vat & sales/use jeff hilt & theresa pardee - …c.ymcdn.com/sites/ 14 of these years...

VAT & Sales/Use

Jeff Hilt & Theresa Pardee

2Jeff Hilt/Theresa Pardee

Presentation Overview

GE VAT Overview Sales/Use Overview Systems Comparison

Speakers

Theresa is a Manager of Tax Technology with General Electric Company based out of Atlanta, Georgia. She received her Bachelor of Business Administration in Computer Information Systems from Georgia State University.

She has more than 17 years in various roles within the Sales & Use tax function. She has spent the last 14 of these years integrating third party tax automation solutions like Sabrix, Vertex and Taxwarewith Financial Applications.

Theresa joined GE in March 2007 after a combined 9 years at E&Y and Deloitte’s National Tax Technology Solutions Practices as a senior tax manager. Since joining GE, her job responsibilities include providing transactional tax technology solutions for various GE businesses globally.

Theresa is certified in SAP R/3 in the Sales and Distribution Module and has obtained her Oracle Applications Team Member Implementation Masters Certification.

Theresa Pardee

Jeff HiltJeff has been with the GE Corporate Tax Systems team since 2001 supporting the Corporate Federal team, State Income Tax team and for the last 7 years the Sales/Use and VAT/GST teams supporting the Audit, Advisory and Compliance functions as well as the Sabrix Platform.

GE Summary & ContextDiverse portfolio of products and services

Global footprint – operating in over 120 countries

Thousands of Legal Entities

Tax, State and VAT/Sales obligations

Global Branch Structure

Various ERP and legacy billing platforms

VAT Overview

VAT AwarenessVAT stands for Value Added Tax

A general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services.

A consumption tax because it is borne ultimately by the final consumer. It is not a charge on businesses.

Charged as a percentage of price and actual tax burden is visible at each stage in the supply chain

Over 150 countries worldwide operate VAT systems of some description and this is likely to increase in the future as the money collected from VAT represents a major source of revenue to national governments

* VAT is usually a national/ federal tax, but in some countries it operates at a state/provincial level.

VAT Awareness - EU1967 – EC Common Framework for VAT was established to attain the objective of a common market.

The overriding law on VAT in the EC is the EC Directives, notably Council Directive 2006/112/EC which recast the articles of the 1st and 6th VAT Directives.

Under Article 395 of Directive 2006/112/EC, member states may be authorized to derogate from common VAT rules to simplify local rules.

EC Law takes precedence where there are inconsistencies with the intent (over time) of having a harmonized system. The VAT Package of 2010 (supply of services) is a step in that direction.

VAT is a tax charged on any supply of goods or servicesmade in <Country> where it is a taxable supply made by a taxable person in the course or furtherance of any business

Harmonization and DerogationLack of harmonization in the EU – is like, well, running a marathon with a front loader on your back.

What could be harmonized?Simplified ratesSimplified returnsHarmonized rulesInvoicing and invoicing formatVAT rules to avoid double taxationLonger deadlines for filingEtc.

VAT names - ROW

EU - VAT

Brazil ICMS - State VAT IPI – Federal Excise TaxISS – Municipal Service Tax Australia

GST – Goods and Services Tax

IndiaVATService Tax

CanadaGST – Goods and Services TaxHST - Harmonized Sales Tax

VAT Compliance means…

• Receiving compliant invoices from suppliers or you can’t reclaim input VAT

• Issuing sales invoices in the right format or you have customer relationship issu

• Book-keeping the right VAT at the right time – or you can’t fill out your VAT retu

• Reporting VAT in the right currency – local currency using the right exchange r

• Filing VAT returns at the right time with the right transactions – typically calend

• Settling the right VAT with the tax office – pay vs. file

• Maintaining the right books and records

• Keeping books and records for the right period of time

Terminology is key

Rate DefinitionsRate Type Definition Min/Max

Allowed (EU)Standard Highest rate – covers most goods and

services. This is the default unless a specifically mentioned alternate rate applies. EU – capped at 25%

Max 25%Min 15%

Reduced Rate

Given specific relief from the Standard Rate

Min 5%

Other Rates Member State derogrations variousZero Rate Taxable but at Zero Rate e.g. FoodExempt No VAT is chargeable

No VAT reclaim is allowed and factors into a partial exemption calculation

Outside the scope of VAT

Not covered by the VAT System

If you are registered to collect VAT, you must charge VAT at the standard rate unless the supply falls into one of the other categories. Where, When and On What is considered

Picture yourself

Coming from Town Centre and want to go to Oxford.

