Financial Management - VAT Reporting.pdf

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Implementation Tips

for USAID Partners

Sharing Resources and Knowledge Among the Global CSO Community

Financial Management 6 | 2018

STRENGTHENING

CIVIL SOCIETY

GLOBALLY

Foreign Tax (VAT) Reporting

Is our organization exempt from paying VAT and customs

duties on goods and services purchased with USG funds?

And, what are the Foreign Tax Reporting requirements?

Organizations implementing U.S. Government (USG)-funded

development projects are exempt from certain taxes and

duties imposed by the government of the country where they are

working. Exemptions cover both prime recipients as well as

subrecipients.

Specific exemptions and the process for requesting reimbursements

of taxes paid are outlined separately for each country in bilateral

agreements between the USG and host governments. Below are

several common exemptions, as well as taxes you may be required to

pay. You will need to find out what exemptions and requirements are

relevant in each of the countries in which your organization is working.

The following provides examples of the kind of information to report,

discusses the requirements of the USAID Foreign Tax Report (due

from USAID recipients every year on April ) and offers suggestions

for tracking your tax payments and reimbursements to make

reporting easy.

Taxes Exempt in Most Countries

• Value Added Tax (VAT) levied on commodities purchased

in-country.

• Customs duties levied on commodities imported into the country

for use in USG-funded projects.

Taxes Not Exempt

• VAT or sales tax levied on items purchased outside of the host

country where you are implementing your USG-funded program.

For example, if an organization purchases commodities in South

Africa for use on its USG-funded project being implemented

in Mozambique, it would not be exempt from paying VAT in

SouthAfrica.

• Organizations with headquarters (HQ) outside of the host country,

including those in the U.S. or Europe, are not exempt from VAT or

sales taxes in their home country, whether the items purchased are

used in the HQ office or in the field.

Definitions

Value Added Tax (VAT)—Tax levied on

the purchase of goods and services, similar

to sales tax in the U.S.

References

USAID Guidance on Foreign Tax Reporting

Mandatory Reference for ADS 302

In Your Agreement

USAID partners will find the “Reporting

Foreign Tax” clause in the standard

provisions in their agreement in

the section called Reporting Host

Government Taxes.

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Implementation Tips for USAID Partners

Financial Management 6 | 2018

Other Taxes Levied by Host Governments

Though the USG seeks exemptions on all taxes levied against foreign

assistance projects by host governments, there are several categories

of taxes that you may be required to pay, for example:

• Payroll taxes, and

• VAT on projects with no USG funding.

Be sure to check with the in-country mission and other donors for

details about what taxes your organization may be required to pay.

Country Specifics

Each country negotiates its own bilateral agreement with the

U.S., which includes provisions regarding the taxation of U.S.

foreignassistance.

These provisions typically address what taxes are exempt and how

organizations implementing USG-funded programs can receive

reimbursements for any taxes paid. Exemptions and reimbursement

procedures can vary widely from country to country, but it is your

responsibility to check with the Mission regarding the rules in the

country where you are working.

Work with the in-country USG team to answer the following

questions:

• What taxes am I exempt from paying?

• What taxes, if any, am I required to pay?

• What is the process for obtaining an exemption or reimbursement?

The process for obtaining an exemption or reimbursement varies

by country. Some countries provide VAT exemption letters to show

vendors at the time of the purchase. Others require that you pay the

VAT and later request reimbursement, either through the Revenue

Authority or through the local USAID Mission or U.S. Embassy.

Where the recipient has a means to obtain an exemption or a refund

of the taxes and does not take reasonable steps to obtain the

exemption or refund, the paid taxes will not be an allowable cost.

Contact your in-country team or your Contracting Officer’s

Representative/Agreement Officer’s Representative (COR/AOR) for

further guidance.

Foreign Tax Reporting

A Foreign Tax Report must be submitted by all organizations

receiving USAID funding by April  each year. All organizations

receiving USAID funds must comply with the foreign tax reporting

requirements established by the U.S. Embassy in that country.

