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Monday, January 18, 2010

VAT refund changes hold up Europe businesses

Businesses across Europe have cash flow worries because of problems with a new electronic system that was supposed to speed up value added tax refunds across borders.

The move from a paper-based to an electronic system for VAT refunds at the start of January has been marred by the failure of about half of Europe’s member states to set up a working interface through which businesses can submit claims to other member states.

Meanwhile, a technical change to the point of time at which VAT has to be assessed means that it is virtually impossible for businesses to comply properly with the new rules, according to BusinessEurope, the umbrella organisation for national industry federations in Brussels.

“The new rules on when the supply of services needs to be reported for VAT are almost impossible to comply with. This may bring penalties even where no tax is due,” it warns. Henk Wildeboer, head of its VAT working group, says the organisation will be detailing its concerns in a formal paper shortly and lobbying for legislative changes .

A spokesman for the International VAT Association said that assurances about the state of the systems from member states representatives and the commission had proved over-optimistic. He said: “They are not as ready as they indicate they are.”

The biggest problems were potentially faced by transport companies for which VAT on diesel fuel is a significant portion of their operating costs, he said. They could face serious cash flow problems if the VAT refunds are delayed. VAT reclaim agencies will also face particular difficulties, he said.

The survey by the International VAT Association found that Cyprus, Poland, Romania, Italy, Lithuania, Greece do not yet have working portals allowing businesses to access the electronic system. Portals in Ireland, Slovak Republic, Portugal, the UK, Luxembourg, Spain, Denmark and the Netherlands are only partially working.

Sweden, Finland, Germany, Austria, France, Belgium and Bulgaria had fully working systems, while it was unable to obtain information about Estonia, Slovenia, the Czech Republic, Latvia, Malta and Hungary.

The change from a paper-based to an electronic system, which was designed to make refunds for businesses faster and easier, was part of a package of reforms that represented the most far-reaching changes to the EU VAT system since the introduction of the single market in 1993.

The reform of the refund system was an attempt to move away from a burdensome paper-based system which often resulted in delays with valid claims being paid late or not at all. Many companies ended up paying much more tax than they needed because they were put off making claims by the difficulty of keeping up to date with legislation in different countries, complicated paperwork, tight deadlines for submitting claims and language barriers.

A spokesman for the Association criticised a failure to conduct end-to-end testing of the IT system before it went live. He also criticised the failure of member states to collaborate in building compatible portals, saying that Finland and Sweden were the only countries known to have worked together.

Suggestions that the EU should go back to its old paper-based system until the new technology is up and running have been rejected on the grounds of legal rules and the unworkability of operating two systems in parallel, he said.

The timing issue stems from the fact that a “taxable event” for cross-border services supplied to businesses is now deemed to occur when the service is supplied, rather than when it is invoiced. But Mr Wildeboer says that, because invoicing inevitably lags, this means that businesses cannot realistically calculate the right amount of tax due in any month. While some member states are fairly sympathetic to short payment delays – such as the UK and some Nordic countries – others are “really strict” and could impose penalties.

BusinessEurope will lobby to revert to calculating VAT at the invoice date, but Mr Wildeboer says that it will also want some assurances that member states will apply a “soft touch” vis-a-vis penalties in the meantime.

European Union finance ministers, meeting in Brussels, will have another stab at trying to agree revisions to the savings tax directive, so as to better crack down on tax evasion, on Tuesday. The measures require agreement by all 27 EU member states, and progress proved impossible last month, when Austria and Luxembourg dug their heels in over automatic sharing of savers’ bank account information. Although the majority of EU member states are supportive of the changes, diplomats say it is unlikely that unanimity will be forthcoming.
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