For those involved with the financial and taxation processes within organizations, it’s safe to say their plates are pretty full at the moment. Sweeping, digitized changes towards a real-time future have permeated Europe from Latin America, with even tighter controls starting to emerge from Asia and the Middle East in countries such as India, Singapore and Saudi Arabia.
It’s clear to those working within the field that the rate of change is also accelerating; probably more has been seen in the last five years than the previous fifteen.
The focus of this digital change has been mainly based on the invoice function of business. This makes sense, as the vast majority of expenditure takes place through invoices; it does mean however that the wider expense side of taxation is often an afterthought when it comes to discussions on developments. And, in particular, for multinational companies and those people that travel on their behalf, there is a huge fiscal need to understand the shifting sands of regulation.
Reporting—the Shifting Time Frames
To understand this from a wider perspective, it makes sense to look at where we were in the U.K. 10 years ago, when it came to value-added tax (VAT) reclamation on both expenses and invoice expenditure. For companies, the process was entirely paper-based, involving a trip into archive facilities for expense reports that may or may not have line items that were eligible for VAT reclamation. In essence, those in charge of the process didn’t know what they were looking for and, even after the process was complete, were unsure of whether their claim was successful, partially or otherwise.
Traditionally, the adoption of technology for financial institutions like tax authorities can be relatively slow in comparison to other sectors: it was only in 2013 that digital invoices were accepted in the U.K.
Fast-forward to the present day and the process may have been made more transparent and digital, but in some ways can actually place more strain on a company’s infrastructure when it is looking to reclaim VAT.
Innovation has been continuous, and the overall shift by tax authorities to real-time, or as close to real-time as possible, reporting has resulted in a huge strain being placed on the financial infrastructure of companies that need to comply with this. Italy has introduced controls on invoicing, Spain has Immediate Supply of Information (SII) with a three-day window for reporting, and other similar schemes have been implemented across Poland and Hungary.
The Scale of Reclamation
With these fundamental changes from time-period-based reporting through to much more dynamic reporting on any expenditure, it makes sense that reclamation has tended to take a back seat in comparison to the more fundamental blocks of the financial process. But a review of the statistics on this area shows that companies would do well to pay it more attention, as the figures involved are sizeable.
The global market potential for VAT reclamation comes in at 61 billion pounds ($74.9 billion), with only a fraction of that amount being recovered. A major factor in this is that almost half this figure is lost instantly by companies that don’t have a VAT recovery system in place.
This amount of recoverable VAT is whittled down even further throughout the process by those actively reclaiming. The claims need to be watertight; the correct information being present, the dates and amounts must be 100% accurate and all additional paperwork also presented. By the time this has been submitted and reviewed by the likes of HM Revenue & Customs, the average compliance rate for claims to continue successfully is around 30–40%: two-thirds is being lost instantly. Research from SAP Concur & Vanson Bourne also backs up these figures, showing that on average U.K. businesses only claim back around 47% of eligible VAT and 37% is improperly calculated for reclaim.
Variety of VAT Structures
It may seem self-explanatory at this stage that an automated approach would make life far easier for companies working and looking to reclaim VAT, but digitized reporting and the precise nature of claims are just two pieces of the puzzle; that does not even touch on the varying VAT landscape across the globe or the issue of cross-border reclamation.
Globally, only around 120 countries have a functioning VAT mechanism, and even more importantly, only a third of these have reclaim enabled for cross-border reclamation. This group includes countries within the EU, Switzerland, Canada, Japan, Australia, South Korea and some countries in the Middle East such as Dubai, but is only a third of the overall number of those with a VAT system, with major economies such as China, India and the vast majority of Latin American countries not allowing reclamation from foreign parties.
Again, this is an area in flux. Take Germany as an example: if your country does not have a VAT mechanism, then you can recover VAT from a trip to Germany. But if you do have a VAT mechanism which doesn’t allow cross-border reclamation by those visiting from Germany, then you are cut off. As more countries introduce and adapt their VAT tax regimes, this can mean that the rules for visiting are altered in a short space of time.
Down the Regulatory Rabbit Hole
Another important issue that leaves businesses in a state of constant puzzlement—especially those sending travelers abroad to work—is the multitude of different rules and regulations that are in place country to country.
In the U.K., businesses can of course claim VAT back on hotel stays, meals, car hire, taxis—the list continues. But it cannot be taken for granted that the same rules apply even in close European countries. As just a singular example, take hotel stays in France; you can’t recover VAT on employee stays, but pay for a business guest and the reclamation can take place. Conversely, the U.K. upholds a rare tax arrangement when client entertainment is non-deductible with some exceptions around business meals, whereas many other foreign authorities allow deduction on all client entertainment expenses.
Tackling Reclamation Head On
With the move to real-time and digital reporting in to tax authorities, the differing VAT structures across the globe, and the specific regulations when it comes to businesses doing transactions abroad, coupled with the sheer scale of the amount of money left on the table by businesses, it is clear that the problem needs to be tackled head on.
The first step is knowledge; it’s not surprising that 75% of financial leaders wished they had more knowledge on VAT and tax reclaim when surveyed recently. But this can be viewed in two different ways, much like satellite navigation. You can spend hours a week memorizing maps and recent updates to roadways, or you can gain outside help through technology and expert specialists. There are businesses which shoulder the burden of keeping up with the regulatory change and minutiae of global tax, ensuring that reclaims fit within the rules of varying countries and submitting these on the behalf of businesses.
Technology also plays a major role in order to access the untapped money being left behind by companies too busy or unsure to tackle reclaims, both domestically and cross-border. It’s imperative that anyone engaged with this is putting sufficient effort into the solution from a digital perspective. Look for those focusing on artificial intelligence and optical character recognition in order to adhere to the shortening windows for VAT reporting and reclamation—especially if this can start automatically assessing expense reports for taxation information. This will help both to accelerate the process and minimize the amount of incorrectly completed reclamation requests.
Finally, and most fundamentally, there needs to be a mapping of companies’ tax structures in order to be as successful as possible in making sure money is not being left behind. For the 80 or so VAT-enabled countries that don’t allow cross-border reclamation, much of the tax to claim back can be done under domestic policy. It isn’t unusual or frowned upon for companies to have international VAT registrations in all of the eligible countries where they have a presence, and send overseas employees to. This needs an openness from businesses to share transactional data with the experts, but by doing so, the tax specialists can ensure that the huge amount of money usually blocked by a lack of cross-border reclamation can flow back into those business accounts.
At its most fundamental, VAT is a consumption tax and a massive revenue generator for the roughly 120 economies that use it. Therefore, the controls by tax authorities to ensure they are minimizing their VAT gaps and receiving what they are owed are only going to become more digital, more real-time and even tighter in their assessing of companies. The utopia for many regulators when it comes to expenditure (such as expense reports) will be direct reporting from the enterprise resource planning (ERP) systems of businesses through to the tax authority in real time.
Businesses need to be prepared for this—ensuring that they have the knowledge, expert help and technology in order to keep up with regulatory change, both domestically and abroad. However, for many businesses, this isn’t extended to the reclaim that they are in line to receive. And so, a slick reclamation function should be built into any advances in working with tax authorities—because it’s billions of the businesses’ own money that is being left on the table.
Joe Healy is Director of Strategic Partnerships, Taxback International and Martin Leonard is Director of Business Development, FSI, EMEA, SAP Concur.
The authors may be contacted at: firstname.lastname@example.org; email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.