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Invented by the French, value added tax, or VAT, has been harmonized within the European Union, and is now among the most complex tax disciplines in the world. Laxafoss, Morabito, and Smith attempt to unravel these complexities and discuss its effect on worldwide global workforce mobility.

VAT or “value added tax” is charged on goods and services purchased by relocation companies and their clients. Many believe that VAT is applicable only in Europe when in fact this tax is common throughout the world. Currently, approximately 145 countries in the world have implemented a VAT or GST system, and the OECD has been known to say that “the spread of Value Added Tax has been the most important development in taxation over the last half-century” (OECD—International VAT/GST Guidelines. Centre for tax policy and administration—February 2006). Because VAT may have a significant financial impact on your business, regardless of its location or whether you are the client or service provider, it is important that managers in the relocation industry have a good un­der­standing of what VAT is in order to avoid any unnecessary costs. As a result, Worldwide ERC® has included a first ever session on VAT at its Glob­al Workforce Symposium in Chicago.

It is, perhaps, no surprise that VAT was invented by the French in 1954. Today, VAT is the most important source of income in France, accounting for more than 52 percent of the country’s revenues. Over the years, VAT has been harmonized within the European Union (EU); however, there are 27 EU countries and each has added its own flavor and rules requiring individual country interpretation. Outside the EU, many other countries have been inspired by the EU VAT model and have adapted many of its principles. However, because VAT is not harmonized outside the EU, the risk of double taxation (and in some cases non-taxation) exists. VAT is a tax like any other, and not following the rules and not paying the VAT has its consequences, just as with any other tax.

The umbrella legislation mentioned above is contained in the EU Principal VAT Directive, which sets out the rules for VAT in the EU. It determines when, where, and how much VAT must be levied, who is liable for its payment, and the rules governing the right to a refund of the VAT incurred. EU VAT law is somewhat similar to the U.S. legal system, as the practical application of EU VAT law also is governed by case law. The European Court of Justice (ECJ) is the supreme court when it comes to settling disputes between VAT authorities and taxpayers, which is good as advisors who understand the core principles of EU VAT law can seek recourse with the ECJ to address any unjust decisions made by local tax authorities.

VAT is intended to be borne by the end consumer. The total tax levied at each stage is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by the business, rather than by the state. VAT basically was invented because high sales taxes and tariffs encouraged tax fraud. Contrary to sales tax, common in the United States, VAT is in theory neutral with respect to the number of passages that there are between the producer and the final consumer, where sales tax is levied on the total value at each stage.

Crash Course in VAT in the European Union

Before we start outlining some of the VAT issues that relocation companies and their clients face, it is essential to provide you with a basic understanding of VAT. According to the Directive, the fol­­lowing transactions are subject to VAT in the EU:

• the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
• the intra-community acquisition of goods for consideration within the territory of a Member State;
• the supply of services for consideration within the territory of a Mem­ber State by a taxable person acting as such; and
• the importation of goods.

In other words, whenever you are selling or buying goods or services, and you are according to a legally binding agreement making or receiving a payment, or consideration, for this supply, you most likely either charge or pay VAT.

For the sake of simplicity, consider  “taxable person” to mean “business,” but please note that anyone actually can become a “taxable person,” as the application of VAT is based on what you do, not who you are.

Taxable persons that carry out taxable activities in countries within the EU generally are obliged to register for VAT purposes and charge local VAT on its sales. Registration for VAT purposes is both an obligation and a right for businesses. The standard rate of VAT in the EU is set at a minimum of 15 percent, and a maximum of 25 percent. Any input VAT incurred may be recovered by those businesses liable to charge VAT. This is done by means of submitting periodical VAT returns, and by offsetting VAT payable to the authorities on sales against VAT due for repayment on purchases. Taxable persons that incur VAT in connection with their business activities in a EU country in which they do not have taxable activities are not liable or entitled to register for VAT purposes. However, they still can reclaim the VAT incurred, either via the 8th VAT Directive (applicable to a company established in the EU reclaiming VAT from another EU country) or the 13th VAT Directive (applicable to non-EU established company reclaiming VAT within the EU—subject to reciprocity restrictions).