Always ask your in-country tax professional

Swindon - mini-roundabouts were invented by Frank Blackmore

Zero Rate of VAT?Zero rated VAT is a rate, but at 0%.

You can reclaim VAT on your purchases for sales related to zero rate, but not for exempt purchases.

In the UK, the grocer Tesco, sells mostly zero rated food, but is able to reclaim most of the Input VAT they pay on purchases.

UK, but not strictly part of the EC rules.

UK Rates

Standard rate 20%Most goods andservices (taxable)

Reduced rate 5%Domestic fuel(taxable)

Zero rate0%Exports, food, books,newspapers andchildren’s clothes(taxable)

ExemptFinance, insurance,land, health andeducation

Non BusinessGovernmentdepartments etc

EU Member States(MS) and Standard Rates

21% 20%

19.0%20%

27 Member States – not including Norway and Switzerland

UK SR History2011 20%2010 17.5%2008 15%1991 17.5%1979 15%1974 8%1973 10%

2011 Rate Changes EUSlovak Republic – 1 Jan 2011 SR increased to 20%

Poland – 1 Jan 2011 SR increased to 23%, RR to 8%, LR 5%

Greece – 1 Jan 2011 RR increased to 13%

United Kingdom – 1 Jan 2011 SR increased to 20%

Portugal – 1 Jan 2011 SR increased to 23%

ROW sampleSwitzerland – 1 Jan 2011 SR increased to 8%

New Zealand (GST) – 1 Jan 2011 SR increased to 15%

Botswana – 1 Jan 2011 SR increased to 12%

2011 – Scope of VAT ChangesEUFrance – 1 Jan 2011 SR also applies to TV, Phone and bundled Internet services

Belgium– 1 Jan 2011 SR also applies to buildings and land

Finland – 1 Mar 2011 general postal services are exempt from VAT

ROW sampleIndia – proposed the introduction of a new Central and State GST - delayed

China – Major reform planned for 2013 with VAT replacing business tax

Zambia – Property and casualty insurance and fee-based banking services are subject to VAT at the Standard rate (16%).

Simple Transaction – B2B

Supply – Goods or services. Services defined as anything that does not constitute a good.Deemed Supply, Self supply

Further Example

Tesco Output VAT

Biz A Input VAT

Petrol purchased by a taxable person (Biz A) in furtherance of business.

Business Transaction VAT Chain

Input VAT refunded via Input Tax credit line.

EU Transactions

EU Member State

CountriesOutside ofEU

Other EU Countries

EXPORT

IMPORT

ACQUISITION

DISPATCH

DOMESTIC

Types of TransactionsTransaction DefinitionSupply of Goods The transfer of ownership of tangible

propertySupply of Services Anything that is not a supply of goods.

Services can be subject to the Reverse Charge mechanism.

Intra-Community acquisition of goods Acquisition of the rights of tangible property transported to another member state (eg Fr to Es)

Imports/Exports Entry into the community of goods which are not in free circulation.Exit from the community with the proper level of documentation.

VAT and Customs Territory Third territoriesTerritories in the EU but not part of the VAT or Customs Territory.

