The Tax That Gave Birth to a Small Industry

New York Times and International Herald Tribune (IHT)
Business/Financial Desk November 8, 2000, Wednesday

By John Tagliabue

High taxes help destroy jobs, right?

Not always. Some European taxes have actually created a flourishing cottage industry.

In the late 1980’s, the European Union started allowing European and non-European tourists and businesses to reclaim the value-added tax levied on some products and services — an amount that could be as much as 25 percent of the money spent.

But few people — to the delight, presumably, of European tax collectors — bothered to claim the money.

By the mid-1990’s, John H. Powell calculated that as much as $10 billion was being left in European coffers. So Mr. Powell, who had become familiar with the intricacies of the value-added tax while working at Walt Disney’s business development office in Europe, started a company in Seattle that produced software that enabled companies to trace and reclaim that money.

Yet by the time he started his company, Corporate VAT Management, in 1995, he was far from alone. Dozens of companies had sprouted up for the same purpose, though with different methods, and others have since joined the pack.

In the Netherlands, Luuk Vredeveld, a business consultant, began in the 1980’s to help trucking companies reclaim taxes paid on, say, fuel. Today his company, Retourtax, has clients in various industries in the United States, Japan and Canada.

Europe has long favored the value-added tax, a complex system in which products and services are taxed at each stage from production to final sale. Though American legislators have shied away from it, the system has gained favor in other nations, like Canada, South Korea and most recently Australia.

Some refunds — for purchases at an airport, for example — are immediately available, with little paperwork and fuss.

But claiming some other refunds can be a daunting task, even for a hardened accountant. For example, business travel expenses that qualify differ by country. In Britain, where the VAT rate is 17.5 percent, eligible expenses include hotel rooms, meals (though not those for entertainment) and car rentals. In Germany, they include hotels, car rentals and meals for business entertainment.

To qualify for a refund, a business traveler must submit invoices within a certain period, which can vary by country, together with a reclaim document in the proper language. A claim for meals eaten in Denmark, for instance, must be submitted in Danish in Copenhagen.

But for many companies competing for this business, the procedure has become assembly-line simple. Clients send their invoices, which are sorted to see which qualify for refunds, and then those that qualify are forwarded to tax authorities with a refund request. Typically, a percentage of the refunded tax money — anywhere from 7 to 20 percent — is withheld as a fee.

Mr. Powell of Corporate VAT Management said many companies had failed to claim VAT’s because of paperwork lapses or uncertainty over which expenses qualified.

Corporate VAT’s latest software is designed to be applied to expense and credit card records to ferret out refundable amounts, then automatically list them and fill out the claim forms — in the right language. He is working to persuade banks, credit card and car rental companies to use his software to program accounts to trace refundable value-added taxes. These companies could then reclaim the VAT and pass all or part of the savings to clients.

One bank that has signed on is U.S. Bancorp of Minneapolis, which this summer did blind tests of the software on expense records of some big corporate clients. Robert T. Abele, president of corporate payment systems at U.S. Bancorp, said it was urging top corporate clients to test the software. ”They can get significant savings,” he said. ”And when we say significant, I’m talking tens of thousands of dollars.”

U.S. Bancorp is also the largest issuer of Visa corporate and purchasing cards, and Mr. Abele said he believed credit card companies would embrace similar software since the use of a single corporate payment system could allow companies to automate VAT claims.

Meridian VAT Reclaim, which set up shop in New York in 1990 and now has 30,000 clients, is the market leader in VAT refunding.

Deborah Ferolito, Meridian’s president, acknowledged that software like Autovat may be ”the right product for simple bread-and-butter activities.” But she said many companies also require tax consultancy and legal advice. Meridian employs about 400 people in 42 offices worldwide. Last year, revenue totaled about $33 million, and roughly 40 percent of its business is now done with European companies seeking refunds elsewhere in Europe.

Ms. Ferolito says many customers are not aware of what is refundable, and in some cases, may even have paid value-added taxes erroneously.

”Some European companies, if they’re not sure, they charge it,” she said.

Calculations become even more complex, she said, when non-European companies set up shop in Europe and must register to pay and levy the tax.

As in most businesses, the drive for economies of scale is leading to consolidation. Last year, Fexco teamed with Apax Partners, the venture capitalists, to acquire the Global Refund Group, a VAT refund specialist in Sweden, from Cendant.

At the same time, Meridian was acquired for $190 million by the Profit Recovery Group International, an Atlanta company specializing in account auditing. Ms. Ferolito said Meridian brought its client base to the marriage, while Profit Recovery brought experience in recovering misspent money in other areas of corporate accounting, like telecommunications and shipping.

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