Intro Video Transcript

VAT (Valued Added Tax) Accounting and Control By Carlos Di Brico, CPA-BA Brought to you by Illumeo. First of all, thanks to everyone for your interest on this VAT Training. The main purpose of this training is to provide you with a vision on the importance of managing VAT transaction and balancing it in a proper manner. VAT Management is not rocket science but as for my experience some headaches can be avoided with the proper registration control process in place. This training will be mainly focused on Latin America but the concepts and role are applicable in other region since the mechanics are basically the same. I hope you find this training useful. Let’s move on to the agenda. This is the agenda we’ll be covering today. Agenda: • Definition of the Value Added Tax • Brief History/ LAM Overview • VAT Terminology • Difference between Zero Rated and Exempt • VAT Calculation... Journal Entries! • VAT Calculation... Example! • When VAT is not Neutral • VAT Red Flags • Audit Compliance Tips • VAT Reconciliation Tips • Lessons Learned Now, we will be going into our first section: VAT Introduction and History Definition of VAT: In a sense VAT is a tax on the Value Added product, material or service by each stage of its manufacturing or distribution process. At the end of the day who pays the VAT is the final customer. Other Characteristics Anyway it is very important to point out that the business is a sponsor for correcting and remitting the VAT to the tax authorities. It’s also important to mention that VAT does not work internationally as income tax does. VAT is always a local tax that never can be considered as great in another country. Our main characteristic of the VAT is that Personal end-consumers of products and services cannot recover VAT, for them VAT is always a cost. Brief History/ LAM Overview In terms of a brief History/ LAM please let me mention that VAT was first enacted in 1954 in France, and is currently used in over one hundred. In terms of VAT Latin American Structure may have some differences among Latin American countries but the main characteristics remain similar in all cases. Rates and extent of the tax change in each country. But let’s move in the main characteristics of this tax reminding you that the mechanics are very similar in every Latin American country. VAT Overview Main Characteristics Indirect: Indirect Tax since it affects consumers because they should pay for goods and services plus VAT but please remember that who’s responsible for paying to the tax to the tax authorities is the company. General: All goods and services sold and imported VAT is also a general tax since it affects all goods and services with some as specific exceptions that we will be covering in the next lines. Multistage: Extraction, Production and Sales Stages And being a sharer tax it operates at two important points; (a) at the moment of the sale and (b) at the moment of the input. It is also a multi stage tax because VAT operates in every stage of the commercially station chain. Non Accumulative: Fiscal credit system It is also known as non accumulative tax since the VAT paid at the previous stage is conciliatory in the current station. Territorial: Operate inside of the border Since VAT operates only within the limit of our specific country, transactions done outside that country are not subject to this tax. World-Wide VAT Presence In terms of the world-wide VAT Presence, this chart will try to give you an idea on how VAT use is extended around the world. The spread of the VAT has been the most important event in the field of tax during the last fifty years. It went from being a largely unknown outside France tax in the fifties to be adopted by around one hundred and thirty six countries that have no money VAT represents one quarter of tax revenues. Considering how extending the use of the VAT is if you have the community on taxes it is very important for you to be aware of the best practices in terms of accounting and control management for VAT. What we are discussing today applies for Latin America as well as for other countries in the world since the mechanics of the VAT is very similar for all of them. This next chart gives you an idea of VAT in Latin America, country by country. This is a general picture, this is a basic chart but the idea is for you to get an idea how you see VAT is structured in country for country in Latin America. You can see here the name of the tax could change but the structure of the tax remains the same across the region. Initially there are some differences to mention. In first place we have different rates. Rates could change depending on the country where located in. In places such as Venezuela the rate is 12% but in country where we’ve seen rates can reach 44%. Another important difference is the categorization in terms of the tax authorities that set the rules and collect the tax. In most countries VAT is a general tax applied by federal government. But in countries like Brazil there are two favourite taxes, but there’s a regional tax which should be added to the federal ones. So a complexity you see change, could change country for country. But what is very important to understand is that VAT does not work internationally as income tax does. VAT is a local tax that never can be considered as great in another country. And this is a keep away in terms of importing any purchase to be executable. We will see in the next slide when VAT input is considered a cost and not a credit. Let’s move on to the VAT terminology section.