05/02/2010 - Many businesses incur VAT on costs in countries where they are not carrying out any taxable activity or are not established. Many countries will refund this VAT through specific reclaim procedures and some allow recovery through direct VAT registration or zero-rating of supplies to foreign business.
The lack, or complexity, of these relief procedures means businesses cannot always recover the VAT on these costs. In 2006 the Committee on Fiscal Affairs (CFA) adopted the principle that “the burden of value added taxes themselves should not lie on taxable businesses except where explicitly provided for in legislation”. As a result, the CFA’s Working Party on Consumption Taxes undertook surveys of both governments and businesses to estimate the extent to which this principle was applied to VAT incurred abroad.
This report shows that, although most OECD countries have implemented VAT relief procedures, these are frequently complex. 72% of the businesses surveyed said that they found these procedures “difficult” and that more than 20% are unable to recover any foreign VAT. Many businesses said that they recover less than 25% of the VAT incurred in foreign countries and a third said that these difficulties influence decisions on investment.
This clearly shows the importance of the issue. The replies indicate that businesses would like to see improved communication with tax administrations. Greater harmonisation and standardisation of the procedures would speed up and improve these repayment systems. The CFA will continue to work on these issues with a view to helping countries improve their VAT relief procedures whilst at the same time providing safeguards against fraud.