If your ambitions go beyond American borders, one challenge you'll eventually face is learning how to comply with other countries' regulatory and tax systems. For example, a large number of countries charge some form of value added tax, or VAT, on goods and services sold there. If you're going to do business in one or more of those countries, you'll need to learn how to create a VAT receipt and how to manage them in your own operations.
VAT Rules for U.S. Companies
The VAT is just a sales tax, but it doesn't work quite like the ones you're used to at home in America. VAT is a universal tax that applies to most goods or services you buy or sell. The big difference is that it's charged throughout the supply chain as opposed to the time of final sale, so the revenues reach the hands of the corresponding government right from the first step in the chain.
You'll pay the VAT on your materials and then charge it again to your customers. In the end, you'll remit your outstanding VAT amounts to the appropriate government and claim a refund of the VAT you've paid on many of your purchases.
Registering to Collect the VAT
If you're going to do business consistently in an European Union country or any other country with a VAT – and especially if you plan to establish a physical presence there – you'll need to register as a vendor with the local tax authorities. This can be a nontrivial process, and you might find it prudent to hire a consulting firm to guide you through the bureaucratic maze.
The end result is that you'll be assigned a VAT number that must appear on any VAT receipt or VAT invoice. You'll need it to collect and remit taxes on the products you sell and in some cases to claim reimbursement for amounts you've paid.
Setting up a VAT Invoice
A properly compliant VAT invoice or receipt probably follows the same pattern as your existing ones in most details. You'll still need to cite the date on the invoice, along with your full business name and location, the products or services sold and the customer's full business name and location. Beyond those basic details, you'll also need to include your VAT registration number, the unit price before VAT, the VAT percentage and the total VAT payable.
Getting these details right is done as a one-time setup in your invoicing software, and if you use a local consultant to guide you through the VAT process, you can negotiate to have this included in the fees. Afterward, of course, you'll need to update periodically as the VAT rate or regulatory requirements change.
Collect and Remit
When the invoice is paid, you'll issue your customer a receipt meeting the same VAT requirements as the original invoice but indicating when the amounts were paid and which discounts or late charges, if any, were applied. The amounts of VAT you collect are tracked in a separate account in your accounting software, and periodically, you remit them to the local taxation authority under your unique VAT registration number.
If you're ever audited for VAT compliance, you'll need to show that:
- You've been collecting VAT on all appropriate transactions.
- You've been charging VAT in the correct amounts.
- You've remitted the full amount of VAT you've collected for the reporting period.
Getting Money Back
For the sake of your bottom line, it's important to remember that your role is mostly to collect the VAT. It should only be an actual expenditure on your part if you're the end user of the product or service you've purchased. Otherwise, you're entitled to claim a refund.
There is plenty of official and unofficial guidance on how to go about this process in any given VAT country, or in some cases, it can be automated through your software or a third-party consulting firm. Don't expect to see your money refunded in a hurry. The process is cumbersome, and tax departments are always wary of potential fraud, so refunds can take a while to arrive back in your hands.
- RSM International: Europe – How European VAT Impacts US Companies
- Deloitte: European VAT Refund Guide, 2018
- Irish Tax and Customs: VAT Records, Invoices and Credit Notes
- Bahamas Ministry of Finance: VAT Guidance on Invoices, Sales Receipts, Credit and Debit Notes
- Quaderno: What You Must Know About VAT if You Have Customers in Europe
- Ernst & Young Global Limited: Collecting VAT and GST Is Relatively Easy; Getting Refunds Isn't
- VAT Free tags background (seamless repeat tile) image by Sophia Winters from Fotolia.com