Indirect taxes include broad-based taxes on consumption, such as value-added tax/goods and services tax (VAT/GST) and sales taxes; taxes on imports, such as customs duties; excise taxes; energy taxes; and environmental levies that apply to the trade or manufacture of a range of products, including alcohol, tobacco and fuel.
For most businesses, indirect taxes are intended to be “tax neutral” because they can be offset against other taxes in the supply chain or can be included in the costs of production, distribution or sale.
But in reality, these levies can create burdensome costs that must be actively managed. Unclaimed tax credits and missed or delayed refunds commonly cause negative cash flow and “tax leakage” that increase business costs and reduce profitability.
Complex local legislation, evolving business models and compliance obligations that vary widely by jurisdiction add to the complexity of making claims — and to the risk of disagreements about the validity of credits, rebates and refunds.
To manage these costs effectively, you need to take action across the organization to gain visibility into the indirect taxes you incur and clarity about how they can be refunded or offset. Ask yourself the following questions:
- Do you know how much duty is trapped in your supply chain?
- Do you know how much VAT/GST is sitting on the balance sheet?
- If you are expecting a refund, how realistic is that receivable?
- Will you receive it in full?
- What will the refund cost to claim, and how long will you wait for reimbursement?
- Can you afford to claim? Can you afford not to?
- Are you missing opportunities to reduce negative balances, obtain rebates and avoid absolute costs?
The answers will help you to design an effective refund strategy that increases recovery, improves cash flow, and reduces costs and risks.
Managing cross-border VAT/GST refunds
Recovering foreign VAT/GST and reducing excess foreign VAT/GST credits are crucial parts of an effective indirect tax strategy. However, recovering foreign VAT/GST is difficult or even impossible in many countries. Even where refunds apply, long delays are common, and claims may be subject to intense audit scrutiny that can tie up corporate resources.
As a result, unclaimed or irrecoverable foreign VAT/GST is a common cause of excess indirect tax credits for many global businesses, leading to negative cash flow and absolute costs. Not all nonresident businesses qualify for direct VAT/GST refunds.
Is it time to review your foreign VAT/GST refund strategy?
Developing an effective strategy for dealing with or mitigating foreign VAT/GST can improve recovery rates and reduce associated costs. However, many organizations assume that the costs and difficulties of recovering foreign taxes will outweigh the benefits.
Now may be the time to review and challenge that assumption. Changes in tax legislation and advances in technology mean that fact patterns, assumptions and decisions made even just a few years ago can be quickly out of date.
Claiming direct refunds of foreign VAT/GST
A successful foreign VAT/GST refund claim depends on complying with all of the conditions imposed by tax administrations — in every jurisdiction where you want to claim. Understanding the detailed rules and thoroughly applying them can improve your chances of success in reclaiming foreign VAT/GST on your business expenses.
Accurate documentation, in particular, is key. Planning ahead and complying with how and when you make your claims and understanding the reciprocity rules are also crucial factors.
Alternatives for recovering foreign VAT/GST
As few countries make direct VAT/GST refunds to nonresident claimants, global businesses must explore other options to reduce and avoid irrecoverable costs and long delays in receiving reimbursement, such as registering for VAT/GST locally or rerouting supplies.
Identifying the key jurisdictions for your business where VAT/GST may be refunded, or where incurring tax should be avoided, is a vital aspect of planning cross-border activities.