The adherence to VAT rules is based on different pillars. Read here how to ensure VAT compliance in all of them.
VAT Compliance requires clean data
Adherence to VAT rules starts with proper data in sales and accounting systems. A later correction of wrong data means extra workload. In case of local VAT real-time reporting duties there is even no time for a correction. Thus, VAT Compliance requires clean data BEFORE the issuance and posting of invoices.
Examples for VAT relevant data
Clean VAT relevant data first concern proper customer and vendor master data. In B2B transactions it is thereby of high relevance to secure the validity of customers VAT Identification Numbers. This particularly applies since the introduction of the VAT Quick fixes as of 01.01.2020 (for more information click HERE). And suppliers may VAT register themselves in customer countries and apply for a local VAT Identification number. This duty can occur in certain B2C transactions but also in B2B supplies, e.g. in certain warehouse and converter constellations. Further VAT relevant data concern the minimum content of invoices as provided by law. Goods and services supplied and received must be allocated to the correct accounts. Additionally, VAT refunds may require formally correct invoices. And last: No VAT Compliance with incorrect tax codes. Invoices cannot be correctly posted if tax codes in the accounting system are not properly defined and up-to-date.
VAT Compliance relating to outgoing invoices means again a pre-check of a potential VAT registration duty in the customer country. This question mainly depends on the kind of customer relationship, supply chain and conditions (eg Incoterms). Furthermore, suppliers must know and apply the local VAT rules. This includes the correct tax rates but for example also the awareness of domestic reverse charge regulations. Then, formal invoicing rules have to be fulfilled. This for instance means a clear and comprehensive service description and the consideration of all mandatory content information. Furthermore, local VAT rules may stipulate invoicing deadlines, mandatory e-invoices and and electronic real time reporting to tax authorities (eg in Italy).
Correct postings of incoming invoices
The correct posting of incoming invoices first requires a correct invoice. Customers should therefore establish a respective validation process. Furthermore, the VAT assessment of incoming invoices particularly depends on the VAT Identification number used by the supplier. Thus, in addition to the other invoice data also this information needs to be transferred to the used accounting system. VAT compliant postings furthermore consider whether purchased services and goods are subject to a VAT refund right or not. In case of foreign currency purchases, accounts should check the local VAT approach concerning the applicable conversion approach.
Recording, documentation, archiving
Local VAT rules regularly stipulate archiving obligations for invoices. These may differ for invoices received in paper or e-formats. Also local retention periods are different and require an individual check. In addition to this, taxpayers may be obliged to collect, record and archive further information and documents, such as proof of deliveries for EU supplies or customs documents and Master Reference Numbers (MRN) for export supplies.
Finally: Adherence to VAT reporting duties
VAT reportings duties first concern the proper VAT filings as such. Additionally, however, taxpayers may have to submit further reports like the EC Sales lists or Standard Audit Files for tax purposes (SAF-T). Some countries stipulate further real time reporting duties. Taxpayers therefore need to ensure an adherence to these formal reporting obligations in due time. Before the filing, however, they need to ensure the correctness of the content.
How to ensure VAT Compliance: Know how, clear processes, automated controls
VAT Compliance depends on VAT know how in the organisation and clear processes, eg based on a RASCI-Matrix. Where possible, automated validations and controls offer a relevant support.
VAT Know How
A relevant VAT know how in the taxpayer’s organization is crucial to ensure VAT compliance. Without this basis it is not possible to define proper processes and to implement automated controls. This is because the consideration of VAT relevant data and transactions first requires to know and properly assess them at all. This can only happen if the departments involved have a minimum VAT awareness and communicate VAT relevant facts to the tax experts. In this regard, VAT E-Learnings are excellent tools to safeguard the communication of VAT rules. We offer here a basic VAT Online Course as well as an E-Learning about VAT & B2B in transactions.
Processes and responsibilities
A further need to ensure VAT compliance is the establishment of VAT relevant processes based on a RASCI-Matrix. The taxpayer identify VAT relevant processes and define who in the organisation is responsible, accountable, supports, needs to be consulted and informed. Typical VAT relevant processes can be the maintenance of tax codes, collection and archiving of VAT relevant documents and the filing of VAT returns.
Automated validations and controls
And finally – VAT Compliance can more and more be ensured by using automated validations and controls. A prominent example is the real time validation of VAT Identification number via VIES or local databanks. Some products also allow an ongoing validation of VAT postings in ERP systems, particularly SAP, and support the adherence of VAT filing duties and real time reporting. We recommend a closer look on AMANA’s VAT software “VAT@GTC” which standardized recurring processes in all VAT-related matters (more information can be found HERE).