from the local government.
“Businesses are often unaware that some countries have refund procedures which allow foreign businesses to apply to get the VAT back,” explains Phil Flynn, senior manager in Deloitte Tax LLP’s Global VAT Services practice. “Due to a lack of knowledge or the perceived difficulty of managing the internal company process, many businesses simply do not respond to these allowances and fail to put in place policies to make the’ process easier. Other businesses choose to hire an outside firm year-over-year to complete success fee-based refund claims. Although not necessarily significant if looked at on a single year basis, these services can become rather expensive when looked at over a number of years.”
“It’s one of the best-kept secrets for companies to save money,” said Hendrik Vordenbaeumen, CPO for SAP travel and expense solutions.
In addition, many U.S. multi-national corporations have foreign subsidiaries, who incur VAT on expenses locally. VAT in these cases is typically recovered through the local VAT return that entity is filing.
So, what can you do to reclaim the international VAT to which your company is entitled?
What you need to know about reclaiming VAT:
1) On what kind of expenses is VAT typically recoverable?
VAT is recoverable in approximately 30 countries around the world. The European Union, in particular, has foreign VAT refund procedures for both EU-established and non-EU established companies. Although the rules and amount of VAT recoverable differ per country, the following are examples of expense types on which VAT can often be reclaimed:
- Car hire and taxis
- Meetings, events, and conferences
- Client entertainment
When expenses are incurred for business purposes, the VAT on at least part of these expenses may be recoverable.
2) How do I make VAT refund claims and when?
Foreign VAT refund claims are often made in the year after the expense was incurred.
“There are strict time limits on making these claims, so it’s important that businesses act quickly before the opportunity to recover the VAT is lost,” says Flynn. “Businesses wanting to recover VAT on foreign travel should acquaint themselves with the rules in the jurisdiction in question and understand the process to prepare a refund claim. For example, although the rules in the EU are somewhat harmonized, each country does approach the refund process differently.”
According to Flynn, a major sticking point for businesses is often obtaining valid invoices to substantiate the VAT recovery: “Most countries require original invoices to validate that the expense was incurred – the challenge is that these invoices are often missing or contain missing fields, such as the traveler’s company’s registered name and address. This is often due to the fact that an employee may not be very incentivized to ensure the invoice they receive is “VAT compliant.” However, with the T&E processes these days often being managed by large central organizations and/or through technology, there are many potential opportunities available to overcome such a hurdle if thought through properly from the outset of implementing the T&E process.”
3) What can I do to improve my processes around foreign VAT recovery?
Flynn explains that, aside from merely submitting a claim for previously incurred VAT, there is much businesses can do to make the process easier moving forward. “An impactful action a business can take right now is to work on streamlining its expense policies and processes through the use of one of the many available technologies. This includes configuring your technology to capture the relevant expense data upfront, as well as implementing automated processes to capture the invoices for employee travel directly from the vendor, rather than through the employee,” Flynn states.
According to Deloitte Tax, the following is a starting point for businesses when considering how to strengthen their expense policies:
- Identify VAT-related data and documentary requirements at the outset of a new T&E process or technology implementation
- Identify the jurisdictions or group entities that have the biggest T&E spend
- Work with your IT and expense teams to build these requirements into the expense process and technology solution
- Make necessary policy changes for your employees to capture and input relevant details relating to their expenses
4) What’s the cost of doing nothing?
Since 54% of all VAT is going unclaimed, companies are losing out on $20 billion in uncovered VAT globally, according to Finance Monthly. Thus, failing to reclaim VAT can significantly increase the cost of your travel program, especially if your travelers aren’t aware of the correct steps to successfully complete its submission. Moreover, in today’s world of increasing electronic VAT reporting, tax authorities are now capable of using technology to identify “anomalies.” Many errors are identified in the space of VAT reclaims on expenses. As such, submitting an incorrect, incomplete, or not fully substantiated reclaim for VAT on expenses, involves potential risk, and possible exposure, of opening up further enquiries by the tax authorities.
Automate VAT recovery to increase savings
SAP Concur solutions can help ease the burden of reclaiming VAT. In fact, companies report typically seeing a 75% increase in reclaimable VAT after switching from poor expense reporting to the SAP Concur platform. With an integrated solution, our end-to-end spend management system can:
- Eliminate hours of manual labor, such as gathering and transferring data and managing reports as well as recurring costs from outside providers to perform success fee-based assessments.
- Minimize tax exposure through powerful data analysis that reviews travel and expense (T&E) transactions against a multitude of VAT recovery parameters, including entities, dates of transactions, countries of origin, and countries of spend.
- Offer direct integration with Concur Travel, empowering your business travelers with real-time alerts of VAT opportunities on upcoming travel itineraries.
- Help your organization partner with international VAT recovery firms that can assist you in recovering VAT through integrated apps.
Deloitte Tax’s U.S.-based Global VAT Services practice has more than 50 team members with experience spanning the Americas, EMEA, and Asia Pacific regions dedicating to serving US-based global businesses. The team has deep experience of assisting clients with designing VAT policies and procedures for T&E expenditure to streamline the reporting and recovery process, as well as requirements gathering for expense technology implementation projects.
The Global VAT Services practice is supported by Deloitte’s Global Indirect Tax network, comprising the member firms of Deloitte Touche Tohmatsu Limited (DTTL) and their affiliates around the world. This network contains over 1,500 Deloitte VAT professionals in approximately 150 countries.
For more information about Deloitte Tax’s VAT services relating to T&E, please contact Phil Flynn at email@example.com.