For example, Ceuta is part of Spain, therefore the EU but not part of the either territory.Import duty and import VAT

Part of the customs territory but not VAT:Channel IslandsFrench overseas departments(Martinique, Guadalope)No import duty but import VAT

Monaco – not EU, but part of EU VAT and Customs Territory.No import duty nor import VAT

Place of SupplyTransaction Place of supplySupply of Goods Where the goods are located when the

supply takes place. Follows origin principle.Article 33

Supply of Services B2C – There the supplier is establishedB2B - Where the customer’s business is established

Imports/Exports Entry into the community of goods which are not in free circulation

Place of origin or destination based

Time of Supply rulesGoods

VAT is chargeable when the goods are supplied

Intra-Community supply of GoodsEarlier of the issuance of the invoice or the delivery of the goods.

Supply of servicesVAT is chargeable when the service is supplied or if the service is prepaid then it’s at time of payment.

Importation of GoodsProvided there are no import duties due, chargeable upon entering the country.If import duties are due, VAT is chargeable when the customs duties are due.Importation into a customs warehouse may be exempt of VAT.

There are many exceptions to the general rules

Partial ExemptionA partially exempt business is one that makes both exempt and taxable supplies. The issue for a partially exempt business is how much of their input VAT they may reclaim.

Standard calculation for computing the

Taxable Supplies (excluding VAT)Total Supplies (excluding VAT)

Expressed as a percentage and rounded up. Is recomputed annually.

Taxable supplies does include zero rated supplies.

As an example:If my business has a 70% taxable and I’ve purchased Fuel from Tesco with 15.95 GBP VAT I can reclaim 70% of the VAT.

Exempt supplies include Insurance, finance credit, education and training

Reverse Charge - examplesUnder EU VAT Law, the general rule for B2B services is they are taxed where the customer belongs. Invoicing cross border would then be charged free of VAT, but the customer must account for the VAT in their country.

Reverse Charge (Tax Shift) the recipient of the service must act as both the supplier and customer and account for both Input and Output VAT for the transaction subject to normal reclaim/partial exemption rules.

On the sale of professional services from a French (FR) business to a Spanish (ES) business of 1000 Euro’s net. The ES business would self assess 200 Euro’s Output VAT and 200 Euro’s VAT Input VAT in the same month yielding a net 0 due to the tax Authorities.

100 % reclaim200 Output VAT200 less Input VAT (100% reclaim)

0 Tax Due

50% reclaim (partial exemption)200 Output VAT100 less Input VAT (100% reclaim)100 Tax Due

In Spain, failure to reverse charge could lead to penalty up to 150% of the VAT even if no tax was due the tax authorities. Other country apply different rules.

RegistrationFor VAT purposes, a taxable person is any individual, partnership, company which supplies taxable goods and services in the course of business.

However, if the annual turnover of this person is less than a certain limit (the threshold), which differs according to the Member State, the person does not have to charge VAT on their sales.

VAT Registration process and VAT reporting differ from country to country. Spain has no threshold but the UK threshold is 73,000 GBP annually.

A business does not have to have an establishment in a country in order to be required to register. Sales activity could trigger a registration requirement.

Once registered, a business is provided with a VAT Registration number and expected to file a periodic VAT return as well as other possible filings.

All the registration rules change frequently. From August 2012, UK threshold will be removed for businesses not established in the UK.

ReturnsAcross the EU, periodic VAT returns are due on either a monthly, bi-monthly, quarterly and/or annually. Some countries (eg Germany, Italy) file returns on a monthly and annual basis.

In the EU, no two returns are the same and are typically in local language.

Returns typically match calendar month unless other arrangements are made with the tax authorities.

Ireland

France

VAT Groups – general EU rulesVAT Grouping

Provided for via article 11, this option allows for taxable persons who are bound to one another by financial, economic and organisational links are treated as a single taxable person. The supplies between members of a VAT group are outside the scope of VAT. This only applies domestically.

