Of VAT refunds and cabotage rules:
Valued-added taxes (VAT) may now amount to 25 percent of a jet fuel purchase in some parts of Europe. But that’s the bad news. The good news is that in most cases this tax may be refunded, as may VAT levied on many other business-
related goods and service expenses incurred by company employees traveling abroad.
VAT actually begins as a government tax imposed on businesses at all levels of the manufacture and production of goods or services. It is based on the increase in price, or value, provided at each level–hence the term “value-added tax” as it is passed along to the end user. It was first introduced in France in 1954 and is now an ingrained element of the tax structures of virtually every European nation and many other countries throughout the world.
Moreover, it is a major revenue source of many governments. In France, end-users are encountering VAT at rates in excess of 19 percent. In Russia, where VAT is currently 20 percent, there have been discussions in recent months of raising it to 21 percent.
VAT in Denmark is a staggering 25 percent for everything from jet fuel and professional fees to hotel rooms, auto rentals and meals. Portugal is among countries at the lower end of the VAT structure, charging 17 percent and only on professional fees and trade fairs, conferences and exhibitions.
Is it worth the time and effort to make the application for a refund of VAT? The answer typically depends on the amount of the VAT paid and what portion of it may be refunded. For a few inexpensive gifts, it is probably not worth the trouble. But for a Challenger 604 uploading 19,000 lb of fuel at Paris Le Bourget Airport at about $1.42 a gallon, the VAT of 19.6 percent brings the refundable amount to about $800. Add to that the VAT attached to FBO service fees, aircraft catering and hotel charges and meals for the crew and passengers for a week, and the total VAT charges can quickly reach several thousand dollars.
Surprisingly, some companies do not take advantage of VAT refunds. According to VAT Recovery Group, Bonn, Germany, “U.S. companies are currently reclaiming only about 20 percent of the more than $1 billion they are paying [annually] in VAT in Europe.”
What value-added tax expenses may be recovered? It varies from country to country, but according to the VAT Recovery Group, refundable VAT expenses may include those paid on:
• Business travel costs (car rentals, hotel accommodation, meals, gas, telephone and so on).
• Business operating expenses (jet fuel, maintenance costs and so on).
• Marketing/advertising services and professional advice, such as that obtained through consultancy services.
• Trade-fair expenses and conference costs.
• Goods, machines and equipment.
• Exports into Europe and inter-European transfers of goods (subject to certain limitations).
VAT recovery claims must cover a minimum three-month period, or they may be filed once a year, subject to various country-specific restrictions. An exception is made for claims covering the remaining period of a fiscal year. There are limitations to the minimum amount of VAT reclaimable for certain periods of time.
The growth in the number of items subject to VAT and rising tax rates have spawned an expanding number of companies similar to the VAT Recovery Group, all specializing in tax recovery on behalf of individuals or companies.
Most work on a percentage basis, some charging the client only for those VAT fees actually recovered. Commissions charged for the service generally range from 25 to 50 percent, and most work on a “no refund/no charge” basis. But be warned, documentation is required. To qualify for a VAT refund, the company applying for the refund should be prepared to provide:
• Original records, such as invoices, import documents and so on. Credit-card slips or copies of invoices may not be sufficient. Receipts should note the amount of the total paid in VAT. Depending on the country (Germany and France in particular) receipts and invoices should include the name of the company and the individual making the purchase.
• Proof of registration as a corporate taxpayer. For U.S. companies this is form IRS 6166.
• VAT application recovery form signed in the hand of a fully authorized signatory (not required by every country).
• Power of attorney granting authority to process the VAT recovery claim application.
• In some cases, a copy of the air operators certificate.
There are also value-added tax software programs for those who prefer to avoid commissions by tracking VAT expenses and filing for refunds themselves. This, according to VAT.cc, a free Internet valued-added tax advisory, is generally most appropriate for small business owners.
While some smaller companies experienced in travel to the EU handle their own VAT recovery applications, larger companies will typically outsource the chore. Universal Weather & Aviation, for example, has an agreement with VATAmerica of Princeton, N.J., for recovery of valued-added tax on behalf of its clients. Executive Jet International outsources VAT recovery to its fueler in Germany.
TAG Aviation, one of the world’s largest charter operators of business aircraft, also outsources its VAT recovery efforts. While a spokesman declined to name the company, he did note that it was a new contract and that the 25-percent commission was considerably less than the 50 percent levied by the former company. He also emphasized that all VAT refunds recovered on behalf of TAG, less commission, are returned to the aircraft owner or charter client.
Is it worth the effort? In general, it depends on the amount of VAT charges incurred, according to those in the VAT recovery business.
Jim Walker, president of VATAmerica, offered as one example a recent five-day trip through Europe by a U.S.-owned Gulfstream IV client. The VAT charges for ground handling and hotel expenses in Austria and Germany and Irish and EU overflight charges came to $3,087. Another $5,969 in refundable excise tax on mineral oil was added to jet fuel costs in Germany. Excluding the VATAmerica commission, said Walker, the client can expect a refund of about $6,700.
Walker pointed out that the VAT refund on this particular trip was higher than usual. He stressed that expenses vary, as do the VAT charges from one EU country to another, as well as items purchased that are subject to VAT.
How long does recovery of VAT take? Like the amount levied, it varies from one country to another–“as little as three or as long as 10 months,” said Walker.