Incorrectly applied zero VAT rate It is possible to check the syntax – the format of the VAT number, including the number of positions. However, it is not possible to check whether the VAT number is valid. To this end, the European Commission has provided an online database, VAT Information Exchange System (VIES) for the validation of VAT numbers.
We checked VAT numbers during a private data analysis exercise. In practice, it appears that 5 to 25 percent of the existing VAT numbers in the customers and/or vendor master data are incorrect or invalid.
From a VAT perspective, this is a material tax risk area as the 0% VAT rate might have incorrectly been applied and the risk amount involved would most likely exceed the company's risk appetite. This especially applies when cross-border transactions are part of normal course of business. It will therefore be an area of investigation during a tax audit.
An important control measure in terms of material indirect tax risks is checking whether the 0% rate is correctly being applied. A prerequisite for the application of the 0% rate for cross-border transactions within the European Union is a valid VAT number of the client. The valid VAT number must also be mentioned on the invoice. Adequate monitoring of this is crucial to eliminating risks as much as possible.
The number of erroneous VAT numbers is close to 25%. From a VAT perspective this implies material risks that exceed every risk tolerance (0 percent, client acceptance with regard to preventing VAT fraud).
If not correct, the tax authorities might seek to recover tax due from this supplier via a levy of a tax assessment. If the applicable VAT rate is 25%, the tax assessment will be 25/125 of the consideration charged. This assessment will be increased with interest and penalties to determine the total tax burden. The outcome could be used as supportive arguments for writing a problem statement and business case.
Click to enlarge
VAT numbers can expire or change due to changes in the legal structure of customers. It is therefore, again, important to periodically check the validity of the VAT numbers.
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.