VAT Compliance Is Crucial for Businesses’ Global Supply Chains

For many multinational businesses, supply chains are longer and more global than ever. Driven by the desire to expand into more lucrative markets, launch new products faster, or reduce costs, many businesses have chosen to distribute activities further across the world.

However, the global supply chain is becoming increasingly difficult to manage as revenue authorities adopt more sophisticated and collaborative measures. One hundred and sixty-five countries worldwide levy value-added tax or some related form of transactional tax. This means compliance and tax reporting needs can be complex, challenging, and substantially varied across differing jurisdictions.

As digital tax reporting and e-invoicing become the norm, and new international and local requirements appear, VAT compliance should be central to supply chain planning and transformation.

In supply chain management, businesses will likely face several questions regarding VAT and related taxes. What are the different VAT obligations the business is likely to encounter? How can non-compliance impact cash flow? And how can risks be minimized?

Understanding VAT Obligations

VAT on imports. Import VAT is generally levied on goods sourced from outside the relevant country/economic community. The amount of import VAT varies depending on the country of destination. In some countries, the tax is payable on the arrival of the goods; in others, it’s deferred until the periodic VAT return is submitted, often presenting a substantial cash flow challenge.

In addition, non-deductible import duties and excise taxes may apply, further complicating international trade.

Delivery of goods at the local level. In the context of the EU where goods are supplied within a member state, VAT must be levied and paid according to the rules of that state. In cases where a supplier isn’t established in a member state but still has customers in that country, an extended reverse charge procedure may apply.

For example, UK businesses with customers in the EU don’t need to obtain a local VAT ID if the correct exemption is applied. However, if this isn’t applied correctly or the wrong information is obtained, it may often trigger the need to obtain a local VAT registration, placing a financial and administrative burden on the business.

The process of paying VAT within the EU has been further complicated for UK businesses post Brexit, including the input tax refund claim—the EU 13th Directive refund mechanism—being moved from an electronic system to a paper one, adding another administrative layer and potential confusion for businesses.

Intra-EU chain transactions. Special rules apply to intra-community transactions involving several EU member states and parties in a single transport of goods. These transactions involve a movable (tax-exempt) supply and several local sales, depending on the number of parties and arrangements for transporting goods.

All parties in such a chain may have to register for VAT purposes in the member state from which goods are sent or to which they are delivered, which creates additional administrative burdens.

Impact on Cash Flow

A company’s VAT compliance can have a direct impact on cash flow. Businesses must collect and remit VAT in every country they operate in, which often means an increased financial burden should customer payment terms not align with the due dates for payments of associated taxes.

Implementing streamlined processes and ensuring remission and associated refunds of any taxes at each step in the supply chain is understood can reduce this and improve cash flow. With some EU member states having VAT rates well above 20%, this can represent a substantial financial benefit.

Consequences of Non-Compliance

Governments are increasingly aware of the financial consequences of VAT non-compliance, so businesses within and outside the EU shouldn’t take understanding these regulations lightly. According to the European Commission, member states lost 61 billion euros ($65.1 billion) in VAT revenues in 2021. This VAT gap has driven a wave of EU digitalization reforms known as VAT in the Digital Age, or ViDA, that aim to tighten up compliance and increase revenue.

With greater insight into transactional and other economic data from companies, these systems will make cases of non-compliance easier to catch. By providing tax authorities with greater insight into transactions and other financial data, compliance is becoming a more binary position, increasing the chances of businesses having to pay non-compliance fines.

With more rigorous VAT compliance measures in place, businesses must ensure that tax considerations are made throughout their global supply chain.

Multinational companies need to take proactive approaches to manage the complexity of VAT compliance in a global supply chain. The key to understanding a business’s global supply chain is gaining a holistic view of business operations mapped against regulatory changes.

Looking Forward

Global supply chains continue to evolve. VAT compliance therefore remains a critical concern for businesses. Understanding the intricacies and differences of VAT regulations in different countries and taking proactive steps to ensure compliance is crucial to reducing operational, reputational, and financial risks.

With such an approach, companies can meet their VAT obligations and optimize their supply chains in an increasingly interconnected world.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andrew Hocking is vice president of consulting and compliance services for Europe at Sovos.