We have just outlined that, as a general rule, the supplier is obliged to charge VAT on taxable goods and services, and the recipient of the goods or services subsequently is able to recover the input VAT incurred to the extent that the costs are for business purposes. However, the liability to account for the VAT due may be shifted to the recipient of the goods or services in some cases—this is commonly referred to as the “reverse charge mechanism.” Essentially, the recipient of a supply self-assesses the output VAT to himself, and at the same time deducts this as input VAT.

As you can see from the illustration below, VAT is charged at every stage of the production in the supply chain. The VAT due is a percentage of the sales price. A taxable person is entitled to deduct all the tax paid in the preceding stage, the input VAT, if the supply is used either directly or indirectly for business purposes. Double taxation is avoided and VAT is paid only on the value added at each stage of production and distribution, hence “value added tax.” As it is a consumption tax, the final consumer bears the tax burden and the final price of the product/service is equal to the sum of the values added at each preceding stage. If the input VAT exceeds the output VAT, the taxable person is entitled to a refund.

It is important to note that businesses are not entitled to deduct wrongfully charged VAT, i.e., be­cause of applying the wrong place of supply, and the actual invoice also needs to be formally correct in order to deduct the VAT. There are a number of restrictions applicable to the recovery of VAT. Generally, it only can be recovered by the legal recipient of a supply, and only if he or she is in possession of a valid original in­voice on which VAT has been correctly charged. Furthermore, a number of time restrictions apply to the recovery of VAT, specifically where taxpayers are using the eighth or 13th VAT Directive refund mechanisms.

Contrary to goods, services can have more complex rules attached to them that determine where the service is taxable—commonly referred to as “place of supply”—which are based on what type of service is being supplied. The general place where services are subject to VAT is where the supplier is established. However, in the case of services supplied across borders to other businesses, the recipient of the supply very often uses the reverse charge mechanism we mentioned earlier to account for the output VAT. This is a significant rule—and we will dem­on­strate why under the section dealing with the new VAT rules under “the VAT package.”

Following are some examples of typical services that relocation companies would supply to their clients:

• training services—place of supply where these services are carried out (where the services take place);
• services connected to immovable property—taxable where the immovable property is located;
• consultancy services—taxable where the recipient is established;
• work on movable tangible
• property—taxable where the work is carried out; and
• household goods transportation services—as a general rule, the place of supply is where the transport takes place (numerous exemptions apply).

With effect from 1 January, 2010, the place of supply rules in relation to services will significantly change with the introduction of the so-called  “VAT package.” In short, these changes will have an impact on the general rule for the place of supply of business-to-business (B2B) services. The new general rule will be that VAT is due where the customer has established its business where services are supplied in B2B transactions. Please note there are numerous exceptions that apply to this new general rule (e.g., services provided in relation to immovable property, use and enjoyment criterion, fixed establishment, and the like.).

Services that do not fall under the general rule will be treated differently for VAT purposes. For instance, if you are rendering services relating to immovable property, the place of supply will be where the property is located. If a relocation company renders these services, and the recipient of the service is not registered for VAT purposes in the respective EU country where the property is located, the supplier cannot apply the reverse charge mechanism, and thus must register and charge local VAT. The place where a certain transaction is subject to VAT does not normally change in the supply chain for services. In other words, whenever a relocation company supplies services, and the place of supply of those services is in the respective EU country, it remains so throughout the supply chain, even if the onward supply takes place outside the EU.

Last, it should be stressed that it is important to establish to what extent the actual costs are actually deduct­ible for the end-customers. As mentioned several times, VAT costs that are meant for business purposes are deductible, but what does that actually mean? Relocation companies should be able to deduct the VAT incurred in full as their costs are by nature used for taxable activity, i.e., supplying the relocation services.

In regard to the end customers, it is more complicated. Some EU countries may argue that some of the relocation services relate to the private sphere rather than business purposes, i.e., gardening services for a rented expatriate property and are, therefore, not deductible. As mentioned in the introduction, VAT is harmonized throughout the EU; however, there are 27 EU countries and what the practice is in each of those countries and how they interpret the rules may vary—what applies in one country is not necessarily the rule in another. For instance, the German VAT Act stated that relocation costs were not deductible until June 2007, which was deemed a violation of EU VAT law and the regulations had to be amended where costs were clearly linked to business activities.

Some Examples

Enough talk about the theory—it is time for some examples. Following is a description of a typical scenario of a relocation company providing services to a client. This scenario is not in any way meant to be exhaustive, and there may be numerous variations depending on the services in question, where they are rendered, and to whom and how they are rendered, but hopefully it will provide some guidance.

