Value-added tax (VAT) and customs duties - two determining factors when choosing where to locate a business - are explored here with direct reference to Ireland's situation. In the case of VAT we look at how headline-grabbing rates should not be taken at face value, as well as reviewing the customs regime in Ireland.
Value-added tax
Ireland currently enjoys a unique position in the EU with its extremely low corporation tax regime at 12.5%. But its standard VAT rate at 21% is at the higher end of the EU scale (varies between 15% and 25% - Luxembourg and Sweden respectively). For this reason many businesses may decide not to locate in Ireland. This could be a serious financial mistake. Because of the nature of the EU-VAT system, there are a number of reasons why the VAT rate in the member state in which an operation locates may have no adverse affect on the customers to whom they supply goods or services.
Firstly, if locating in Ireland to sell into the Irish market, business competitors will also be charging VAT at the same 21% rate so there will be no disadvantage. If, as is more likely, an operation locates in Ireland to sell into other member states or to customers outside the EU they will generally be relieved from the obligation to charge Irish VAT on supplies.
The main aim of the EU-VAT system is to collect tax from consumers and not from businesses. While there are exceptions to this general principle, these revolve around difficulties in applying VAT to the services and commodities concerned, so that it can be passed efficiently to final consumers. For example, financial and insurance services providers are usually exempt and do not charge VAT to their customers. But the downside for these businesses is that they cannot reclaim VAT on their costs. In effect, they are treated as if they were final consumers for VAT purposes and it is generally a bottom-line cost for them.
Apart from these exceptions, VAT generally only results in cashflow costs for businesses. These arise from the way the regime is operated to ensure the tax is collected, and therefore the rate applied between businesses is not that important. What really matters is how long it will take to recover the VAT required to pay to another business supplier from the relevant tax authority. We will look at this point later when dealing with compliance.
Also, the VAT rate applicable in a particular member state such as Ireland may not be that relevant from a business perspective because, despite a common perception that it is an EU tax, it is in fact a national tax collected and retained by the individual member states for their own disposal. So there is a motivation, within each individual member state, to collect and retain as much revenue as possible.
To achieve this end, and to have fair distribution of the benefit of the revenues, member states have agreed rules that ensure VAT is collected by the member state in which the goods or services supplied are used or consumed. A consequence of these rules is that it will, with few exceptions, be applied at the rate applicable in the customer's member state rather than in the supplier's country.
So with some tax planning, businesses can be structured to ensure they can use the rate applicable in their customer's country while still being able to use Ireland's low corporation tax rates.
VAT compliance issues
Ireland has a reputation for being business friendly and the tax authorities are usually helpful. But there has been a move within the last few years to a more strict approach by the tax authorities to compliance issues, with a trend to impose penalties for all mistakes. It is essential to get advice early.
At the time of writing, VAT registration in Ireland takes approximately three weeks to obtain from the date the relevant forms are filed with the tax authorities. Ireland does not require a fiscal representative to be appointed for VAT compliance, nor does it require a business address in Ireland other than an undertaking to present the records of the company at an address in Ireland at which they can be inspected by the tax authorities. The tax authorities will also conduct inspections outside of Ireland at the taxpayer's request, provided that the taxpayer undertakes to pay the expenses of the exercise.
Ireland is prominent in the EU in relation to electronic commerce and it is possible to file most tax returns, including VAT returns, electronically. The tax authorities demand little information on periodic VAT returns, collecting only one detailed return each year from registered persons.
Business-friendly-VAT-return regimes are also available by option. A business can file one return a year by agreeing in return to make monthly direct debits of its expected annual VAT liability.
Businesses that are in a consistent refund position can file monthly VAT returns to reduce cashflow costs. Payments and repayments of tax can be made directly to bank accounts.
Overall the tax authorities are helpful to businesses starting up in Ireland and will also give rulings on which the trader can rely so that they have certainty in relation to taxation issues. Revenue audits are not overly intense in comparison to other member states within the EU, and a business that is in a payment position and is compliant can expect to be audited on average once every six years. Businesses in a repayment position are generally audited more frequently but if they are compliant their audit program will probably be every four years.
Business-friendly VAT relief
There are a number of these available to businesses locating in Ireland, which are not available generally within the EU.
VAT 13A
A particular relief available to businesses that derive more than 75% of their revenue from sales outside of Ireland is the VAT 13A. Under this relief the qualifying company can receive virtually all of the goods and services supplied to it without VAT being charged.
VAT 4A
VAT 4A relief allows an Irish landlord to grant a lease on a business premises to a company, which is entitled to recover the VAT without charging and collecting VAT on the lease. In Ireland, a lease in excess of 10 years is treated as if the property has been sold to the tenant and a significant charge can arise on even a medium-sized facility. The relief is particularly important, even though the charge would be recoverable by the company because start-up operations will be relieved from the obligation to fund the significant charge.
VAT 60A
Under European rules VAT must be charged on certain services which are supplied from a member state even where the recipient of the services is located elsewhere within, or outside, the EU. Foreign businesses are generally entitled to reclaim VAT paid abroad from the relevant tax authorities, provided that their business would qualify for refund if it was located in the member state concerned. However, this is a slow process and involves submitting original invoices to vouch the claims.
For non-EU businesses, some member states, for example Spain, apply reciprocity rules under which they will refuse to refund Spanish VAT to non-EU businesses unless the tax authorities in the claimant's country refund VAT to Spanish businesses. This rule is applied even where the claimant's country does not have a VAT system, so, for example, US businesses cannot recover Spanish VAT that has been charged to them.
Under Irish VAT 60A relief a company located in Ireland can be relieved from the obligation of charging Irish VAT to other EU and non-EU businesses provided that the customers concerned would be entitled to a refund of the amounts if their businesses were located in Ireland. Ireland does not apply reciprocity rules, and this is a very significant cashflow and administrative relief for non-Irish customers.
