What Does a US Tax Professional
Need to Know about VAT
COST Canadian Tax Workshop for U.S. Companies
October 2nd, 2014
James Freed Karl Frieden -
KPMG LLP – Chicago
Council On State Taxation, Washington DC
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Agenda
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Overview of Global VAT
VAT Compared to Retail Sales Tax
VAT Terminology and Rates – a Recap
Global VAT Risk and Management
Will the U.S. Continue to be “Tax Exceptional”?
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Overview of Global VAT
3
Growing Importance of VAT
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VAT is a concern for companies doing business globally
Many governments are shifting the emphasis from taxing
earnings and gains to taxing consumption
Many governments use VAT as first tool in fiscal policy
− Reduce to stimulate consumption
− Increase to reduce deficits
Almost 160 countries have a VAT regime
− U.S. is only OECD country without VAT
− In Canada, regime is known as GST/HST
− Other countries considering VAT include many in the Middle
East
EU average VAT rate is above 21.5% (and rising)
Trend is towards increasing rates and anti-avoidance
measures to defend yields and reduce the “tax gap”
4
VAT Enactments Timeline
Source: OECD,
Consumption Tax
Trends 2012;
WNT Research
1969
1974
1979
1984
1989
1994
1999
2004
2009
2014+
11
21
24
34
47
92
123
137
152
>160
Countries
Countries
Countries
Countries
Countries
Countries
Countries
Countries
Countries
Countries
Shift to Indirect Taxation

OECD Tax Revenue by Sector as Percentage of Total
35
30
25
Personal income tax
Corporate income tax
20
Social security contributions
Property taxes
VAT
15
Sales tax
Other consumption taxes
10
5
Source: OECD, Revenue Statistics
0
1965
1970
1975
1980
1985
1990
1995
2000
2005
2011
6
Evolution Average Standard VAT Rates in the EU
Evolution average standard VAT rate in the EU
22.0%
21.5%
21.0%
20.5%
20.0%
19.5%
19.0%
18.5%
18.0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: European Commission,
VAT Rates in the EU, July 2014
VAT Compared to Retail
Sales Tax
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VAT vs. Sales and Use Tax
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VAT is imposed at the national government level whereas
Sales and Use taxes are generally imposed at the subnational level
− Any U.S. consideration of VAT would necessarily involve
issues of coordination with state and local sales taxes
− Canada and India (proposed) are examples of multi-level
VATs in a federal system
− India (current) and Brazil deal with multiple levels largely by
dividing (as opposed to sharing) tax bases

VAT rates are typically high in comparison to Sales and Use
tax rates
− Standard VAT rates between 15%-27% vs. average Sales and
Use tax rates of around 7.5%
− VAT does have reduced rates, super reduced rates for certain
categories of products/services and zero rates
VAT vs. Sales and Use Tax (cont.)

VAT generally applies to inter-company relationships whereas
Sales and Use tax frequently exempts inter- company transactions
(as sale for resale or exempt transactions)
− VAT grouping in certain countries allows disregarding intercompany transactions for VAT

VAT typically applies to a much broader tax base of goods
and services whereas Sales & Use tax generally only applies
to goods and a limited number of services
− When properly designed with full input tax recapture through
credits, VAT allows taxation of all transactions without
burdening business inputs
− Burden of tax falls on final consumption
− Avoids “errors” of current sales taxes and the impact on
business inputs that have “doomed” efforts to extend sales tax
to service transactions
VAT vs. Sales and Use Tax (cont’d)
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VAT refers to “place of supply rules” to determine where
VAT is due, whereas Sales and Use tax generally refers to
“nexus” for jurisdictional rules.
− Collection obligation under VAT generally determined by
turnover or receipts from within a jurisdiction.
− There is no “physical presence” limitation placed on the
collection of VAT compared with the “Quill” restrictions on
sales and use taxes