A local subcontractor in Denmark invoices a relocation company in the United Kingdom with Danish VAT for services that have place of supply in Denmark, i.e., services relating to immovable property.

The UK Ltd Relocation Company provides the same services, which are taxable in Denmark to its client, U.S. Inc. Relocation Company, which is not VAT registered nor established in Den­mark (if it was registered reverse charges may have applied). It should be noted that although UK Ltd Relo­cation Com­pany and U.S. Inc. Relo­ca­­tion Company are part of the same group of companies, they are still from a VAT perspective considered to be separate companies and, thus, any supplies be­tween them should be treated the same way as any other third-party supplies.

In order for UK Ltd Relocation Company to be able deduct the local Danish VAT incurred and provide these services onward, UK Ltd Relo­cation Company is liable to register for VAT in Denmark and charge local Danish VAT to U.S. Inc. Reloca­tion Company, as the services provided by UK Ltd Relocation Company remains taxable in Den­mark. UK Ltd Reloca­tion Company pays the Danish VAT charged by the Danish subcontractor, which it will subsequently be able to deduct as input VAT in its Danish VAT return accordingly, and the Danish VAT due on the services provided to U.S. Inc. Relocation Com­pany must consequently be remitted to the Danish VAT authorities by UK Ltd Relocation Company through the Danish VAT registration.

With the current setup, U.S. Inc. Relocation Company is also liable to register for VAT purposes in Denmark and charge local Danish VAT on its supply to U.S. Inc. Client as the service rendered still is taxable in Den­mark. It should be stressed that U.S. Inc. Relocation Company is not entitled to recover the VAT via the 13th Directive—any claims made in this respect will be rejected by the VAT authorities in the respective EU countries and any attempt to do so may be considered tax fraud.

The Danish VAT incurred by U.S. Inc. client that was charged by U.S. Inc. Relocation Company, that is the true and final recipient of the service, then will be recoverable to the extent that it is meant for business purposes via the 13th Directive and if U.S. Inc. Client is in possession of a valid Danish invoice.

In Summary

 We hope we have been able to provide you with some insight into the sometimes complex and difficult area of value added tax. With the right legal advice, correct procedures and processes in place, VAT should not be a direct cost to your business. It is our experience that there may be VAT locked in the system and eligible for recovery that has not been realized as a result of improper administration and at the same time, it is probable that companies may not be VAT-compliant requiring payment that could result in penalties.

If you would like to test if your business is VAT compliant, why not take a look at the questions below—or speak directly to your VAT advisors for an individual review.

For your business as supplier of relocation services:

1. Are you VAT registered in the right country?
2. Are you charging the correct VAT?
3. Are you deducting all the VAT that you are entitled to?
4. Are you issuing correct invoices to your customers that allow them to reclaim the VAT you charged?
5.  Are you risking penalties and fines for not paying tax where you should?

For your business as the recipient of relocation services:

1. Has VAT been specified on the invoice?
2. Has VAT been applied correctly?
3. Is the VAT deductible?
4. Are you deducting all the VAT that you are entitled to?

Editor’s note: Worldwide ERC® is actively involved in the VAT issue as a sponsor of the VAT Task Force co-led by Peggy Smith, SCRP, GMS, and Joseph Morabito, SCRP, with representation from all Worldwide ERC® member segments. This Task Force is studying various aspects of VAT compliance related to relocation services in an attempt to identify opportunities to legally reduce VAT costs. Current­ly, the Worldwide ERC® VAT Task Force is focused on destination services; however, it is likely that other global relocation services will be reviewed as well as the task force gains a better understanding of VAT compliance issues affecting Worldwide ERC® members around the world.

Johannes Laxafoss is senior VAT manager for Meridian Global Services, Dublin, Ireland. He can be reached at +353 1 4000519 or e-mail Johannes.laxafoss@meridianglobalservices.com.

Joseph Morabito, SCRP, is president/CEO of Paragon Global Resources, Rancho Santa Margarita, California. He can be reached at +1 949 635 6000 or e-mail jmorabito@paragongri.com.

Peggy Smith, SCRP, GMS, is director, global relocation for Microsoft Corporation, Redmond, Washington. She can be reached at +1 425 703 6250 or e-mail peggy.smith@microsoft.com.