VAT Determination for MNCs: Mapping the Biggest Challenges

As globalization transforms business and trade models, value added tax (VAT) management is becoming more complex and demanding.

For every transaction, companies face a list of challenging questions: Does VAT apply? If so, when and where does it need to be reported? What data is needed to support compliance?

A new Vertex e-book maps out the most burdensome areas of VAT lifecycle management, from data management and analytics, to calculation, to compliance and audit: VAT Determination: The Biggest VAT Challenges for Multinationals.

Here are two of the most difficult issues:

Issue 1: VAT determination is more than a yes/no answer.

A single customer order may result in “a series of complex, interdependent calculations fueled by a large dataset,” the e-book points out. The complexities include:

• Transport of goods in chain transactions. In sales among multiple entities, it’s important to consider the relationship under which transportation takes place; it can affect the tax treatment.
• Determining the right VAT registrations for each transaction. Companies operating in multiple countries will have multiple registration numbers, and their customers may also be registered in different countries. The VAT registrations must be correctly determined for each transaction.
• Simplified triangulation. Despite the name, this determination principle may involve some serious complexity. Simplified triangulation may apply, for example, when a company in one EU member state sells goods to a company in another member state, and then drop-ships the goods to an entity in a third EU member state. Understanding the transport of goods is crucial for determining simplified triangulation, but the data may be hard to obtain.
• Supply of services. Different rules apply, depending on whether a company is supplying services to businesses or to consumers, and whether the transaction is cross-border or domestic.

Issue 2: When it comes to VAT requirements, no two are the same.

Different tax authorities impose vastly different requirements. For example, the cash accounting scheme is mandatory in some countries, optional in others, and non-existent in others.

The e-book describes three more pain points in the VAT management cycle; I’ll pick those up in my next post.