Richard Cornelisse

Posts Tagged ‘Limited Risk Distributor’

High level comparison between LRD, Commissionaire and Agent

In Audit Defense, Business Strategy, Indirect Tax Automation, Indirect Tax Strategic Plan, Processes and Controls, SAP add on, SAP add on for VAT, SAP for VAT, Technology, VAT automation, VAT planning on 07/09/2014 at 2:20 pm

If the reason of a business model change is to optimize company’s effective tax rate (tax opportunities), minimizing cash tax effect or cost reduction or realize efficiency overall such standardizing business processes, it is important that with regard to managing such change the indirect tax functions is timely involved (design phase) and also ascertains that proper implementation and executing of indirect tax planning has been taken place. That means that indirect tax issues should be addressed up front during the design phase.

Any change has impact on current processes and controls and its effectiveness. Business model change such as centralized operating model result often in an increased number of transactions and indirect tax obligations across many geographies.

Operational changes have a tax consequence due to the change in transactional flows and the change in a company’s assets, functions and risks profile. Important is to ensure that the new operating model is not only implemented correctly from a tax perspective, but also ensures that business processes are tax aligned realizing support of the business in the areas of compliance, finance & accounting, legal IT systems, indirect tax and regulatory matters. That means teaming is a necessity with with various work streams.

In many Asian countries the Commissionaire concept is not known. In several Asian and Latin- American countries centralized ownership of raw materials, work in progress and finished inventory is not possible. In most countries outside Europe having to register for VAT/GST/Consumption Tax will often results in a full taxable presence, including a liability for Corporate Income Tax.

One of the key processes relate to ERP system. A wrong perception in the design phase can lead to substantial tax and commercial risks. It could also impact the company’s reputation as also customers, suppliers, external auditor, senior management, tax authorities could become stakeholders when it goes wrong.

A condition for success of any ERP solution is involvement by the indirect tax department in design phase, teaming with other workstreams.

The change of a business model can create not only VAT risks, but as well commercial risks such as logistics problems in getting goods into a country and delays and hold off of shipments resulting in disruption of daily business. Some root causes: the company forgot to register for VAT or procurement forgot to agree with supplier who was importing the goods.

SAP change: the perception of Plug And Play

For ‘simple’ business models (AB scenario’s) standard SAP functionality works.

However when business models are more complex, standard SAP VAT functionality is insufficient due to the company’s business model, organizational structures and/or VAT requirements. To manage the correct VAT treatment additional features need to be implemented.

In practice, configuration – the amount depends – is needed when companies deal cross border and/or complex business model are set up such as a centralized principal structure with for example “Limited Risk Distributor” or „Commissionaire”. The latter also known as principal-toller-agent model (PTA).

The company’s principal bears – contractually – from a business deal perspective the major risks (business responsibility). Principals are in the main rule still owner of the goods when these are sent to customers. For corporate tax reasons, such principals have their residence in low tax countries.Tollers are manufacturers that produce on behalf of other parties (e.g. the principal). The toller receives as consideration a tolling fee.

Commissionaires only act as intermediaries to the customers. The principal pays them a commission fee. In a strip-buy-sell model not an agent but a reseller (LRD) is part of the supply. The difference is that a resellers becomes owner of the goods.

VAT Automation of complex business models

In the last decade, companies have increasingly automated their business processes. The most common method is by using an Enterprise Resource Planning (ERP) system. Such a set up can be hugely complex. This is definitely the case where it relates to European based indirect tax. As manual processes are subject to human error, automation could – under circumstances – result in performance improvements and savings.

There are all kinds of business reasons for setting up such centralized models. The challenge from an implementation perspective is indirect tax.

What Makes It Complex?

LRDs and Commissionairs have neither legal ownership to the inventory during storage nor during transport as the Principal is at that stage still the legal owner. It is often the case that the Principal delivers the goods physically and directly to the final customer.

This creates only one physical departure of goods (`goods issue’) in the ERP system. However, two invoices should be raised (one from Principal to LRDs/Commissionairs and one from the LRD/Commissionaire to the final customer.

In the ERP system, the correct ‘ship from’ information at the LRD and Commissionaire level is missing so that the VAT treatment by the system is determined based on the ‘ship from’ and ‘ship to’ information present at the Principal level. In principle, for cross-border transactions this results in the incorrect VAT treatment.

Therefore, in practice, it is time consuming to correctly configure the ‘tax determination logic’ set up. You need to know your practical workarounds, preferable in the design stage.

Even more bottlenecks in case of a commissionaire structure

A “Commissionaire Model” has some more bottlenecks. Since according to civil law, the “commissionaire” does not have ownership, the commissionaire does not own any inventory not even temporarily. That is different with the LRD as a LRD becomes owner via flash title for a very short period.

A “commissionaire” is never the legal owner of the goods. From a VAT perspective, the commissionaire however acts as though he was the owner and a fictitious supply takes place to and subsequently by the commissionaire. The commissionaire has to issue invoices in his own name which can create problems if there are no bookings with respect to inventory.

High level comparison between LRD, Commissionaire and Agent

A sales Principal located in non-EU country will create more complex registration and trading issues. VAT treatment for Commissionaires and LRDs in principle similar (buy and sell), but with different legal flows.

