VAT refunds are inherent to our current VAT system, which is based on the general principle that VAT should only tax the final consumption of goods and services. This principle of neutrality is embedded in the right to deduct input VAT by VAT taxable persons.
Summarized in short, the VAT refund system works as follows: VAT taxable persons pay VAT on the sales of their products and services ("output VAT"), but they are also charged VAT on their own purchases ("input VAT"). Any VAT taxable person with a right of deduction may deduct this input VAT from the output VAT in their periodic VAT return. To the extent that this periodic VAT return results in a VAT credit, this VAT credit can be subject of a VAT refund application.
In principle, a VAT refund takes place in the country where the taxable person is registered for VAT. There are three exceptions to this:
(1) a VAT refund to a VAT taxable person established in another EU member state,
(2) a VAT refund to a VAT taxable person established in a third country (non-EU member state), and (3) a VAT refund to travellers from a third country.
VAT refunds are subject to strict conditions in the different EU Member States. VAT administrations must be vigilant when refunds are made because they are susceptible to fraud and there is a significant risk of loss of VAT revenue. Nevertheless, an efficient refund of VAT is essential for the liquidity of VAT taxable persons.
The difficulties faced by tax administrations in the context of VAT refunds are numerous. They have to identify refund applications from fraudsters in a timely manner, as well as those from VAT taxable persons (often in good faith) whose VAT is actually not eligible for refund - either because of VAT deduction restrictions or because of expiry or statutes of limitation periods. However, this has a price in terms of resources used in the VAT administration. In a report published in 2017 by the European Commission on VAT collection and control procedures in EU Member States, the European Commission observes that, due to the limited resources of tax administrations, they have to strike the right balance between a quick refund and the control of applications. According to the report, most EU Member States use automated procedures with risk assessment methods for efficient processing. In other EU Member States, all refund applications are checked prior to payment, resulting in a refund delay.
The Belgian VAT administration played a pioneering role in automation at European level with its co-developed data mining software "Transitional Network Analyses". This software was made available to the tax administrations of other EU Member States in 2019, to better combat VAT carousel fraud.
In 2019, the European Commission also commissioned a study on refund practices in EU Member States and the improvements to be made in this area. The study showed that, in the period between 2013 and 2016, although the number of VAT refund applications increased, the value of cross-border VAT reclaimed per application decreased.
In practice, additional controls continue to delay the payment of VAT credits. This is all the more true for foreign VAT taxable persons who need to be patient in some EU Member States and third countries.
Taking everything into account:
a) If you are a policy maker, are you in favor of more extensive controls to limit the loss of VAT to the state treasury, or is an efficient refund of VAT entitlements a priority as they are essential for the liquidity of bona fide VAT taxable persons?
b) Does your opinion change if you are a business manager? Are you prepared to wait longer for VAT refunds if this means that fraud can be detected in a timely manner and there is less room for unfair competition from fraudulent companies?
With increasing globalization of world trade and cross-border provision of services, the importance of effective (technological and VAT-technical) solutions for VAT refunds will only increase. This could improve the efficiency of current refund procedures, but other VAT technical solutions could also help to reduce the system's vulnerability to fraud (such as a digital procedure for refunding VAT to travelers from third countries). Meanwhile, the right to deduct input VAT remains a fundamental element of the European VAT system. It is also for this reason that VAT refunds in both the EU and Belgium will continue to be important for at least the next five years.
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Author: Samir Haouari, Director
The VAT system in Belgium was introduced in 1971, which will be 50 years ago in January 2021. On this memorable anniversary, KPMG Tax & Legal Belgium and Wolters Kluwer jointly publish a series of articles that reflect on the current VAT system in the context of our changing business and social environments. In each article, KPMG tax experts address a specific aspect of VAT and related challenges of the system and offer predictions on future evolutions by 2025.