What is the Difference Between VAT Compliance and VAT Reporting?

Value-Added Tax Solutions

When it comes to doing business across international borders, one of the major challenges that companies face is managing tax compliance. The complexity of tax regulations and reporting requirements can often become overwhelming, particularly when it comes to value-added tax (VAT).   

Many businesses confuse the end-to-end VAT compliance process with the last-mile VAT reporting obligation, which can often lead to costly mistakes and some potential legal issues. In this blog post, we will explore the differences between VAT compliance and VAT reporting and provide tips to help you stay on top of your global VAT compliance obligations.  

Understanding VAT compliance  

VAT compliance refers to the process of ensuring that your business processes are meeting obligations under VAT regulations. This encapsulates VAT registration, correct VAT charging on sales, supplier VAT verification, transaction detail collation and precise VAT return submission in the format stipulated by respective tax authorities. In today's digital age, e-invoicing compliance is also becoming an increasingly important aspect of tax compliance. This involves ensuring that your invoices are issued and received in a compliant electronic format that meets the requirements specified by an increasing number of tax authorities.  

Compliance is a business-wide activity that stays in process continually. Continuous compliance is important because failure to comply with any aspect of end-to-end process can result in costly penalties, interest charges and even criminal sanctions in some countries. Therefore, it's essential to ensure that your business is fully compliant with local VAT regulations in every country where you operate and hold a valid VAT registration. This can be challenging, given the variations in rules and regulations across different jurisdictions; hence the requirement for global VAT compliance if the business is conducting international cross-border transactions.  

Understanding VAT reporting  

VAT reporting, on the other hand, is the process of preparing and submitting the required VAT reports to the relevant tax authorities. The VAT reports typically contain information on the amount of VAT charged on sales, the amount of VAT paid on purchases and the resulting VAT liability or refund.  

While VAT reporting is an essential aspect of VAT compliance, it's important to remember that it's just one part of the compliance process – the tip of the iceberg, so to speak. Focusing solely on VAT reporting aspects can lead to overlooking other compliance obligations that are required to be embedded much deeper within business transactions and processes. An example would be the deep involvement needed from tax teams along with IT and finance teams for embracing the upcoming e-invoicing compliance requirements that are being rolled out in an increasing number of countries globally.   

How to Differentiate VAT Compliance from VAT Reporting  

While VAT compliance and VAT reporting may seem similar, there are distinct differences between the two. Both are important to understand and form core responsibilities of the tax team. The key differences are:  

  • The entire rolling video of a journey: VAT compliance involves more than just reporting. It includes all aspects of ensuring that your business is meeting its VAT obligations, such as a tax-sensitised process for all transactions inclusive of e-invoicing compliance, local tax registrations and readiness for any tax filing-related audits.  
  • A snapshot from the end of the journey: VAT reporting is necessary and often the most visible and frequently measurable part of the overarching tax compliance process. Focusing solely on VAT reporting can lead to overlooking other compliance obligations, which can result in VAT non-compliance issues.  

To avoid confusion between the two, it's important to have a clear understanding of your global VAT compliance obligations, including e-invoicing compliance and frequently changing local tax requirements. This can be done by using tax technology solutions that help automate the entire compliance process by supporting every transaction’s lifecycle.  

Conclusion: VAT Compliance and VAT reporting   

Understanding the difference between VAT compliance and VAT reporting is critical for businesses. Although they may seem similar, each has its unique set of requirements and obligations. Failure to comply can result in costly penalties and legal issues, both locally and internationally.  

Ensuring that your business is fully compliant with local VAT regulations across all jurisdictions can be complex and time-consuming. However, by taking a proactive approach to global VAT compliance, businesses can avoid costly mistakes and maintain a competitive edge in the global marketplace. Using tax automation solutions can help streamline the compliance process, making it easier and more efficient for businesses to stay on top of their tax obligations.

Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position or opinion of Vertex Inc.

Blog Author

Gunjan Tripathi Headshot

Gunjan Tripathi

EMEA Director, Product Marketing

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Gunjan Tripathi is a Director of Solutions Marketing for Vertex. In her role, she helps shape the strategic messaging and course for Vertex's Indirect Tax offerings. She is an experienced Chartered Tax Advisor, specialising in European VAT. Her tax career experiences comprise of consulting with EY, leading compliance at European Shared Service Centre for SC Johnson, Global VAT manager for Endeavor and VAT proposition lead at Thomson Reuters. She holds a Bachelor of Honours in Economics from the University of Delhi, India and a Master of Science in Development Studies from School of Oriental & African Studies from the University of London. She is an Executive MBA scholar at the Warwick Business School and member of the Chartered Institute of Taxation.

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