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Indirect Tax Planning
Greg Lockhart, head of the firm's VAT and Customs consultancy practice, was interviewed by Finance Monthly for its July 2013 issue. Read his views on the importance of planning for indirect taxes.
Q. Why is indirect tax planning important and how can it help multinational companies manage risk, improve cash flow and reduce costs?
Indirect tax is the broad term used to describe a collection of taxes which, from an EU perspective, generally have a link with EU law, including most notably VAT but also Customs Duty and Excise Duties. For many businesses, VAT is seen as no more than an administrative burden only being a relevant real business factor for those businesses engaged in financial services or other VAT exempt activities. This however is not the full picture. In practice, even though a business may have full VAT recovery there remain many potential pitfalls and other mistakes which can lead to significant VAT costs and the potential incurrence of substantial interest and penalties.
When a mistake is made as to VAT regarding the turnover of a business, this can have dramatic and devastating consequences as the VAT error will relate to the turnover of the business regardless of whether the business is in profit or not. Other issues can arise regarding the ability to recover VAT, which, if triggered, can dramatically impact on the profitability of a company.
Likewise the ability to understand and control relevant customs duty and excise costs can have a significant impact on overhead costs of a business.
Q. Why are governments taking an increasingly aggressive stance on the collection of indirect taxes?
The answer to this is somewhat obvious in that all Governments face a dramatic squeeze to public finances and require stabilisation of taxation revenues. Indirect taxes can provide an easy answer insofar as they are not dependent on companies or individuals making profits.
The second driving factor relates to the potential prevalence of a temptation for some parties to engage in fraudulent activities through practices such as missing trader or “carousel” fraud which many Governments within the EU are attempting to tackle.
Q. How can a company handle indirect tax efficiently whilst still maintaining the correct level of regulatory/legislative compliance?
The key factor here is to understand the main driving forces behind the complexity of indirect tax. Once these drivers are identified and understood a business should seek to ensure that someone within the organisation, or an outsourced service provider, will take responsibility for monitoring the correct application of the indirect tax procedures within the company. This is not simply a question of ensuring that VAT returns are filed by a due date or that customs duty at a certain level is paid. This will of course include ensuring that all relevant reliefs and authorisations available to, or appropriate for, the business are availed of. Likewise, seeking to ensure that maximum certainty is obtained with regard to critical classifications can entail submissions to relevant tax authorities where appropriate.
A simple example can be the obtaining of what is referred to as a BTI (Binding Tariff Information) for customs duty purposes. A BTI is in effect an agreed classification of a particular good for importation purposes which although issued by the customs authority of one member state legally permits the holder of the BTI to import goods within the description set out on the BTI at the agreed classification rate within all 28 member states of the EU for the duration of the BTI’s validity.
Q. What aspects of indirect tax are often overlooked that shouldn’t be?
The administrative returns such as the European Sales Listings for supplies of goods or services cross border, known in Ireland as VIES, and monthly or quarterly INTRASTAT returns for movements of goods within the EU are sometimes not as widely understood as the requirement to file a VAT return.
There are a number of VAT obligations which arise that don’t result in an actual payment being due to the tax authorities. However, failure to reverse charge or correctly issue documents to customers, etc can give rise to penalties and cause more attention to be paid to a business by a tax authority. Businesses need to ensure that they are meeting all of their obligations with respect to accounting for reverse charge VAT, etc. The majority of these obligations arise from cross border supplies. There is, of course, increasing cooperation between member states tax authorities which will identify non-compliance by businesses in this area.
Other issues that in practice can give rise to problems relate to ensuring that invoicing both with respect to sales and with respect to invoices received from suppliers conform to relevant invoicing requirements so as to permit VAT recovery for the recipient of the invoice. Linked to this can be the question of the retention of original invoices in order to support the claim for VAT recovery. In recent years I have been involved in obtaining agreement from Revenue for the retention of records by means of scanned copies of original paper documents despite the various published statements indicating the contrary. If a business wishes to remove the paper mountain that arises from the receipt of paper invoices it is in my view critical that agreement is reached with Revenue, especially in light of recent decisions of the European Court of Justice regarding proof of VAT recovery.
Q. Is there anything else you would like to add?
As I mentioned earlier, across many member states of the EU the issue of missing trader fraud is a very hot topic. The problem here is that the European Court of Justice has confirmed that tax authorities need not confine their efforts to pursuing the perpetrator of the fraud but can seek to deny input VAT deduction from the genuine business purchaser in certain circumstances. It is important that a business seeks to ensure that it puts in place practices so as to, as far as possible, be vigilant of, and mindful to, potential missing trader activity and if unlucky enough as to be caught within such a chain to defend their right of VAT recovery within the parameters of the relevant ECJ decisions. We continue to see growth in our indirect tax litigation practice in relation to this matter as well as various other indirect tax issues.