Advantages:Simpler VAT Accounting – there is only one VAT return for the entire groupSupplies between members are outside the scope of VATExempt entities (entities making purely exempt sales) will now be able reclaim input VAT

Disadvantages:By including exempt entities it makes the entire group partially exempt – reducing the recovery for allVAT return preparation can be challenging for large VAT groups – if the return is late – bigger issueJoint and several liability for VAT for all group members if one member becomes insolventNeed to manage the group members

VAT grouping is allowed outside the EU as well, Australia, New Zealand

EU DeclarationsIntrastatIntroduced in 1993 to allow for the collection of statistical information on intra-community trade of goods including both acquisitions and dispositions. Typical filing includes ICN commodity code, country code, value in local currency, Delivery terms , Nature of Transaction (XY), Net Mass and Supplementary Units (optional).

Across the EU, the return is filed either monthly or quarterly and differing thresholds for filing apply. In addition, some countries require additional fields and specific software to upload the filing (eg Netherlands).

Penalties for late or missing filings may apply.

EC Sales & PurchasesTaxable persons that may intra-community sales must submit the EC Sales list to the VAT Authorities. A typical filing includes country code, customer VAT Registration number (must be valid), value of the goods, value of the services.

Across the EU, the return is filed either monthly or quarterly and differing thresholds for filing apply. In addition, some countries require additional fields and specific software to upload the filing. France requires a combined Intrastat and EC Sales Listing report.

Penalties for late or missing filings may apply.

UK return and reconciliationBox 8 and 9 are the Intrastat Arrivals and Dispatches respectively. The Monthly Intrastat transactions should reconcile to these boxes on either the Monthly or Quarterly VAT Returns.

ItalyItaly recently introduced a new annual communication list including all supplies to black listed countries. This is an annual filing due 30 April for the proceeding calendar period.

Assessments, Penalties etcGeneral process

Control visit – visit from a Tax AuthorityExamination of records Assessments Appeals

UKReasonable care – when do penalties apply?

Penalties will apply when a return contains a careless inaccuracy or a deliberate inaccuracy.

Three categories of offences – failure to take reasonable care:– Careless action– Deliberate but not concealed– Deliberate and concealed

Reason Penalty Unprompteddisclosure

Prompted disclosure

Careless 30% 0% 15%

Deliberate but not concealed 70% 20% 50%

Deliberate but concealed 100% 30% 15%

An unprompted disclosure is when the taxpayer has no reason to believe HMRC are about to discover the error

Penalty applies to tax

UK - Senior Accounting OfficerCertificate• The SAO of a qualifying company must provide HMRC with a certificate stating whether

the company has appropriate tax accounting arrangements or, where it does not, providing an explanation.

• The certificate should be provided to the CRM (HMRC Client Relationship Mgr) for the company or companies covered and the suggested format for the certificate is as follows: -

• “I….. as Senior Accounting Officer of the qualifying company /companies listed below, hereby certify that to the best of my knowledge and belief throughout the company’s or companies’ financial year ended [….] the company/companies had appropriate accounting arrangements or to the extent it/they did not an explanation is provided below.”

Penalty Provisions• There could be a penalty of £5000 assessable on the SAO if they fail to comply with the main

duty• there could be a penalty of £5000, again assessable on the SAO, if they fail to provide a

certificate or if they provide an incorrect certificate; or• there could be a penalty where a company fails to notify HMRC of the name/s of the person who

was the SAO throughout the financial year

How to measure risk?Annual and/or periodic surveys measuring risk

VAT Under Management

Annual review of business processes

Working closely with the tax authorities

More real time metrics – KPI’s

Data Analytics

Data Mining

Sales & Use Tax

Sales Tax:A Sales Tax is a tax imposed on receipts from sales by the supplier on taxable intrastate transactions.

Seller’s Use Tax:A Seller’s Use Tax is a tax imposed on receipts from sales that is collected by the supplier on taxable interstate transactions

Consumer’s Use Tax:A Consumer’s Use Tax is a tax that is imposed on tangible personal property brought into a state for storage, use, or consumption in the state when the seller did not collect seller's use tax on the sale of the property.

Other names for common sales taxes include: Privilege tax, License Tax, Gross Receipts Tax

Types of Sales/Use Tax

Importance of Sales and Use Tax

Percentage of Total State Tax Collections by Category, 2010

Source: U.S. Census Bureau, 2010 State Government Tax Collections

State Sales/Use Tax

Today, 45 states, the District of Columbia and Puerto Rico impose some form of sales and use tax.

