The expanded EU has arrived ten steps to help avoid costly penalties.

May 1st has arrived. How successfully did you transition to the new order?

On May 1, ten countries--the largest group to join the European Union (EU) since the six-member European Economic Community was created in 1957--officially came on board to form an economic and trading coalition of 25 member countries. If your company is like most U.S. based multinationals conducting business in Europe, chances are you may not be as prepared as you need to be. But ignoring the tax implications of EU Accession or leaving it up to local subsidiaries to address may leave some companies open to financial and reputation risk.

The EU's expansion affects companies currently operating anywhere in the EU but primarily those that are based or trading in the 10 accession countries of Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia. The new EU members will enjoy the benefits of trading in a harmonized, single market free of most trade barriers. The tradeoff, however, is that enterprises with operations in the new member countries must navigate new tax compliance regulations and determine how they affect cross-border trading on a going-forward basis.

Ignore at Your Own Risk

Despite the immediacy of the tax issues associated with EU Accession, it does not appear that companies have yet undertaken to assess how accession affects their operations. For example, in February 2004, a survey of 60 tax professionals from U.S. companies asked, "At what stage is your U.S. company in addressing EU enlargement issues?" The responses were, as follows:

* 33 said they were not addressing it at all

* 11 said their European subsidiaries were addressing it

* 10 reported they are investigating the effect of accession

* 5 said implementation was underway * 1 had implemented its plan.

While the sample was small and hardly constitutes a formal, scientific study, the results suggest a level of un-preparedness that may be pervasive.

The cost of ignoring the implications of EU accession could be quite high. Fines as much as $30,000 to $35,000 for a single compliance infraction may be levied against companies that fall short of the rules. And countries will be on the lookout to collect on those fines, to make up for federal revenues lost because of the lower income taxes, as well the loss of customs duty and excise levies. Moreover, failure to meet all requirements can delay or prevent some business transactions from going through, resulting in costly business downtime.

Check the List

The following checklist will assist tax executives in covering their EU bases. These 10 practical action steps for U.S. companies with operations in one or more of the accession countries can ensure protection against penalties and other negative repercussions of noncompliance--inadvertent or otherwise. They can facilitate a smooth transition and mitigate the risk of penalties. The list is not exhaustive of all steps companies may need to take to address their specific circumstances, but they can help begin an important dialogue within your enterprise.

1. Review and confirm that new VAT numbers have been received or are in process. In some countries, new VAT numbers will be automatically issued; in others, companies will need to apply for them.

2. Confirm that new invoicing regulations will be factored into your billing system. Run some test transactions.

3. Test the new processes for intra-community trade and related VAT compliance that should have been implemented.

4. Confirm that a controlled process exists to help ensure that newly required documents are completed correctly and filed on time, and that the individuals responsible for these new compliance requirements understand their roles and responsibilities. Errors will likely be penalized--severely, in some cases.

5. Review transaction flows from order to billing (for both purchases and sales) to help ensure that VAT liability and entitlement and VAT recovery determinations under the new VAT compliance rules have been correctly implemented. Again, run some test transactions.

6. Review your employee handbook and expense reimbursement system against new domestic and EU legislation. Make appropriate changes to help ensure that new domestic and foreign out-of-pocket employee deductions can be made on a timely basis and that any newly disallowable expenses are excised. Out-of-pocket employee expenses often carry an entitlement to recover the related VAT.

7. Create and implement an internal communication process to provide critical information to specific departments associated with the changes taking place. For example, you may need to discuss liability changes on particular transactions with the legal department so that associated contracts can be drafted to help manage any potential risk or cost exposure.

8. Review the effect and implement steps to help ensure new costs are not accidentally incurred with the loss of border customs controls and processes. It may not be too late for customs duty relief and import quota requirements applications. It may also be worthwhile to avoid having products moving into or out of the new EU countries on April 30 and May 1 to steer clear of the anticipated chaos and confusion as the regulations switch over.

9. Ask suppliers and customers whether they've also taken appropriate steps to prepare and confirm you have gathered your customers' new VAT numbers and provided your suppliers with your VAT numbers so that you will not incur avoidable VAT expense.

10. Be sure that you test your transaction management processes, billing, intra-community compliance, and knowledge of key personnel--all of which are undergoing many changes. Remember, the penalties for non-compliance can be quite severe and represent a substantial risk to the business--both in cost and reputation.

For those operations that have fully and successfully addressed the effect of EU Enlargement at a compliance level may now want to consider the many tax efficient corporate and business structuring opportunities.

DUNCAN STOCKS is Midwest Area Leader, International VAT Center, for KPMG LLP.