Tax advisers trying to help clients maximize cash reserves amid the pandemic are struggling with a new problem—value-added tax relief rules that vary widely by country.
Companies are seeing declines in sales revenues as lockdowns meant to contain the spread of the virus force businesses to close and halt foot traffic. That means companies will need all their cash on hand to pay unavoidable business costs like rent or salaries during the coronavirus outbreak.
So far more than 65 countries, including Chile, the U.K., and Israel, have announced VAT filing or payment delays to help companies weather the economic downturn, according to data compiled by Bloomberg Tax.
But differences in their VAT relief requirements, such as who is eligible and how long taxpayers can defer payments, are making it harder for companies to quickly plan what to do. It could be too late to apply for VAT extensions that have tight turnarounds or companies may not have enough time to rebound during the pandemic with no clear end.
“Companies often need to act quickly and on a global scale during this crisis, and adding complexity will mean that they run into issues because the response is different everywhere,” said Jurgen Scholz, managing partner and global head of indirect tax at WTS Global in Germany.
The differences “mean you have to get into the nitty-gritty before you can arrive at a good answer for companies applying for deferrals,” Scholz said. He added that companies restructuring their supply chains because of the coronavirus should consider redirecting shipments to get the VAT delays they need.
VAT is a tax on consumption designed to be paid by the end consumer. It is paid at every stage of the supply chain but can be recouped by a business after a sale is made. The recouped tax is known as input VAT.
Singapore and Italy are examples of countries that have targeted some of their value-added tax relief efforts at the sectors most affected by the coronavirus, like tourism and leisure, regardless of revenue and size.
Only companies with less than 350,000 Chilean unit of account ($11.68 million) in revenue can apply for deferred payments, with no limit on the amount they can defer. In Spain, businesses with less than 6 million euros ($6.5 million) in turnover are eligible for deferred VAT, but importers can only defer amounts between 100 and 30,000 euros.
This process can be confusing for multinationals who have subsidiaries that can apply for the deferral, and it can seem arbitrary for companies that are only just over the threshold, said Sebastián Ferrer Del Valle, counsel with law firm Garrigues in Chile.
The proof to show hardship can vary: the U.K. wants businesses to show the VAT payment itself will cause them economic damage, while the Netherlands will accept an inability to pay utility bills as evidence.
“The variation in procedures is very confusing to multinationals,” said Richard Asquith, vice president of global indirect tax at tax software firm Avalara Inc.These differences carry their own incentives and can have an effect on where and when a company wishes to makes a major purchase, he said.
Delays for Importers
Countries are also divided in the kinds of VAT eligible for deferral.
The U.K., for example, requests proof of hardship for import VAT—a type of VAT on imported products paid immediately when the item enters the country. But companies owing VAT on domestic sales between March and April automatically get their payments deferred by one year.
Businesses relying on imported products are then at a competitive disadvantage, said Alan Pearce, a VAT partner at Blick Rothenberg in London.
Pearce said he has a client who will be forced to pay 1 million pounds ($1.2 million) in import VAT without evidence that the payment will cause immediate hardship, despite facing possible cash flow issues in the coming months.
The differences can be especially harsh as importers often take out bank loans to pay the import VAT for goods arriving into the country and can only recoup the VAT after the goods are sold. Businesses that don’t deal with import VAT typically make payments quarterly or monthly and can recoup their input VAT in the next return.
Most countries, like Italy, Ireland, and Colombia, are focusing VAT relief on imported medical equipment used to fend off the virus, but companies need to import other kinds of goods to run their businesses.
The European Union has also coordinated VAT and customs treatment of medical equipment to ensure goods can move easily to where they need to.
Length of Relief
Businesses are also struggling with how long they can postpone their VAT payments.
Most countries, like Belgium, Chile, and Italy, have opted to give companies between one and three months to defer their payments. The U.K. postponed payments for a whole year for those that are eligible, while some, like Germany, have no limit on how long a business can delay their VAT. The repayment is instead linked to the application process, which determines a company’s level of hardship, Asquith said.
In Israel, the Institute of Certified Public Accountants took the government to court, arguing that its tight VAT delay put undue pressure on businesses. Monthly VAT returns and payments were pushed by ten days, while bi-monthly VAT filings and payments due from January through February are postponed to April 27.
The government on April 23 granted a further delay until May 18 for VAT payments.
“Business has suffered significant damage, and some are on the verge of collapse,” said Henriette Fuchs, a senior partner at Pearl Cohen in Tel Aviv.
“The deferral of the VAT payments by another two to three weeks will not solve the economic pressure on mid and small businesses, and the tax authorities, the implementing arm of the government, will be requested to consider further delays and postponements to help avoid the collapse of businesses,” she said.