Amid deteriorating macroeconomic conditions, cash is crucial. Global VAT reclaim from international business travel is a way to recover some. ProKonsul Consulting’s Gaurav Sundaram provides pointers on maximizing the opportunity.
Global VAT reclaim (GVR) is today the single-largest untapped savings opportunity inherent in business travel programs. The opportunity is twofold — monetizing both past and upcoming spending by recovering a percentage of expenses incurred outside home markets.
VAT, or Value Added Tax, is essentially a consumption tax levied in over 166 countries, according to the Tax Policy Center. In some countries, it is called General Sales Tax (GST).
Based on multinational tax agreements and treaties, expenses incurred by employees of a foreign employer may be eligible for reclamation of the VAT/GST component. Here’s a simple example:
John Doe is employed by ABC Inc., a company that is registered in the United States and pays corporate and income tax there. John visits France for an ABC Inc. business purpose and spends 5,000 euros on accommodation, meals, business entertainment, taxis and other travel expenses. France currently has a general VAT rate of 20 percent (with some services charged at a lower rate). So John paid out almost 1,000 euros as VAT from his total 5,000 euro expenses. On John’s return to the United States, ABC Inc. can file with the French tax authorities to recover the 1,000 euros.
GVR isn’t the same as the airport VAT refund many of us claim when traveling. The Airport VAT refund is an individual benefit extended by the country you are visiting. It relates to the purchase of products that are eventually exported to you in your country of origin.
GVR is a corporate benefit not available to an individual. To qualify, the employer must have foreign tax residency. This facility is available to companies of all forms: proprietorships, partnerships, limited liability companies and large publicly traded enterprises.
What Can You Reclaim And From Where?
Based on the country of residence of the applicant company, VAT reclaim eligibility varies by the market in which the employee incurs business expenses. Different expense types are eligible in different countries, adding to the complexity.
As a general rule, employers in most countries can reclaim VAT from Australia, Canada, Western Europe, Japan and South Korea, among others.
Eligible expenses under the GVR regime fall into three broad categories:
1. Direct International Business Travel Expenses
- Accommodation, including hotels, serviced apartments and guesthouses
- Meals, including food and restaurant bills
- Business entertainment
- Transport including trains, ferries, car rental costs and any self-driving expenses like fuel (these categories will vary by country)
2. Overseas Marketing and MICE
- MICE, including costs incurred from participation in corporate incentive travel and meetings, conferences and other events with a business purposes
- Marketing, including advertising, printing, stationery and any other expense items related to overseas company promotion
3. Miscellaneous Expenses
- Inter-company invoices received by the applicant entity from overseas corporate locations for expense allocations, license fees and other charges
- Professional services delivered in the foreign country, including those from accountants, consultants and venture capital advisory firms
- Accounts payable invoices, a very broad category covering invoices for a range of goods and services
As you can see, the GVR scope is quite large and variable.
Successfully Filing Claims
In most cases, expenses require invoices with the correct legal names of applicant companies. Exceptions include expenses related to meals, business entertainment and ground transportation. Each invoice should clearly outline the name of the supplier, its VAT registration number and the exact VAT amount charged.
Organizations need to file annual GVR applications within a specified period of time, usually by June 30 of the following year. The United Kingdom follows a July-June calendar for this purpose, and claims need to be filed by Dec. 31. Some countries, like the Netherlands, permit retrospective claims, allowing you to file claims for preceding years if you have eligible expenses. Applicants can file on a quarterly basis, as well, if their claims have sufficient value, improving cash flow.
These are just a few of the complex conditions related to GVR.
Put simply, applying for a GVR from a foreign tax office is akin to going to court: a large volume of documentation is required, claims initially can be rejected and there is an appeals process.
A specialist GVR company with a team of auditors and tax professionals can be very helpful. They can help file claims in multiple geographies. Such firms often operate with a success fee model; the applicant pays the GVR company only if the reclaim request is successful. This significantly reduces risk and effort.
During the initial application process, you may discover a large number of noncompliant invoices, simply because this aspect was never recognized in your travel policy and T&E settlement process. Properly addressing it means requiring invoices for all expenses (even those below a certain cost threshold that wouldn’t require invoices for typical reimbursement) and asking employees to ensure the invoices they collect have the correct legal name and registered address of their company.
When a travel management company organizes all the logistics, accommodations and food and beverage for an event at an overseas location, it often presents to the client a single consolidated invoice for settlement. In such an instance, no reclaim of VAT is possible. Invoices from the suppliers of each service provided are necessary for VAT reclaim eligibility.
Many GVR specialist firms have a solution to these issues. They offer invoice correction and retrieval, drastically reducing noncompliance.
Many GVR specialists offer no-obligation assessments of claim potential. Some also have deep integration with such T&E solution providers as SAP Concur, Expensify and Chrome River to facilitate the assessment and make the overall claim application process smoother.
In general, it takes 60 to 180 days to settle a claim.
Why Do Many Companies Fail To Recover Global VAT?
There are several reasons:
- There often is an absence of clarity on who “owns” this activity. Is it business travel operations, procurement, finance or accounts payable? If no one takes ownership, VAT reclaim falls between the cracks.
- Corporate leaders may not know about or recognize this cost-saving opportunity.
- Key performance indicators relevant to business travel managers and procurement professionals may not contemplate VAT.
- Travel management companies and MICE agencies may not have the proper understanding about GVR and therefore don’t educate their clients about the opportunity.
- Organizations don’t set up travel policies and expense claim processes to seamlessly incorporate GVR.
- Travelers are not educated about GVR, resulting in large volumes of noncompliant invoices.
Get started today to initiate your global VAT reclaim project. In the post-Covid-19 world, it will resonate with your corporate leadership.