The Foreign Tax Report must be

submitted by all organizations

receiving USAID funding by April 16

each year.

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Implementation Tips for USAID Partners

Financial Management 6 | 2018

The purpose of The Foreign Tax Report is to ensure that U.S. foreign

assistance is not being taxed and, therefore, that the funds are used

for their intended purposes. The USG uses these reports to track

whether or not foreign governments are complying with the terms of

their bilateral agreements.

Who Must Report

Any organization that purchased US or more worth of

commodities with USG funds or paid any customs duties in the country

where it is operating during the prior fiscal year is required to submit

an annual report on foreign taxes. This report is required even if you did

not pay any taxes on those items during the reporting period!

All subrecipients under your award with in-country purchases of

US or more must also track taxes paid and reimbursements

received. You must incorporate subrecipient data directly into

yourreport.

What Taxes Do I Report?

• The tax was paid to the government in the country where you are

implementing.

• The transaction was US or more (not including the VAT).

• The transaction related to a commodity as defined as supplies,

materials, goods or equipment.

• The purchase related to your USG-funded project. (Report the

purchase regardless of whether the specific purchase was made

with USG funds or was part of cost share, as long as it was a

legitimate part of the project).

When is the Report Due, and What Timeframe should

itCover?

The Foreign Tax Report is due annually each year on April . You are

required to report the following three figures:

• Figure A. Taxes paid to the host government during the previous

fiscal year. This includes VAT and customs duties.

• Figure B. All reimbursements received during the previous fiscal

year, regardless of when the original tax was paid.

• Figure C. Reimbursements received from the taxes paid through

March 31 of the fiscal year being reported on.

The purposes of the Foreign Tax

Report are to ensure that U.S.

foreign assistance funds are being

used for their intended purposes

and not being taxed and to track

whether or not foreign governments

are complying with the terms of

their bilateral agreements.

Because exemptions and

reimbursement procedures vary

from country to country, check

with the in-country team or U.S.

Embassy in the country in which

youareworking.

Where the recipient has a means

to obtain an exemption or a refund

of the taxes and does not take

reasonable steps to obtain the

exemption or refund, the paid taxes

will not be an allowable cost.

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Implementation Tips for USAID Partners

Financial Management 6 | 2018

Oct 

Start of USG

Fiscal Year

Figure A:

Figure B:

Figure C:

Sept 

End of USG

Fiscal Year

Mar 

Apr 

Report

Due

Taxes Paid

Total Reimbursements

Received

Reimbursements Received from

Taxes Paid in most recent Fiscal Year

(Fig. A, above)

Where Do I Submit My Report, and What Is the Format?

Submit the report to the office listed in your Cooperative Agreement

under the Reporting of Foreign Taxes standard clause or as directed

by your funding agency (usually the U.S. Embassy or your funding

agency’s in-country financial management office). Also send a copy of

your report to your AOTR/COTR.

There is no standard form for the report. However, the report must

contain the following:

• Your organization’s name;

• Contact name with phone, fax and e-mail;

• Your agreement number(s);

• Amount of foreign taxes assessed by a foreign government on

purchases valued at US or more financed with USG funds

under the agreement(s) during the prior fiscal year. If you work

in multiple countries, list each country separately. However, if

you work on multiple projects within one country, you can report

on the total for each country. Only foreign taxes assessed by the

foreign government in the country in which you are working are

to be reported. Foreign taxes assessed by a third-party foreign

government are not to be reported; and

• Report all reimbursements you have received during the prior fiscal

year regardless of when the foreign tax was assessed. Also, provide

a separate figure giving the total of any reimbursements of taxes

assessed during the fiscal year you are reporting on that you have

received through March .

To simplify your annual reporting,

develop a process for tracking

VATand customs duties paid,

as well as for requesting and

receivingreimbursements from

thehost government.

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Implementation Tips for USAID Partners

Financial Management 6 | 2018

Example

Organization: My CSO

Contact: Jane Smith

Phone: --.

