Many times a year, I get the same question that all relate to businesses that have a VAT liability (or potential one) in a country where they have no presence. These typically fall into three common categories:
1. Sales to the 32 countries that currently have taxing requirements for non-residents on sales of digitized goods or services to private individuals or non-business customers.
2. Sales of goods with installation as part of the contractual terms where no simplification exists.
3. Drop shipment, intra-EU tri-party sales, DDP Incoterms and similar where one or more people have the VAT treatment incorrect.
In virtually all cases, the answer means that a Tax Authority somewhere has not received or had reported, VAT on domestic transactions. The fact that the customer in some cases would have been able to recover the missing VAT in full is no longer a rationale for not reporting, but this still seems to be a reason offered as to why appropriate compliance steps were not undertaken. In some instances, the business may actually be owed VAT by the Tax Authority due to a mix of rules and rates coming into play, but these are usually in the minority.
Common statements often include, “they can’t get me”, “how will they know”, “they have no collection powers over me”. While these statements may be factually true, we don’t and cannot use them as defense against proper compliance and accurate accounting.
Many of the folks I speak with are based in the United States and here it is often domestic legislation and regulation that begins to unwind the issue. Formerly known as FAS5, ASC450 (Accounting Standards Codification Topic 450) are the rules that require SEC registrants to manage potential liabilities and the impact of these events on the balance sheet. Even where the accounting standards are not mandatory (public entities or those with public debt for example should fall into the mandatory category), many privately held businesses have through the Board of Directors decided to implement the same standards. This is very much the case for companies who are intending to IPO in the near term. The same concepts in ASC 450 are to be found in IAS/IFRS 37.
As such, I generally point out that unrecorded liabilities (those that are Probable and those that are Possible & Material) should be reflected in the accounting records of the business. Often, businesses have already undertaken this exercise before I become involved. It is my personal view that businesses who continue to accrue any VAT liability where it is Probable (in the VAT world it is usually relatively easy to determine whether you owe or not) and Estimable (again, usually relatively easy to calculate a VAT liability) has reached the line in the sand between legal and illegal. All Tax Advisers have their internal and external rules about clients who will not settle a known tax liability – here at ITP, we would no longer be able to work with businesses who have clearly committed tax evasion and continue to not remedy the situation.
So in summary, I don’t believe the “they can’t get me” argument has any place in today’s business and accounting world. At some point, the position will be discovered and the cost of dealing with extended non-compliance would massively outweigh the cost had actions been taken earlier.