But the VAT compliance issues that naturally arise as a consequence of creating an SSC structure can be relatively neglected in the set-up and management of the centre.
It is vital that SSCs account for VAT correctly – failure to do so can lead to major fines and penalties, lost opportunities to recover VAT, poor cash-flow, the incorrect charging of VAT to customers, inaccurate information on ERP systems and disputes with tax authorities.
The issues mentioned above commonly arise when SSCs are required to process and code invoices for VAT purposes. But there are further significant risks when SSCs compile VAT Returns across several territories, or are responsible for other statutory reports (Intrastat, EC Purchase and Sales Listings) in a number of EU Member States.
It can be difficult to ensure that staff in SSCs have the necessary VAT knowledge to correctly deal with VAT in all countries serviced by the centre. Although core VAT systems in the EU have in principle been harmonised there are, in practice, many variations from country to country in the interpretation of legislation; consequently, reporting requirements can differ substantially. And because rules about deductibility vary from Member State to Member State, these differences can have a significant bottom-line impact.
Three Key VAT Issues for SSCs:
There are very many VAT issues that can affect SSCs, and the problems in a given case are determined by the responsibilities of the SSC itself; but probably the three major topics of concern for Indirect Tax Managers are:
1. Coding of AP invoices
SSC staff are often responsible for the coding of AP invoices (which establishes whether VAT can be recovered by the business). Even where ERP systems have been set up with tables of relevant VAT conditions in order to determine appropriate VAT codes (which themselves require regular reviewing and updating), SSC staff will have to ensure that the invoice is correct and that correct codes have been allocated.
As an example, a supplier of services in another Member State incorrectly charges local VAT when the reverse charge should apply. In order to take corrective action, a SSC staff needs to identify this.
If it is not identified, the incorrectly charged VAT could be expensed; increasing the costs of the business as a result. Or a claim will be submitted via the Refund Directive which will be rejected. This is because the VAT was not properly charged. In addition, it is unlikely that the reverse charge will be applied by the purchaser. This gives the possibility of penalties and interest charges.
SSC staff should also be aware of the rules on VAT deductibility in each Member State they are responsible for. Recovering VAT which is not deductible can lead to penalties and interest charges; and failing to recover VAT that is deductible directly reduces the profitability of the business. Rules are often complex and subject to alteration. Either as a result of legal cases or because of changes in interpretation by the local tax authorities.
2. Coding of AR invoices
ERP systems will normally automatically code AR invoices based on the VAT conditions contained in the system; but SSC staff need to be able to identify where an incorrect VAT code has been generated. Staff involved in raising manual invoices (particularly for transactions with group companies) need to be able to allocate the correct VAT code to an invoice.
Potential problems are, again, twofold:
- VAT charged incorrectly on sales invoices causes serious commercial issues with overcharged customers (who will in turn face problems with tax authorities);
- VAT not charged at the time could cause a likely exposure to penalties and interest charges – thereby reducing the profitability of the business.
To complicate matters further, incorrect sales invoices creates issues with Intrastat and EC Sales Lists for goods and services. As as result of incorrect information needed for the reports.
3. Completion of VAT returns
If the SSC is responsible for the completion of VAT Returns in various Member States, it is essential that staff have the necessary knowledge required to ensure that declarations are submitted correctly. Though SSC personnel can work in conjunction with local tax managers in order to minimise risk, there needs to be clear communication and, crucially, absolute clarity about the respective roles in the process of SSC and local staff. Errors often arise, and opportunities are often missed, because confusion about the precise responsibilities of the SSC is not addressed.
If, on the other hand, the local entity is responsible for the preparation and submission of VAT returns and other reporting it must be confident that relevant information provided by the SSC is accurate.