How does VAT actually work

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The Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the Community.

High level: EU VAT system

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A high level overview is provided of the EU VAT system: what is subject to VAT and the right and methods of VAT recoverability. It includes also a comparison with the US Sales and Use Taxes system.

VAT neutrality has to be earned

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Often the question is asked what risk management even has to do with VAT/GST. The reasoning behind this question is that VAT/GST is typically cost neutral for most businesses: “a cash in and cash out” scenario. However, every indirect tax function knows that deductible input VAT and liable output VAT have to be managed separately to avoid substantial VAT assessments, penalties and interest payments. It is a risky business to monitor only the balance between output VAT and input VAT. Neutrality can only be achieved – better is the word ‘earned’ – if certain formal and material requirements are met.

Manage audits and disputes

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Tax audits could be very time consuming and have a huge impact on resources or external advisors. Be therefore prepared and minimize the risk that extensive resources have to be allocated when a audit is held. A transparent relationship with tax authorities might resolve any disputes faster.

Design an indirect tax strategic plan

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A relevant indirect tax strategy—correctly implemented—will allow the new business to function effectively from go-live, from both a tax and commercial perspective, so that it can move inventory, generate sales and invoices, face fewer disputes with non-paying customers, remain tax compliant, and integrate the business on time and on budget.

Manage business model change

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There is one common denominator that is too often missing from the strategic or planning elements of a business model change — indirect tax. But do these taxes get the attention they need, especially in light of increasingly complicated and globalized business models?

VAT and shared service centers

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Take a Shared Service Center. In the past local country teams were handling VAT matters and its department who had been there for a long period of time, had access to talented staff, and were well trained and also employee turnover was low. Under a Finance transformation all of their responsibilities are often moved to a far away location and new process owners who do not know the company's historical background and employee turn over is high. The local staff are often made redundant. Can you predict the risks?

Migration to new jurisdictions

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From a Tax Control Framework perspective, for setting up risk based controls, the more unusual the transactions, the greater the tax risks. Migration to a new jurisdiction will most likely involve dealing with VAT. For some migrating corporations it may mean having to deal with VAT for the first time although probably for most, VAT will be a familiar concept with some variations from the ‘old’ jurisdiction. 

M&A integration and indirect tax

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With indirect taxes intertwining through the day- to-day operations of a company—raising sales invoices, moving inventory, paying suppliers, collecting cash—indirect tax risk can have a distinct and domino-like effect on the commerciality of an organization. The impact can increase exponentially in the event of a merger or acquisition. But do these taxes and tax planning opportunities get the attention they need, especially in light of increasingly complicated and globalized business models?