U.S. companies may claim a VAT refund on most of their business transactions in Europe, the U.K., and many other countries. However, few understand the VAT refund process or “reclaim” these taxes. And, once the reclaim deadline is missed, the refund is lost forever.
What is VAT?
The United States has a sales tax system, but many other countries have a VAT system. Value Added Tax (VAT) is a consumption tax that is levied on both goods and all services in many countries. VAT taxes can be up to 25% of the invoice amount — a significant business cost.
The national tax systems of Europe, UK, Canada, Japan, South Korea and Australia allow for a refund of VAT (tax) to most non-resident businesses worldwide. Thus, U.S. companies are often eligible for a VAT refund on business done internationally. Industry estimates suggest that $20 billion in VAT is left unclaimed annually. *
How far back can the client receive a VAT refund?
VAT refunds apply in most cases for up to 18 months back, in some cases as much as five years.
Is there a deadline?
- U.S. companies reclaiming VAT from the United Kingdom have a deadline to submit VAT invoices by December 2017 for the period for VAT incurred between July 1, 2016, and June 30, 2017.
- U.S. companies reclaiming VAT within EU countries have a deadline to submit VAT invoices by June 2018 for the period for VAT incurred between Jan. 1, 2017 and Dec. 31, 2017.
What is the VAT refund process?
- The U.S. company must prepare the various VAT refund forms required. In no way are these forms connected to your company’s regular taxes. They are simply VAT refund registration forms.
- The U.S. company must extract and sort through all expenses from their expense management system, calculating VAT rates per expense type and country.
- VAT refund forms are required to be completed in foreign languages and submitted to relevant tax offices.
- VAT registration in the foreign country is sometimes required depending on the business structure.
- The U.S. company must communicate with the various international tax offices, should they have queries for the claim.
Why aren’t U.S. companies reclaiming their VAT?
The VAT refund process is complex and requires a detailed understanding of the regulations and requirements in each country. Each country also requires their documents to be completed in their local language (German, Dutch, etc.) The VAT rules and rates also vary from country to country and expense type. According to the Organization for Economic Co-Operation and Development, 72 percent of the businesses surveyed found reclaim procedures difficult to navigate, and 20 percent were unable to recover any VAT expenses at all. * Another challenge is that in many cases, U.S. companies don’t keep their original invoices.
What to do next?
Because the VAT reclaim process can be complex and time-consuming, we recommend engaging a company that specializes in VAT reclaim. There are many that work nationwide, and can be found via a simple web search. Typically, these firms do not charge any upfront fees, but rather take a percentage of the VAT that they reclaim on your behalf.
A good pdf reference on European VAT refunds is published the European Commission.