States with NO Sales Tax

New Hampshire

Oregon

Montana

Alaska

Delaware

Local Sales/Use Taxes

Over 6,700 Jurisdictions Have Local Sales/Use Taxes

General Concepts

Sales Tax – Generally a flat rate tax imposed on the gross receipts derived from or the sales price of retail sales of tangible personal property or taxable services

• Regressive tax• Discrete event

— Transfer of possession/performance of taxable service

— Consideration

General Concepts

Sales Tax - Four types of sales tax

• Privilege tax – imposed on the seller for privilege of selling tangible personal property within a jurisdiction

• Consumer levy – imposed on the buyer, but is a debt to the seller who is required to collect

• Transaction tax – imposed on the sale of TPP or taxable services and may be a debt to the seller

• Gross Receipts tax – assessed on the gross receipts of a business in a state

General Concepts

Sales Tax –• Characteristics of all four sales taxes

— Everything taxable unless exempt by statute— Everyone taxable unless exempt by statute— All receipts taxable unless excluded by

statute— Only transactions defined by statute as

occurring with a state are subject to the tax of that state

— Services taxable by exclusion in all but gross receipts states

What is a Sales Tax?

Imposed on Final Consumer

• Imposed on Retail Sales— Includes Leases

• Tangible Personal Property (“TPP”)— Property that can be perceived by the senses

(touched, felt, seen, etc.)

• For Consideration— Cash or Promissory Note— Assumption of Debt— Barter of Goods or Services

Imposed on Final Consumer

• Imposed on Use, Storage, or Consumption of Tangible Personal Property (“TPP”)

• All states with a sales tax have a use tax• Complimentary to sales tax• Generally imposed on owner of property

for the right to store, use or consume property in a state

What is a Use Tax?

Common Taxable Services Related to Tangible Personal Property

• Assembly• Fabrication• Installation• Repair & Maintenance

Enumerated Services

These are services which are “listed” in the statute as taxable services.

Enumerating services allows a taxing authority to move beyond the definition of TPP for additional ability to tax.

Many states are broadening the list of enumerated services to increase revenue.

Activities Involving No Transfer of Property, but Enumerated As Taxable

• Mostly Commonly:— Admissions to amusements— Club fees and dues— Memberships— Telecommunication &

Services— Cable & Satellite television

Business Services Subject to Tax

• Data Processing• Debt Collection• Information

• The term nexus is used in tax law to describe a situation in which a business has a "nexus" or presence in a state and is thus subject to sales taxes for sales within that state.

• Physical Presence— Property location (e.g., sales office, warehouse)— Employees— Agents— Representatives— Independent contractors

Sales Tax Nexus

Having nexus for sales tax purposes means you are required to register, collect and remit the tax.

Pennsylvania

NOT IF:• Mail Order• Advertisement• 1-800 Telephone #s

Is the Seller Required to Collect?

Pennsylvania

Yes If:Sales solicitation by employees, representatives, & independent contractors

Yes If:• Owning/leasing

property• Maintaining an office

Pennsylvania

SitusSale of Tangible Personal Property• Origin – based on seller’s place of

business• Destination – shipping address• May require additional details such as

location of order acceptance or order origin.

Sale of Services• Where performed• Where benefit received

Determination of tax jurisdiction is based upon the situs of the transaction.

Amounts Included in Sales Tax Measure

• Entire Selling Price of taxable Tangible Personal Property (“TPP”) – including fabrication or assembly labor prior to sale, and may include freight & installation.

• Entire selling price of taxable services

Amounts Not Included in Sales Tax Measure

• Separately Stated Services• Separately Stated Repair or Installation Labor• Shipping or Transportation After the Sale • Cash Discounts• Interest and Finance Charges

Use Tax Measure

• Material Cost:— Actual cost of materials only

• Full Retail or Fair Market Value

— Full price including profit margin

• A transaction that is within the general scope of the tax statutes, but is the subject of special provisions removing it from taxation is subject to an exemption.

