Why Are Companies Still Leaving Millions in Foreign VAT Recovery?

  August 30, 2017

Value Added Tax (VAT), is a type of sales tax levied on goods and services, in a number of countries all over the world. This tax is meant to be paid by the residents of the country in which such tax is levied, but does not extend to those visiting the country for business.  Keeping this in mind, the administration of countries that levy VAT have provisions for foreign companies who spend on business travel and other expenses, to reclaim this amount.

Unfortunately, however, it has been observed that billions of Euros lay unclaimed on the table every year. In fact, Delphine Callens in an article on International Business, claims that €20,000,000,000(twenty billion Euros) is left on the table in the form of unclaimed VAT each year.

Although a large part of the unclaimed VAT amount is due to companies not claiming any recovery, the Organization of Economic Cooperation and Development estimates that 50% of companies recover only 50% or less of the VAT actually recoverable by them.

So why do companies leave such large amounts of money spent on their business travel and expenses, unclaimed? Wouldn’t this unclaimed amount add to the bottom line of a company’s profitability? The answer is it definitely would!

There are many reasons why companies may be leaving VAT unclaimed. Let’s look at some of the reasons these reasons.

Lack of Awareness

One of the principal reasons for foreign VAT lying unclaimed is the lack of awareness that a VAT refund can be claimed. Smaller companies are blissfully unaware that they can recover VAT paid on spends for their business travel and expenses. On the other hand, larger companies, lack knowledge about all the heads under which they can claim refund thus end up claiming refunds on only part of the expenses eligible.

There are 3 basic areas in which lack of awareness can lead to loss of VAT refunds.

a. Expenses on which VAT refund can be claimed:
Although the list of expenses varies a bit from country to country, some of the common expenses on which VAT can be reclaimed while traveling on business in Europe are:

  • Business Travel
  • Seminars, Professional Training
  • Conventions and Events
  • Exports
  • Additional Business Expenses
  • Aviation
  • Supplier Invoices

b. Countries and the rate of VAT charged: 
Even though most of the countries in the European Union offer refund of VAT to those travelling to their countries for business, the amount of VAT differs from country to country and even product to product. For example – in Britain, the VAT charged on a hot sandwich differs from the VAT charged on a hot sandwich.

Each country has their own list of products and services and the rate of refund applicable for each of them. It is often a lack of information/knowledge about this that results in claims for refund not being made or alternatively, being only partly made.

c. VAT Eligibility Requirements:
Besides ignorance of the expenses against which VAT can be reclaimed, lack of VAT eligibility requirements too results in VAT lying unclaimed. To make a valid claim for refund, it is important that:

  • The business being charged is not VAT-registered in that country
  • You do not have a residence or a place of business in that country
  • You do not manufacture any supplies in that country (with some exceptions)
  • You’ve paid €400 in VAT over 3 – 12 months, for business travel expenses (this is a general amount. The minimum amount that can be reclaimed varies from country to country)

The Process is Intricate and Complicated

Another major reason is that the entire VAT recovery process is quite complex and confusing. Vast knowledge and deep understanding of technical taxation and accounting terms is required to be able to successfully submit a claim.

Besides the process being multi-faceted, it often requires a lot of back and forth with the administration as well as a number of VAT related queries.  Even if the forms are all correctly filled in and the relevant documents attached, it still takes a few months for the process to be completed.  

Additionally, you need to have good relations with the tax authorities as well as keeping yourself updated on the local tax laws, rules and regulations and processes, as these keep changing constantly.

The good news is that since January 2010, most of the countries in the European Union have started processing claim refunds electronically1.  This has simplified the process considerably, besides hastening the recovery process timeline.

Varied and Complicated Rules

Each country has its own complex procedures and processes. It is imperative that you deal with each country’s VAT authority separately. Many a company has erred by using the processes they used in one country as a yardstick to apply for refund in another country. Another hindrance if that communication should ideally be in that country’s native language.

For example, if a businessman has travelled to France and Germany for business, he has to apply for VAT refund separately in France and separately in Germany. The procedure and processes too would differ in both the countries. Additionally, he will be required to communicate in French in France and in German in Germany. To add to his woes, he will be required to have all the documents being furnished to substantiate his claim, translated to French for France and German for Germany. Often, this results in the companies just forgoing the refund!

Invoices Presented – Not VAT Compliant

It has been observed that nearly 40% of invoices given by travel and entertainment vendors, is rejected due to non-compliance of VAT rules2. This often leads to the claim being rejected.

Although, the picture painted above leads one to think that the better option would just be to forgo the refund of VAT, this is not the case.  The amount of refund your company can get could be a sizeable amount and worth the effort put into claiming for it.

What should I do to ensure that my VAT refund claim is not rejected?

As a company, follow these four simple guidelines and be one of those who walks their way happily to the bank with their entire claimed VAT amount.