Value-Added Tax

A value-added tax (VAT) – sometimes called goods and services tax (GST) - is a form of consumption tax. It is used in many countries - European Union, Australia, Canada, China, India, etc. In France, it is the most important source of state finance, accounting for nearly 50% of government revenues.

VAT is placed on a product whenever value is added at a stage of production, distribution and at final sale. It is calculated as a certain percentage (VAT rate) of the difference between price paid by the buyer and COGS paid by the seller.

VAT is getting more and more popular, because it is far easier to collect and far more difficult to avoid then corporate income tax. Consequently, VAT is the third largest cash flow item in a business entity, second only to sales and COGS. Which, obviously, requires a highly efficient VAT-related cash management system.

Surprisingly, VAT is under-managed in most large businesses, creating some serious corporate risks. Specifically, compliance risk with exposure to interest, penalties and reputational risk. Therefore, you will need to include your VAT-specific risks into your corporate risk management system.