• Common Examples:—Exemptions based on type of buyer (charities,

govt.)—Type of item purchased (e.g., food, medicine)—Certain uses (manufacturing, goods to be resold)

What is an Exemption?

A valid exemption certificate relieves the seller of the obligation to collect or remit the tax.

Contents of a Valid Exemption Certificate

• Name and Address of Customer• Seller’s Permit or Registration Number of

Purchaser• Name of Seller• Description of Business of Purchaser• Description of Property Being Purchased• Date (On or Before Date of Sale)• Signature of Authorized Representative• Statutory Reference to Exemption being Claimed

Sales Tax Rates Changes, 2009

In 2009, there were 707 Sales Tax Rate Changes

Average Sales/Use Tax Rates, 2010

State 5.5%

County 1.5%

City 1.6%

District .9%

Combined 9.5%

Tax Return Filing Process

System is cumbersome, inefficient and expensive

• Filed on a monthly basis.• Due dates: 15th, 20th, 25th, and End of the

Month.• File with state and local taxing authorities

—Over 6,700 taxing locations. Source: ADP, Inc.

• File electronically

Tax Integration with Business Processes

What is tax automation?

Determining tax rules, tax amounts, rates, and reporting codes based on input variables in the ERP

The level of sophistication of the ‘automated’ solution can vary greatly based on available technology and business tax process

The three most common approaches:• Native ERP Tax Engine (e.g. Oracle tax code defaults)• Custom Developed Solution – decision tables (e.g. Old

SSS VAT soln or Energy Parts ERP IC soln)• External Tax Engine Interface (e.g. Sabrix, Vertex,

Taxware, etc.)

Oracle

Tax EngineOracle

1.0Enter

Supplier Invoice

2.0Retrieve Invoice

3.0Determine

Tax Liability

4.0Apply

Tolerances

5.0Classify

6.0Account for Tax

Buyer & Seller Locations

Transaction Type

Product Exceptions for each applicable jurisdiction(s) are evaluated

Check For Exemption Certificates

Apply rates & rules at invoice line level

Compare Sabrix Tax to Supplier Tax

Tolerance determined at OU level

“Short Pay” ability determined at OU level

Tax Code allocated at line level

Custom Account Generator - tax accounting based on rules at LE level

Accounting for Tax

Data passed to tax engine as part of invoice validations

Validations run on a 3 hour cycle

Only transactions that pass all standard Oracle validations are selected

Buy to Pay Tax Overview

L2 SSS Sabrix AP Tax Process

try 1.1Enter PO Invoice

1.2Enter Non-PO

Invoice

2.1Run Standard

Validations

2.2Run Sabrix Pre-

Validate & Populate

Standard Validations Complete?

Oracle Validation

Hold Assigned

Sabrix Tax Status Flag Updated to

‘R’

Sabrix Validations Complete?

Sabrix Pre-Validation

Hold Assigned

3.0Calculate Tax

2.3Execute Sabrix

Tax Process Pre-Calculation

4.0Apply Sabrix Tax

Tolerances

5.0Classify Tax Lines

6.0Perform Custom

Accounting

Severity 2 Tax Error?

Tax Is In Tolerance?

Sabrix Tax Tolerance

Hold Assigned

YTax Code Created in Oracle?

Sabrix Tax Account Hold

Assigned

Valid CCID for Tax Line?

Invoice Processed

Successfully

Sabrix Tax Process Error

Hold Assigned

Invoice Validation

Set Sabrix Tax Status Flag

Sabrix PrePopulate & PreValidate

Sabrix AP Tax Process

o Invoice Validation Request Seto GESSS Paygroup Assignmento GE 170 Invoice Dummy Creationo Invoice Validationo Sabrix Set Tax Status Flago Sabrix PrePopulate & PreValidateo Sabrix AP Tax Processo Markview Approval Check Evento Invoice Approval Workflow

SSS L2 Process Map

Jeff Hilt/Theresa Pardee ACT

Buy to Pay Process

Order to Cash Process FlowOracle Modules and

Interface to Tax EngineTax Engine and interface to

Oracle AROracle AR

1.0Generate

Billing

2.0Retrieve Invoice

3.0Determine

Tax Liability

4.0Generate Tax Code

5.0Account for Tax

6.0Generate Reports

Data is interfaced from order and field service modules.

