What About VAT? Reclaiming Value-Added Tax Boosts Corporate Coffers
October, 04th 2008
As government reliance on value-added taxes has grown to now make up 25 percent of global tax revenues, according to Meridian, corporations with globally managed travel programs are discovering ways to recoup at least some of the VAT paid on international business travel. Yet, thousands of other companies have yet to venture into the complex world of VAT reclaim as original receipts remain firmly locked in file cabinets.
According to the Economics Dictionary, VAT is a "tax on the value added to a product at each stage of its production, from raw materials to finished product. Widely employed in Europe, value-added taxes have the advantage (for governments) of raising revenue 'invisibly,' that is, without appearing as taxes on the bill paid by the consumer."
But VAT isn't just in Europe anymore. According to Meridian VAT Reclaim's international VAT director Mike Molony, VAT systems have "grown to be a preferred basis of indirect taxation in more than 140 countries." VAT was recently approved in Antigua, St. Vincent and the Grenadines, and Laos. India is to debut its nationwide VAT system by 2010. However, Meridian currently recovers VAT in only 35 countries, primarily across Europe.
Some of the most commonly recovered travel expenses include those for hotel charges, meals, car rentals, fuel and parking, transportation/taxi, telecommunications, entertainment, marketing/advertising, professional fees and conferences and trade shows.
U.K.-based BR VAT Reclaim Ltd. noted that "recovery can potentially run into thousands of pounds for many companies. Unfortunately, VAT often is left unclaimed, as many companies write VAT expenses off as costs, leaving you unaware of your real VAT reclaim potential. Each member state within the European Union, and some outside, has passed its own tax law relating to VAT reclaim. These vary depending on the country and can be confusing, especially with different languages and complex legal interpretations to consider."
In countries where VAT is applied, foreign travelers can typically reclaim all or part of the tax from the governing body within one year. However, this process can be complicated and usually requires submission of original receipts and the completion of forms issued by the taxing body in its official language. To be eligible for VAT reclaim, some countries require travelers to stop by an airport kiosk to have all receipts stamped before they can be later submitted for a refund.
"Travelers are too pressed for time to fill out the paperwork," said Tom Wilkinson, president of TRW Travel Consulting. "It is very complicated and time-consuming, and it is not something that most companies are advised to do themselves."
There are other complications. For example, itemized electronic hotel folios that include room rates, taxes and all other ancillary costs cannot be submitted to VAT reclaim offices. Those offices only accept the original paper receipts as proof that the VAT was paid in full. Also, printing the e-receipts--if the traveler did not submit paper receipts--is not accepted.
Due to its complexity, some corporations outsource the reclaim process. Third-party firms often are hired to sort out original receipts and conduct audits to find and reclaim the VAT. "It's definitely something you should outsource," said Dominion Resources director of travel and corporate services Donna Kelliher. "It's significant dollars."
"There are so many idiosyncrasies that are involved in VAT reclaim," said Carol Ann Salcito, president of Management Alternatives. "An expert can get it done in one-eighth of the time it would take an individual to do it, so what do you have to lose?"
Since 1992, U.K.-based Meridian claims to have refunded more than $1 billion in VAT to customers, including Honeywell International, Pfizer Inc. and 12,000 others. The company processes more than 3 million invoices a year, according to Meridian North America president Les Baer.
Once hired, Meridian's team delves into a customer's accounts payable department, obtains original receipts on which VAT can be reclaimed, processes the paperwork and sends it to the proper authorities. Each country's VAT reclaim office then deposits the money into an account managed by Meridian, which issues a check to the corporation for the total VAT reclaim amount--minus a negotiated percentage Meridian retains as payment for services.
Baer said about $5 billion in VAT goes unclaimed each year, and about 86 percent of businesses experience difficulty during the process. For example, a majority of the forms that are sent to VAT reclaim offices are returned due to inaccuracies or lack of information. Baer suggested that a third party can help companies recover 20 percent to 30 percent more of the VAT refunds to which they are entitled.
"There are a lot of corporations," Baer said, "that still don't know you can get the VAT back from the United Kingdom and other countries in Europe."