VAT pitfalls for non-EU corporations
Non-EU businesses are regularly and unwittingly caught out when they embark on making taxable supplies in the EU, without properly preparing for the European VAT compliance issues that can arise.
VAT for US companies
Take, for example, a US corporation agreeing a world supply deal with a high-profile US global-brand customer. It is decided in advance that the US supplier will contract and invoice each individual subsidiary of the US parent for supplies made locally. In the EU, the US supplier decides to source goods supplies from companies in each EU Member State. The US supplier with no presence whatsoever in the EU will purchase goods in say, Germany, for supply to its US client’s subsidiary in Germany, invoicing the German company under the global contract terms.
Under German VAT compliance, the US supplier arranges a non-resident German VAT registration. German VAT will be charged and collected, and at the same time German input VAT suffered on the local supply will be recovered by deduction on the VAT return filing.
When it comes to France, because a VAT reverse-charge mechanism is applicable to non-resident suppliers, the US company is not required to VAT register. The French supplier however, being subject to a standard VAT regime, has to charge French VAT on its supply. Neutrality, however, is achievable, as the US corporation can submit a 13th EC Directive VAT refund claim to recover the French input VAT suffered.
Reverse Charge Rules
Turning to Italy and Spain, the whole situation takes on a different light. Similar to France, the reverse charge rules apply, and so no VAT registration is necessary. Local suppliers will invoice Italian and Spanish VAT. How can that be recovered by the US corporation? By 13th EC Directive claims? Unfortunately not. There is no mutual tax-refund reciprocity agreement between the US and either Italy or Spain, and hence VAT recovery claims by US corporations to these countries will face rejection. While there may be potential solutions going forward, retrospective redress will not be possible, leaving a gaping hole in the net revenue.