Fax: --.

E-mail: jane@myngo.org

Agreement Number: XYZ-

Country

Taxes Assessed

during FY 18

Taxes Assessed

during FY 18

Reimbursements

Received on FY18

Taxes through Mar31

Mozambique US US US

Tanzania US, US, US,

In this example, the organization is operating in two countries:

Mozambique and Tanzania. The amounts in this table are summaries

by country and are not broken down by project or subrecipient. During

FY, the Mozambican Government did not assess any taxes on the

prime recipient (or subrecipients, if any). However, it did reimburse the

organization US for taxes assessed prior to FY. During FY,

the Tanzanian Government assessed the organization US, in

taxes but reimbursed the organization in full by March , . A

separate Foreign Tax Report must be submitted for each country

(Tanzania and Mozambique) as directed by the funding agency.

Tracking VAT and Duty Payments and Reimbursements

Your organization should develop a process for tracking VAT

and customs duties paid, as well as for requesting and receiving

reimbursements from the host government. Establishing such a

process greatly simplifies your annual reporting and helps ensure your

funds go toward providing services to beneficiaries.

Consider the following strategies for tracking your VAT payments

andreimbursements:

• Develop a list of exemptions and required taxes, so everyone

in your organization involved with procurements is aware of the

policy. Share this with subrecipients as well.

• Create a special code in your accounting system for tracking all

payments of exempt taxes. Use this code only for exempt taxes—

not for legitimate taxes paid.

• Create a special code in your system for tracking incoming tax

reimbursement payments from the host government. Make

sure you can tie the reimbursements received back to the original

accounting entry that recorded the taxes being paid. This will

make it easy to identify which reimbursements have and have not

beenreceived.

Implementation Tips for USAID Partners

Financial Management 6 | 2018

page 6 NGOConnect.net

For More Information

For this or other issues of

Implementation Tips, please visit

www.NGOConnect.net. The Web

site is a dynamic and interactive

portal dedicated to connecting and

strengthening CSOs, networks and

CSO support organizations worldwide.

Funding for this publication was

provided by the U.S. Agency for

International Development, under

the Strengthening Civil Society (SCS)

Global Leader Award. Its contents,

managed by SCS Global, do not

necessarily reflect the views of USAID

or the U.S. Government.

may be photocopied or adapted for

noncommercial use only, without prior

permission, provided credit is given to

FHI , SCS Global and USAID.

• Establish a log that tracks the tax payment and reimbursement

process. This should document each tax payment, reimbursement

request and payment received. You may also want to make sure

you have a policy for keeping copies of receipts and reimbursement

requests sent to the host government or USG office, as applicable

(see the example below). Customize your process, so it fits in

with the host government and USG in-country requirements

regarding submitting requests and expected turn-around time for

taxreimbursements.

• Since your subrecipients may also have purchases of commodities

or other expenditures covered by these provisions, work with

subrecipients to submit their reports to you prior to the April16

deadline, so you will have sufficient time to incorporate their

data into your report. Note that their reports must also include

reimbursements through March , so their deadline would need to

be sometime between April  and April .

Example VAT Tracking Log

Below is an example of a log for tracking your VAT payments,

reimbursement requests and payments received. You can create

a log like this for each country in which you operate, and the log

can include all requests related to that country, even from different

projects. You may also want to use this log to track VAT payments for

transactions under US for auditing purposes, though you will

not include these in your USAID-required Foreign Tax Report.

* You may want to track your payments and reimbursements in local currency

Acct Sys

Ref #

Date

Vendor

Description

Transaction

Value

(Pre-VAT)*

VAT*

Project

Date Reimb.

Requested

Date Reimb.

Received

 -Oct- ABC

Supplies

Office

furniture

,  A -Oct- -Jan-

 -Jan- DEF

Imports

HBC Kits ,  B -Jan-

 -Feb- GHI

Computers

Computers ,  C

 -Feb- JKL Inc. Printer   D