Mapping The Steps To Global VAT Management

Often when discussing Value Added Tax (VAT) management with U.S. multinationals, the question arises on how a U.S.-based business, with no particular knowledge or skills in the VAT arena, can start to effectively and strategically manage its global VAT position? It takes effort, commitment, and support from senior management to create the necessary control and reporting processes to achieve this, but the payback is potentially enormous as rates of VAT are generally more than double the average U.S. sales tax rates.

There are three primary reasons for U.S. multinationals to pay particular attention to VAT management.

These are:

Tax can no longer be ignored or pushed to the side lines in thepost-Sarbanes- Oxley regulatory environment. In light of the very high rates applicable in the VAT world, the average global rate being around 18 percent, Sections 302 and 404 of the Sarbanes-Oxley Act have compelled many CFOs to examine how they can obtain a reasonable level of assurance that their overseas operations are in compliance with local VAT legislation before they put their signatures to a Sarbanes-Oxley attestation. This might seem a daunting task for a U.S.-based tax department that may be short on resources and even shorter on VAT expertise but there are steps that can be taken to minimize exposure.

Financial penalties can run into the hundreds of percent of the tax under- declared and interest rates are often compounded. Even non-SEC registrants should take steps to ensure accurate international VAT compliance if for no other reason than the draconian penalties and interest rates that commonly apply to erroneous declarations in the VAT world.

VAT savings almost invariably go straight to the bottom line, which can put quite a different perspective on the value of undertaking this type of work. One multinational that saved a modest $100,000 using a VAT planning mechanism expressed the view that, as they generally operated on a 10 percent profit margin, this saving represented the equivalent of adding $1 million to their revenue figure. Perhaps that type of thinking might assist tax managers in persuading senior management that VAT planning can be a valuable tool in enhancing overall profitability.

Read More: Mapping The Steps To Global VAT Management By Chris Walsh