Overview of Voluntary Disclosure Agreements (VDA)

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Introduction

When you have historical exposures and are deciding how to get your business sales tax or VAT compliant, it is essential to consider the options available to your business before registering for sales tax/VAT in a jurisdiction. See Approach your historic exposure.

Many jurisdictions offer the option to participate in a Voluntary Disclosure Agreement (VDA) to sellers who have NOT completed the following:

  • Previously registered with the jurisdiction — Your business has not completed a formal registration process with the jurisdiction for sales tax/VAT remittance at some point in the past.
  • Received any audit notices from the jurisdiction — Jurisdiction tax/VAT authorities or regulatory agencies have not notified your business that they are being selected for an official review or examination.

A VDA program’s key benefits include finalizing the outcome regarding historical exposures and achieving some economic benefits through the reduction of amounts owed to the jurisdiction.

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The information below is an overview of VDA considerations and does not constitute tax advice. As always, please consult a tax/VAT advisor to find out the best fit for your business. If you would like to be introduced to one of Anrok's preferred VDA partners, you can submit this form to kick off the process.

 

 

How does a VDA work? 

A VDA typically involves a seller submitting to the jurisdiction the amount of their historical liability in exchange for the jurisdiction waiving the amount due from the seller for one or both of the following: 

  • Penalties related to unpaid tax amounts — These penalties are typically calculated as a percentage of the unpaid tax/VAT amount and increase over time, serving as both a deterrent against late payment and compensation to the government for the delayed revenue.
  • Sales made outside of a lookback period established by the jurisdiction — The lookback period is a designated window of time (such as the past three or four years) that jurisdictions examine when assessing whether a business has sufficient activity or presence to trigger tax/VAT registration, filing, or payment obligations.

For example, a jurisdiction may offer a VDA lookback period of three years. In that case, the jurisdiction may reduce the seller's liability from all historical periods to only those from the past three years.

In a VDA, a seller typically engages with a tax/VAT advisor to act as a confidential third party between the seller and the jurisdiction.

 

 

Three potential outcomes

The decision to enter into a VDA will ultimately be based on your company’s risk tolerance on the following three possible outcomes:

   Outcome    Cash impact    GAAP impact
Do not complete a VDA and never get audited $0 Maximum expense recognized in the income statement.
Do not complete a VDA Potential maximum exposure (Full exposure + penalties and interest). Maximum expense recognized in the income statement.
Complete a VDA Lookback period exposure only, potentially resulting in fewer penalties. The lowest expense amount recognized in the income statement. Could result in a gain if previously accrued penalties and interest were reversed.

 

 

Considerations for VDA participation

In deciding which path your company should choose, consider the following factors: 

   Factor    Considerations
Cost of VDA Costs can range from $2,000 to $20,000 or more per jurisdiction to utilize a third-party tax/VAT advisor to support the process, particularly serving as a confidential third party to maintain anonymity through the process in some jurisdictions.
Internal resources The time and effort required to gather and organize historical data from internal resources may be significant, depending on the quality of the records kept by a company. This effort is critical to a successful VDA; however, errors in a VDA could result in voiding the VDA protections.
Amount and periods of
historical exposure
  1. How much exposure exists before the lookback period?
  2. How much exposure exists within the lookback period?
  3. Are penalties and/or interest abated through the VDA
    process?
  4. How much does the company value establishing a date for the statute of limitations on historical liabilities?
Time to complete a VDA A VDA can take anywhere from 2 to 6 months to complete, during which time the seller cannot register for sales tax/VAT and will incur additional liabilities compared to collecting sales tax.
Other tax / regulatory
exposures 		Does the company have other material regulatory or tax/VAT issues that could be surfaced through the VDA process, such as material taxable income in the jurisdiction?
Regulatory environment
and industry

A company should consider the regulatory environment and the industry in which it operates to assess the likelihood and impact of:

  • Public relations scrutiny.
  • Frequency of audits and government focus on sales tax/VAT compliance.
  • Cross-regulatory scrutiny (sales tax audits trigger as a result of other regulatory scrutiny).
  • Their customer base includes serving government entities.
  • The location of the exposure and what other elements of the company’s business may operate there.

 

 

Determining a VDA's value

Although the factors and their respective importance will vary for each business, the VDA process can be attractive to sellers who have one or more of the following:

  1. Extended exposure — Long periods of exposure in the jurisdiction. See Review jurisdiction exposure.
  2. Lookback benefits — Can materially benefit in jurisdictions with limited lookback periods.
  3. Penalty abatement — Material penalties in the jurisdiction that could be abated.

For many other sellers, the VDA process adds another layer of cost to achieving compliance, particularly if VDAs are required across multiple jurisdictions. The time it takes to prepare for and complete a VDA pushes out the timing for compliance. This can cause a company to accrue more liabilities as it waits for the VDA process to be completed.

Regardless of your company’s stage and the factors that influence your business as outlined above, moving quickly to get compliant will help your business stop wasting money on sales tax/VAT. Furthermore, for some companies, generating revenue in the next few months and avoiding accruing liabilities and incurring the cost of sales tax while waiting for a VDA may be more meaningful than the revenue generated the year before. See Start collecting tax during the VDA process.

Each company must weigh the various factors involved and may reach different conclusions for different jurisdictions.

 

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