At the time of writing a further relief is proposed in this year's Finance Bill, which will relieve companies from the obligation to pay VAT to non-Irish suppliers engaged in the supply and installation of goods in Ireland.
With the exception of the provisions above, Ireland is generally compliant with the normal workings of the VAT systems as it operates throughout the EU. There are exceptions, as in other member states, and tour operators, travel agents and telecommunications companies especially should familiarize themselves with the rules before embarking on any activities in Ireland.
VAT summary
Ireland's VAT system has many business friendly provisions and the tax authorities are cooperative in assisting start-up or relocating businesses. Ireland's VAT rules usually follow the mainstream treatment of business transactions that are applied across the other member states and should have a familiar feel to any business currently located elsewhere within the EU.
Crucially, the 21% VAT rate should not be used as a determining factor in locating a business in Ireland until a detailed examination of the possible impact has been carried out. The benefits of 12.5% corporation tax rate should not be abandoned lightly. Even if the VAT rate is a problem, it is possible to shop around for the tax-planning structures that are available to mitigate its effects.
Customs duties
The European Union adopted the single market concept in January 1993. From a customs perspective this was very significant as it provided for the free movement of EU originating goods and duty-paid non-EU originating goods within this single market area; in other words there are no internal borders or any additional import duties once a product has been imported into the EU, irrespective of the member state of importation. To further illustrate the single market concept, duties collected at import are referred to as own resources (EU revenue) and legislation in respect of securing duties is uniform throughout the EU.
As a general rule, import duty is chargeable on goods that originate outside the EU. Duty rates are determined by an internationally harmonized coding system and are uniform throughout the EU. But there are many procedures whereby import duty can be minimized or indeed eliminated depending on the nature of the goods and the reason for importation. Origin of a particular item could also have a beneficial or detrimental effect on the import duty payable, and as duty is a non-recoverable cost (from the inland revenue perspective) it could impact on a company's profit margin.
The main procedures fall into a category called customs procedures with economic impact (CPEI) and with timely and strategic planning a specific procedure can generally be exploited to provide optimum benefit to an EU operator. The implementation of the procedures for custom relief in Ireland is similar to those in the other member states. Anyone familiar with these procedures elsewhere within the EU will find no significant differences in Ireland. The procedures themselves and their advantages are set out briefly below.
Apart from the fact that duty rates have fallen internationally over the past number of years, duty remains a serious non-recoverable cost for many businesses. If your company does incur import duties you should be looking at ways to mitigate these costs. And if your company doesn't pay import duty you should ensure that your goods are correctly classified and properly entitled to zero duty.
Customs compliance issues
The supervision of customs duties in Ireland is quite strict and well policed. The customs officials are approachable in relation to customs procedures for new businesses. Currently, the imposition of penalties for non-compliance with the customs code is rare - other than payment of underpaid duties - but this may change given the general trend within the office of the Irish tax authorities.
As a means towards providing the speedy release of goods at import, customs now carry out post-import audits of business records in addition to their traditional policing role. It is therefore necessary to ensure that documentation is carefully examined and retained to ensure that it stands up to customs auditing requirements.
Business-friendly customs relief
Inward processing
The inward procedure is geared towards an EU manufacturer with substantial markets outside the EU: it provides for the duty-free importation of raw materials provided the finished product is exported. Any goods diverted onto the EU market are levied with the duty that would have been chargeable on the original raw materials consumed in the diverted (finished) product.
Outward processing
Outward processing enables an EU operator to export a product in order to undergo a process: the re-imported added-value product may qualify for partial or full duty relief depending on the classification and valuation method used at re-import stage.
Processing under customs control
Not unlike inward processing as it provides for the duty-free importation of raw materials, though it differs significantly because the finished product does not have to be exported. Instead, with processing under customs control, duty is determined by the tariff classification and the value of the finished product. The procedure has optimum benefit in sectors such as medicines, medical, healthcare, technology and computers, as the import duty rate on such finished products is currently zero.
End-use authorization
Again, it allows for the duty-free importation of specific products. But the specific goods must be assigned to a specific end-use. The procedure has significant benefit for sectors such as petro-chemical, hydrocarbons, aircraft/aircraft spares.
Warehousing
Depending on the nature and volume of trade (economic need) the procedure allows for the storage of goods, while at the same time suspending import duty and VAT as long as the goods remain within bond. It is a procedure that may have significant benefit for just-in-time (JIT) suppliers or for a distribution hub.
Preferential rates of import duty
The EU is party to many bilateral and multilateral trade agreements with specific countries throughout the world (Mexico, the Americas, Eastern Europe, Asia and Africa). A wide range of goods, including raw materials, components and finished products, which can be shown to have originated in these preferential countries, may be imported into the EU at reduced or sometimes zero rates of duty.
Valuation of goods for customs duty purposes
Duty is generally assessed on the CIF price, which is the cost price of the goods plus insurance (if applicable) plus freight, to first point of entry into the EU. However, there may be costs within an invoice price which, if identified separately, could be excluded for duty purposes.
While these procedures are not unique to Ireland, they are available to qualifying businesses.
Duty deferred scheme
Duties payable at the point of entry can be deferred and paid on a monthly basis.
Automated entry processing
Customs operate automated clearance procedures with approved clearance agents under which customs clearance can be effected electronically.
Locating in Ireland
Ireland's customs regime conforms with those of the other EU member states and offers the same principal aids as any other member state. In addition, it offers automated clearance procedures and deferral of payment of duties. There may not be any overwhelming incentives for locating in Ireland, but from a customs perspective there are certainly no reasons why customs issues should prevent a company from locating here in favor of any other location within the EU.