VAT is a multi stage consumption tax whereas Sales and Use tax
is typically only levied at point of final consumption
− Companies have to manage both output tax and input tax
 Collect and remit output tax
 Claim refund of input tax (if allowed)
− VAT under “management” is on average 30 to 35 percent of a company’s non-US
revenues.
 For example, a company with $10 billion in non US sales will have approximately $3
billion of VAT under management.
VAT Terminology and
Rates – a Recap
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VAT Terminology
Output Tax
• VAT charged by businesses on sales made to their customers
• “Output” meant to reflect outgoing sales
Input Tax
• VAT spent by businesses on qualifying business expenditures
• “Input” meant to reflect incoming purchasing
Supply
Consideration
Reverse
Charge
Mechanism
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• VAT terminology for a “sale”
• Goods: tangibles; Services: intangibles
• Payment received in return for the supply of goods or provision of services
• According to the EU, “everything received in return for the supply of goods
and services, …”
• Situation in which seller of services (usually foreign) is not liable for VAT, and
instead buyer is required to account for VAT; commonly applied on intra-EU
transactions
Note the focus on movement on goods/services, rather than
movement of money
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VAT Rates
Standard
• EU VAT rates range from 15% to 27%. Average EU VAT rate is
above 21.5%—somewhat less in ASPAC and LATAM
Reduced
• Any rate lower than the standard rate
• E.g., basic food stuff, books—usually political decision
Zero-rated
• No VAT is charged, but seller has a right to credit input tax
• E.g., exported goods and services
• Aka “Exempt with credit”
Exempt
• No VAT is charged, but the seller has NO right to credit input tax
• E.g., certain financial, medical and education services
• Aka “Exempt without credit”
Outside
Scope
• Not within the scope of VAT in the jurisdiction concerned
• E.g., charities and non-business
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Global VAT Risk and
Management
Impact of Effective VAT Risk Management
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VAT is a transaction tax – must be considered for
every purchase (input VAT) and every sale (output
VAT), and even some movements of own goods
between some countries and states
− The total amount of output and input VAT managed by a
company represents the “VAT through-put”
Not simply an “in and out” tax, as not all VAT may be
recoverable
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VAT Throughput
Example (fully taxable business)
In millions, USD:
Sales
$5,000
Purchases
(3,000)
Salaries
(1,000)
Transfer price adjustments
(500)
Net Income
500
Income Tax (30%)
150
Total Output VAT (rate 20%)
Total Input VAT (rate 20%)
Total VAT flow through the business
(*) Total VAT represents 28 percent of company gross sales (including price adjustments)
1,000
600
1,600(*)
Global Challenges
EU –
Sourcing
changes for
2015
Import
valuation
issues
Importer of
record must
be owner to
recover VAT
Current
reform
Cashflow
VAT
system
VAT credits
vs. refunds
Proposed
reform
Multiple
indirect taxes
and
jurisdictions
Import
restrictions
Reform in
2015
Proposed
introduction
Difficulties
with VAT
refunds
Various rate changes
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What Happens if You Get it Wrong?
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Underpaid VAT liability
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Budget plans inadequate to cover unexpected VAT
costs
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Financial losses e.g., the VAT becomes a real cost if
irrecoverable or never paid out by the tax authorities
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Penalties and interest imposed by authorities can be
up to 200% of the tax due, if not mitigated
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Closer future scrutiny of processes by the tax
authorities
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What Happens if You Get it Wrong? (Cont’d)
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The impact of material VAT liabilities on financial
statements
Damage to business relationships
− Customers being assessed for incorrectly charged VAT
recovered on purchases
− Raising VAT-only invoices in attempt to mitigate own
liability
Cost of correction
− System updates/implementations
− Evaluation of errors and reporting outputs
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Will the U.S. Continue
to be “Tax
Exceptional”?
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Taxes as a Percent of GDP – 2012
Denmark
France
Belgium
Italy
Sweden
Finland
Austria
Norway
Hungary
Netherlands*
Luxembourg
Germany
Iceland
United Kingdom
Czech Republic
OECD*
Greece
Spain
New Zealand
Portugal*
Estonia
Poland
Canada
Japan*
Slovak Republic
Ireland
Switzerland
Turkey
Korea
Australia*
United States
Chile
Mexico*
The U.S. has a low tax
burden (combined
federal, state and local)
relative to Gross
Domestic Product.
0
*= 2011 Data
10
20
30
40
50
60
Source: OECD Tax Revenue Statistics, January 17, 2014
Tax Revenue Distribution – 2012
Taxes by Type as Percent of Total Taxes
0%
10%
20%
Income
30%
40%
Social Security
50%
60%
Property
70%
80%
90%
100%
Consumption
The U.S. relies relatively more on income taxes and significantly less on consumption
taxes than other OECD countries
Source: OECD Tax Revenue Statistics, January 17, 2014
Long-Term Budget Outlook is Still a Concern
Components of Federal Finances
As Percent of GDP
30%
26.2%
17%
18.5%
25%
20.8%
19.7%
21.8%
20%
15%
-- Revenues
10%
Interest
Health
Soc. Security
Other
5%
0%
2013
2023
Calculations based on Congressional Budget Office, The
2013 Long-Term Budget Outlook, revised October 2013
2038
Contact Information
Karl Frieden
Vice President and General Counsel
Council On State Taxation
202.484.5215
kfrieden@cost.org
James Freed
Senior Manager
KPMG LLP
312.665.2627
jfreed@kpmg.com
Thank You
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