Your Taxes: Increase profits by reclaiming foreign VAT

Every Israeli business should check its records for any VAT suffered in any foreign country where the business is not itself registered for VAT.

taxes good 88 (photo credit: )
taxes good 88
(photo credit: )
One tax often overlooked is Value Added Tax (VAT). Many countries, especially in the European Community (EC), have VAT similar to the Israeli system. The standard rate of VAT in the EC varies from 15 percent to 25% in the different EC countries, compared with 15.5% in Israel. If a non-EC business does not recover the VAT on its foreign expenses, this VAT becomes part of the business's costs, reducing profits (or increasing losses). In the current economic climate, few businesses can afford to ignore VAT costs of up to 25%. The EC is a customs and VAT union that operates in parallel to the political union known as the European Union (EU). EU countries are also members of the EC with minor exceptions (e.g. Gibraltar, Isle of Man, the Channel Islands, Campione d'Italia). EC exports are usually zero-rated for EC VAT purposes, but not always. On some expenses, an Israeli company must pay the EC VAT and recover it later. We discuss below the situation for Israeli companies that do not establish a branch presence in any other country and register for VAT purposes there. Most of our remarks will be largely relevant to other non-EC companies; for example, US firms. Foreign VAT as a cost While foreign VAT cannot be reclaimed on an Israeli "home" VAT return, mechanisms do exist for businesses to recover the foreign VAT charged on many foreign expenses. Some "advisors" will give the opinion that there is no VAT on international business-to-business (B2B) purchases. There are even some accountants who might tell you to charge VAT on sales "if in doubt." Neither position is legally accurate. We will not go into all the technical details. But consider for a moment the following expenses, on which EC VAT law requires VAT to be charged in an EC country regardless of the circumstances: • Accommodation in EC hotels, etc. • EC trade shows, conferences, training events, exhibitions, entertainment (including sporting, artistic and cultural events), including services to organize/support these. • Supplies connected with EC real estate (e.g. construction, architects, even representative office expenses). • Handling goods in the EC, including storage, loading, valuations and repairs. • Intermediary or agent's fees, when facilitating supplies made within the EC. • Meals in EC restaurants, etc. • Administrative services performed in the EC, such as bookkeeping. • Services deemed by the local EC country to be used and enjoyed within their territory, including goods on hire (e.g. cars, exhibition equipment, computers, telephones, tools, etc.). This VAT can add up to a significant sum over the course of a year and is often worth tracking with a view to recovering it from the foreign VAT authority. EC countries aren't the only ones to charge VAT that can be recovered via local mechanisms; Japan, Canada and even Switzerland will refund VAT to businesses in "reciprocating" countries. A likely example Consider an Israeli information technology (IT) company that has been advising local clients over the past 10 years, but which now has clients in Europe. Its market is competitive and its profit margins are relatively small. Perhaps many of its clients now prefer not to use an IT company's services as part of a cost-cutting exercise; perhaps some clients have negotiated even smaller fees. Now it is time for a quarterly computer-programming fair in London. Per person: £800 fair £125 hotel £75 restaurant ---- £1,000 total The UK VAT on this £1,000 could be 17.5%, or £175 per person. A team of five, all attending similar fairs every quarter, loses £3,500 of UK VAT each year. This example could also apply to other international professionals - or to any marketing department - with flights all over the world to meet and promote to clients face-to-face, or engineers traveling abroad to advise on foreign sites, and so on. How to eliminate such costs? What can the Israeli company do? The answer is to write to the foreign VAT authority and request repayment of the VAT incurred. While that is easy enough to say, it turns out to be a very delicate process that is prone to rejection. Once a rejection is received, the application is usually out of time and there is no way to recover the VAT. Worse still, the Israel Tax Authority generally does not refund Israeli VAT to companies in a foreign country, so some foreign country's VAT authorities might refuse to refund foreign VAT to Israeli companies on certain purchases. However, even if a foreign VAT authority does refuse to refund the VAT on purchases, there are other approaches to consider. Since many EC suppliers charge VAT "when in doubt," many such suppliers charge VAT incorrectly on services enjoyed by customers in Israel or elsewhere outside the EC; for example, the United States. Typical examples in our experience include: transfers and assignments of copyrights, patents and trade marks; advertising services; the services of consultants, engineers, lawyers and accountants. A copy of the relevant VAT legislation will often persuade a supplier to reissue their incorrect invoice without VAT and refund the difference. If the supplier remains unconvinced, a letter from the local VAT authority (stating that the VAT was charged incorrectly) typically gets results. Fortunately, there are experienced VAT professionals in this field who can review documentation and act as a guide. These specialists often charge a percentage of the VAT recovered. To sum up Every Israeli business should check its records for any VAT suffered in any foreign country where the business is not itself registered for VAT, whether it be Japan, the EC, Switzerland or elsewhere. This should be done every few months as there are deadlines for recovering the VAT. For example, if an Israeli company wishes to recover UK VAT on UK expenses incurred during the 12 months up to June 30, the claim must be received by the UK VAT authorities within six months of the period end. So for the year up to June 30, 2008, you only have until December 31, 2008. As always, consult experienced legal, tax and financial advisers in each country at an early stage in specific cases. Kevin Hall is a VAT technical manager at Intrust and the Benedict Partnership in London. Leon Harris is an international tax specialist in Israel.