VAT cash-flow issues can sink non-resident EU business

While 2015 sees VAT rate increases of in many countries hitting consumer pockets, businesses will also suffer increased cash-flow burdens. Companies do of course employ a variety of commercial measures to plug the ouput-input VAT gap, but often it is the unexpected broadsides in foreign countries that can sink the ship.

Take a scenario in Italy, for example. A French furniture enterprise produces goods in a French factory and markets internationally. As part of a outsourcing strategy, a Milan company is contracted for part of the manufacturing. While the French company has no facilities, offices or premises in Italy, it will take title to the goods at the Milan factory door, requiring it to obtain a non-resident Italian VAT registration.

The French company will suffer Italian input VAT at 21%. The French company then find that they have no output VAT. B2B supplies from non-residents are accounted for under the reverse charge by the Italian recipients. In addition B2B EU intra-community supplies are zero-vatted. The French company’s Italian VAT account is therefore in credit, with refund entitlement.  There is no French VAT.

Obtaining an Italian VAT refund would be as follows. VAT credits built up in 2014 may not be applied for until after the end of February 2015. The applicant has to provide a bank guarantee in favour of the Italian tax office (ITO) for the total amount of the credit refund, together with an additional amount to cover any possible penalties. Once in place, the refund is forthcoming, but sometimes only paid in instalments within ITO budget refunding restrictions, which only adds to the time delays. In addition, the guarantee must remain in place for another three years, to allow the ITO the opportunity for subsequent recovery, if it is subsequently found that any refund has been incorrectly issued.

This is a triple whammy. First, there is a year’s delay in receiving the refund. Second, the guarantee more than doubles the cash-flow stress. Third, there is the three year continuing guarantee albatross. Fortunately there are alternatives, but unsuspecting companies venturing into uncharted fiscal territories can find themselves in quicksand, sometimes with disastrous consequences.