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Value Added Tax (VAT)

ABUS 074

DAU GLOSSARY DEFINITION

Alternate Definition
Value Added Tax (VAT) is a general consumption-based tax (also referred to as a “goods and services tax” or “consumption tax”) charged by a foreign country that is levied on purchases of goods or services within that foreign country. VAT exemption is a customer’s ability to complete purchases without paying VAT. Exemption can take place at the time of purchase or allow the customer to recoup VAT through reimbursement after the purchase.
General Information

VAT and VAT exemption can apply to the Department of Defense’s (DoD’s) international acquisition efforts, which include international deployments, international cooperative efforts, foreign military sales (FMS) cases, and any other major effort where the DoD could spend abundant resources within a foreign country. VAT exemption is an important consideration for DoD international acquisitions as it can produce significant cost savings or cost avoidances. VAT rates are determined by the country where a customer makes purchases and vary per country and type of good or service. For instance, the standard VAT rate for in Finland is 24%, while the standard VAT rate in Japan is 10% for all items excluding groceries, drinks, and newspaper subscriptions which are 8%. Common purchases where VAT exemption can apply include, but are not limited to, materials, equipment, services (construction, engineering, base operations support, utilities, communications, administrative, rental vehicles, leases), and fuel.
 
Authorization for VAT exemption is required from a foreign country’s government. DoD typically receives VAT exemption authority through a Status of Forces Agreement (SOFA) or FMS case. A SOFA is a high-level agreement between governments outlining a major effort where DoD will operate in or with a foreign country (SOFAs are a responsibility of the Department of State (DoS)). Specific to FMS cases, the Defense Security Cooperation Agency (DSCA) requires DoD entities include provisions prohibiting VAT or other taxes and duties for US efforts with foreign countries.
 
There are typically two methods for DoD to receive VAT exemption - time of sale or reimbursement. The time of sale method allows a customer to receive VAT exemption at the point of purchase. The customer has exemption approval prior to purchase and does not pay VAT for the purchase. The reimbursement method results in a customer completing a purchase (including VAT), but recapturing VAT through reimbursement after purchase. In addition to the time of sale and reimbursement method, a foreign country may allow VAT exemption on entire contracts that support the effort covered by a SOFA or FMS case. VAT exemption for entire contracts can apply to both fixed-price and cost-plus type contracts. This option allows DoD and its industry partners to complete VAT exempt purchases in a foreign country without required foreign country approval for each purchase.
 
Many stakeholders are involved with VAT and VAT exemption within the US and the foreign country. US stakeholders can include the DoS, Combatant Commands (COCOMs), DoD acquisition team personnel, DSCA, and industry partners. Foreign country stakeholders can include the DoS equivalent (such as Foreign Ministry), DoD equivalent (such as Ministry of Defense), tax office, and vendors selling goods and services.

Best Practices

  • Apply Team Approach and Share Information. Since initial planning on international acquisitions between countries typically takes place well in advance of an effort beginning, it is a best practice to maintain a “team” approach throughout the effort and regularly share information with necessary stakeholders (between both countries). These actions enable all stakeholders to overcome barriers, such as language, time zones, and culture, that may arise.
  • Pursue VAT Exemption Approval Prior to Purchases. The time of sale method is the preferred method to receive VAT exemption since the customer never pays VAT on purchases and it places the majority of the administrative responsibilities on the foreign country vendor. The reimbursement method is not preferred since it places the majority of administrative responsibilities on the DoD or industry partner and can take significant time for that entity to receive reimbursement from the foreign country’s tax office. Also, pursuing VAT exemption for entire contracts is a best practice, when applicable, since it eliminates the need for the foreign country to approve each purchase for VAT exemption.
  • Streamline Processes and Define Areas of Responsibility. It is highly likely that VAT exemption processes and responsibilities will differ for each international acquisition. This is simply because each international acquisition with a foreign country is unique. However, since VAT exemption activities are similar in nature to other administrative activities, processes and responsibilities should be documented and available to involved stakeholders. Procedural documents, such as standard operating procedures, should include input from individuals of the foreign country and industry partners on that specific international acquisition. This will support the creation of streamlined processes that are efficient, simple to complete, and understood by all.
  • Maintain Documentation and Report Often. Documentation does not only apply to processes or procedures. There are numerous parts of VAT exemption activities that should be documented. This includes VAT exemption requests, VAT exemption approvals, contract documents, and vendor quotes or invoices. The documentation responsibilities apply to both DoD entities and industry partners. Documents are critical since the majority are translated in multiple languages to meet each country’s requirements and have signatures from designated authorities. It is a best practice to maintain documentation if it supports the DoD’s or industry partner’s purchase/contract to receive VAT exemption. In addition, it is recommended that a DoD entity maintain records to document VAT exemption metrics and report as needed.