What is an input tax credit?
It is the mechanism that stops sales tax accumulating at each stage of a supply chain. A registered business charges tax on what it sells and bears tax on what it buys; the credit lets it set the tax on its purchases against the tax on its sales, so it remits the difference and carries none of it itself. The tax ends up borne by the final consumer, who has nothing to set it against. For a non-resident business the point to check first is whether it is entitled to the credit at all, because some registration routes for foreign suppliers carry no right of recovery.
Why can I not recover the sales tax I paid abroad?
Three reasons account for most cases. You may not be registered in that country, and recovery is generally a right of registrants rather than of businesses at large. You may be registered under a simplified route for non-resident suppliers, which collects tax without granting recovery. Or the cost may not qualify, because it was used for exempt supplies, or was personal, or falls in a category the rules exclude. Work through them in that order: the first two are questions about your registration and are fixable going forward, and only the third is a question about the invoice in front of you.
What records do I need to claim input tax credits?
Enough to show that the tax was charged by a registered supplier on a taxable supply made to you, for use in your business. In practice that means invoices carrying the supplier's registration number, a description of what was supplied, the date, and the tax shown as a separate amount. Payment records alone are not enough, and neither is a statement of account. The failure is mundane: the entitlement is genuine, the supply happened, and the claim is refused because the document does not carry the details the rules require. Fix the documents while the supplier still answers the phone.
Can I claim tax on costs incurred before I registered?
Sometimes, and it is worth asking rather than assuming. Systems commonly allow some recovery on inputs held or used at the time a registration takes effect, and treat services consumed beforehand less generously. The answer turns on when the cost was incurred, when the thing bought was used, and the date the registration takes effect, which is one reason that date is worth choosing rather than accepting. Where a business is about to incur significant local set-up costs, the order in which it registers and spends can decide whether the tax on them is recoverable at all.
How do I split credits between taxable and exempt activities?
By use, and the method has to be reasonable and applied consistently. Tax on inputs used wholly for taxable supplies is recoverable, tax on inputs used for exempt supplies is not, and mixed inputs are apportioned. The difficulty is never the principle, it is the overheads: premises, software, professional fees. Choose a basis you can support from your own records, write down why you chose it, and apply it the same way each period. An apportionment reconstructed at audit on a different basis from the one used in the returns is the problem more often than the proportion itself.
Can I recover the tax paid when my goods were imported?
Only if you incurred it in the character the rules require, which usually means as the importer of record and as a registrant. This is where non-resident businesses most often lose money: the customs entry is made in the name of a broker, a customer or a related company, so the tax paid at the border sits with an entity that has no claim to it, or with one that has a claim and never makes it. Check whose name is on the entries before you check your returns, because no amount of work on a return fixes an entry made in the wrong name.
How would a foreign tax authority know I am resident there?
Mostly from information you or your bank already provided. Account-opening forms ask you to self-certify tax residence, and that certification is reported between authorities under the Common Reporting Standard or, for US accounts, under the FATCA framework. Beyond that: employer and payroll filings, property registries, immigration records and the tax filings of anyone who paid you. The realistic planning assumption is that the data arrives. See FATCA and information reporting.
How does the treaty tie-breaker work when both countries say I am resident?
As a sequence, stopping at the first test that gives an answer: where you have a permanent home available; if in both or neither, where your centre of vital interests is; then habitual abode; then nationality; and if all of those tie, the two tax authorities decide by agreement. It is evidential rather than elective — you do not choose your treaty residence, you demonstrate it, which makes the record of homes, family and time the substance of the claim. See tie-breaking dual residency.