Data passed to tax engine as part of auto invoicing or as part of manual invoice process.

Customer Exemption Locations (Ship

From, Ship To) Transaction ID Amount Date of Transaction Legal Entity Lookup Tax Category

(Product and Transaction Type)

Point of Title transfer and Delivery Terms

Supply Location Buyer

Primary/Seller Primary

Excluded EU Provinces

EU Movement Type

Intercompany Transaction Type

Custom Account Generator - tax accounting based on rules at LE level

Accounting for Tax

Reporting

Order To Cash Process

Key Design Challenges - Goods

Ship From – Not Always Captured

in ERP

Vendor Direct

Interco

Manual AR Invoices

Services Modules

Importer of Record – What data element in

ERP?ERP Terminology

vs. GE T&CS

Non-standard Incoterms

Manual AR Invoices

Services Modules

Tax Category for Materials

Item Master Data Structure

Intrastat Classifications

Manual AR Invoices

Services Modules

Key Design Challenges - Services

Address Elements Not

Captured in ERP Modules

Seller Address

Place of Performance

Installation Site

Repair Shops

Legal Entity Structure

Oracle Multi-Org

Legal Entity vs. Branch (e.g.

Commissionaire

Tax Category for Services

Separately Stated vs. Lump Sum

Cross Border Service Types

Outside Scope or Exempt

Progress Billing or Advance Pmts

Comparison between VAT & Sales and Use Taxes

Description

Operation of Tax

Collection & Remittance

Computation of Tax

A multistage tax collected at every stage of the production process; widens the number of entities collecting and remitting the tax.

Tax is calculated based on the value added at each stage of production.

Entities collecting and remitting the tax do not have to verify the status of the customer as either a business or final consumer.

Sales/Use Tax

A single-stage tax collected at the final sale to consumer.

Entity collecting and remitting the tax needs to verify the status of the customer.

Tax is calculated based on the total value (sales price) paid by the final consumer.

Summary: VAT versus Sales/Use

Description

Tax Base

Transaction Based

A broad-based tax; almost all sales are taxable, including sales of service.

Entities may recover the VAT they paid on any intermediate transaction (input tax credit); tax cascading may be minimized. However, over taxation may result if the input tax chain is broken.

Sales/Use Tax

Tax base is generally limited to sale of tangible personal property; only enumerated services are taxable.

Certain intermediate transaction are exempt; others are subject to the tax. Potential tax cascading effect may occur on previously paid tax.

Description

Exemption

Zero Rating

Exempt from VAT means the entity would not impose VAT and would not be entitled to input tax credit for VAT paid on its purchase.

Zero rating means that the entity would impose VAT but at a rate of zero and would be entitled to input tax credit for VAT paid on its purchase.

Sales/Use Tax

Exclusion from RST simply means that the transaction is outside the scope of the tax. The taxpayer has no burden of proving that the transaction is excluded.

Exemption from RST means the transaction is within the scope of the tax but is specifically listed as exempt from tax. Burden of proving that the transaction is exempt rests on the taxpayer.

Description

Taxability

Documentation

Refunds

Entities need to distinguish sales that are taxable, exempt, or zero rated.

May require refunds if inputs exceed outputs.

Use of invoice to self-enforce the tax; harder to evade.

Sales/Use Tax

Entities need to distinguish sales that are either taxable or exempt.

Exemption certificates may not effectively police the use of exemptions.

Refunds are generally limited to overpayment of tax.

vat & sales/use jeff hilt & theresa pardee - …c.ymcdn.com/sites/ 14 of these years...

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