The EU VAT refund claim: How does it work?
Would you like to optimise your cash flow potential? Have you ever thought of recovering VAT on expenses incurred abroad? Are you overlooking the opportunity to recover this VAT due to the complexity of the refund claim application?
Local businesses are in general not only failing to recover VAT on foreign expenses incurred abroad due to the perceived cumbersomeness of the EU VAT refund application process, but also due to the lack of knowledge on the elements of VAT that may be recovered.
Common examples of VAT which is normally foregone as result of failing to identify the eligibility of recovery include VAT on accommodation expenses and travelling expenses incurred by local businesses abroad. Other examples include VAT incurred on business services received from businesses registered for VAT in other member states, where the place of supply of such services is not Malta.
In terms of the VAT rules which are currently in force, input VAT on expenses incurred by a business established in Malta may be recovered through the submission of its Malta VAT return only to the extent that it relates to purchases which are treated as taking place in Malta. Should a Maltese business incur foreign input VAT on expenses charged abroad, then, the only way it can recover this input VAT would be through a claim made on the basis of Directive 2008/9/EC.
The salient features of the EU VAT refund mechanism
At the outset one should point out that to be eligible for a refund the applicant must be a taxable person established and registered for VAT purposes in Malta under the standard VAT registration (Article 10 of the Malta VAT Act) and is making taxable supplies in Malta. Furthermore, one must have incurred VAT on expenses in a member state in which one has no establishment and during the refund period, must have made no supplies within that member state other than reverse charge supplies or certain exempt transport services.
EU VAT refund claims must be submitted electronically through the electronic portal of the VAT Department of the country where the claimant is registered i.e. the Malta VAT Department in the case of Maltese registered businesses.
The deadline for submitting the claims is nine months following the end of a calendar year. A business will be able to make up to a maximum of five claims in each year made up of four calendar quarter claims plus a final claim to sweep up any expenses that have been overlooked during the year. The minimum amounts a business can claim vary slightly between EU countries, but are approximately:
€400 if the claim covers a period of more than three months but less than a year;
€50 if the claim covers a whole year or the remainder of a year (i.e. where your claim covers the whole period between the end of your last claim and the end of the year).
Each member state has its own limits, however essentially the amounts are very similar across the board. Upon submission, the claim is forwarded to the member state where the input VAT was incurred and the latter then has four months to process the claim. Assuming everything is in order, the claim must be paid within 10 days from the date on which the form is processed. In case additional information is required, the member state of refund has a further four months to process the claim. If the claim is paid late, then the tax payer is entitled to receive interest.
While this may seem a bit cumbersome and lengthy in process, experience has proven that the refund claim procedure is highly efficient. On this basis, we feel comfortable to state that gone are the times where foreign VAT incurred by local businesses is foregone as a result of the highly administrative formalities experienced in the past.
Submission of claim for incorrectly charged foreign VAT
Another point of interest is that situations may arise when a supplier wrongly charges VAT to an overseas customer (and the customer pays it in good faith) and the overseas customer then submits a refund claim to the supplier’s country to reclaim this VAT. What happens if the VAT authority receiving the claim rejects it on the basis that the VAT should not have been charged in the first place?
Protection to the customer in this case has been granted by the European Court of Justice’s decision in case C-35/05  between Reemtsma Cigarettenfabriken v Ministero delle Finanze. This particular case related to a refund claim submitted by a German company to the Italian Authorities for VAT which was incorrectly charged by an Italian company to the said German company for advertising services acquired thereby.
The Italian authorities rejected the claim on the basis that VAT should not have been charged in the first place.
However the ECJ ruled in favour of the tax payer, on the basis of principles of neutrality, effectiveness and non-discrimination which allowed national legislation to reimburse VAT unduly paid to the tax authorities.
Steps to follow in submitting a refund claim:
Step 1: At inception make sure the business is in possession of an electronic identification required for the purposes of electronic submission of the claim;
Step 2: The business must appoint an organisation manager to be responsible for the Electronic VAT services of the entity;
Step 3: Ensure the input VAT incurred abroad is supported by valid tax invoices;
Step 4: Check the input VAT deductibility rules in the member state of refund;
Step 5: Check the date of invoice to ensure it falls within the period of reference;
Step 6: Ensure that foreign VAT incurred in 2010 is identified in anticipation of the September 30, 2011 deadline.
Potential VAT recovery opportunities in different member states
The table below represents potential VAT recovery opportunities in a sample of different member states:
In conclusion, proper knowledge of a tax payers rights relating to the EU VAT Refund Mechanism ensures that Maltese registered business will take advantage of these mechanisms in order to improve both profitability and cash flow.
The above overview covers areas of potential interest in fiscal matters.
No liability for error of fact or opinion is accepted. Please take professional advice before applying the context of this article.
Mr Giglio is an assurance and tax partner at Mazars Malta and Mr Zampa is a tax manager at Mazars Malta and is responsible for the indirect tax division of the firm.