A LRD creates opportunity to have local inventory on LRD books, provided all relevant aspects have been resolved. Different accounting rules exist for LRDs compared to Commissionaires.

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Implementation

Once a commercial and tax-efficient structure is determined—one that addresses both historical and potential risk—it is time to take the theory behind the structure into the realm of practice.

Will using a classic principal structure in the new entity help keep maximum profits in low tax jurisdictions? If so, one entity will own title to inventory throughout the various jurisdictions and the principal would require a VAT registration in each location where inventory is held.

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In some countries, particularly Asia and Latin America, a VAT registration will crystallize a permanent establishment for corporate income tax purposes. This could mean for example an increase in the US corporation’s foreign tax compliance obligation and could increase the amount of tax due as well as the workload.

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From Global Indirect Tax Management by Richard Cornelisse

Indirect Tax Considerations: Migration To New Jurisdictions

In Benchmark, Business Strategy, Indirect Tax Strategic Plan, US VAT introduction, VAT planning on 30/05/2012 at 8:41 am

By Richard Cornelisse

Are More Relocations Expected Soon?

Eaton Expects $160 Million Tax Savings From Ireland Move By Richard Rubin

Eaton Corp. (ETN)’s decision to buy Cooper Industries Plc (CBE) and place the combined company’s headquarters in Cooper’s Ireland instead of Eaton’s Cleveland home will save $160 million a year in taxes by 2016, the companies said.

The move, announced today, underscores the tax disincentives for multinational companies organized in the U.S., said Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington.

“The U.S. tax system just invites this,” said Hufbauer, a former deputy assistant secretary at the Treasury Department. “Any tax adviser in his right mind for this kind of thing would suggest: Locate the new company abroad.”

The U.S. has the industrialized world’s highest statutory corporate tax rate at 35 percent. U.S.-based companies must pay taxes when they repatriate profits earned outside the country. Ireland has a top corporate tax rate of 12.5 percent.

President Barack Obama and Republican lawmakers in Congress want to lower the statutory corporate tax rate by removing many breaks that allow companies to have effective tax rates lower than 35 percent.

Eaton is a maker of industrial equipment with $16 billion in revenue in 2011. Eaton shareholders will own 73 percent of the combined company, which may be known as Eaton Global Corporation Plc although the name may change, said the companies’ announcement.

‘Cash Management Flexibility’

“Incorporating as an Irish company provides significant global cash management flexibility and associated financial benefits,” the companies said in announcing the $11.8 billion transaction, which is expected to close in the second half of 2012.

Eaton’s effective tax rate for 2011 was 12.9 percent and its rate for 2010 was 9.5 percent, according to company filings. In 2011, lower taxes on its non-U.S. operations made up more than half of the difference between the company’s effective tax rate and the 35 percent top U.S. rate.

The company also benefited from the research and development tax credit and the foreign tax credit. As of the end of 2011, Eaton had $6.4 billion in profits it earned outside the U.S. that haven’t been taxed because they remain invested overseas, according to the filings.

Cooper, which makes electrical-distribution equipment, was a U.S. company before a 2002 transaction moved the headquarters to Bermuda. In 2009, the company moved from Bermuda to Ireland.

Shift from Direct to Indirect Tax

Methods of governments to balance their budgets are a shift from direct to indirect taxation, increase of VAT rates and tax authority scrutiny. Governments can via VAT revenue lower corporate tax rates and internationally better compete for tax revenues.

“The global spread of Value Added Taxes (sometimes referred to as Goods and Services Taxes) has been the most remarkable development in taxation over the last 50 years. Operated in less than 10 countries in the late 1960s, VAT now raises one fifth of the world’s tax revenue and still more countries are adopting it. The increasing importance of VAT as a source of government revenue is likely to continue as countries deal with fiscal consolidation pressures in the wake of the economic crisis while seeking to restore growth.” Jeffrey Owens Director, Centre for Tax Policy and Administration at the Organisation for Economic Co-operation and Development

From a competion over tax revenues perspective the US does not have (yet) an European based VAT system. I refer to my article: About US Tax Reform – Larry Lindsey, Former Fed Governor: “a Value Added Tax Should Be on the Table”.

Irish VAT Revenue To Support Fiscal Stimulus

Ireland 2% VAT increase to 23% in 2012

  • Standard Rate 23% (since Jan 2012)
  • Reduced Rates 13.5%, 9%, 4.8%

Ireland VAT Recovery Time: 3-4 months
Ireland VAT Registration Threshold Non-Resident: Nil (Source TMF)

Migration And Indirect Tax

Migration to a new jurisdiction will inevitably involve dealing with VAT. For some migrating corporations it may mean having to deal with VAT for the first time although probably for most, VAT will be a familiar concept albeit with variations from the ‘old’ jurisdiction.

Assessing the VAT treatment of the migration itself and the subsequent activities in the new jurisdiction is a necessary work stream that should run parallel other disciplines/work streams, primary because VAT is a transaction tax affecting both costs and revenue, and there will invariably be many transactions happening to achieve the migration and the on-going activities.

Misunderstanding or not recognizing the VAT implications of the migration and subsequent activities in the new jurisdiction could result in an unwelcome and unexpected cost.

In the next paragraphs a number of issues are addressed that should be considered for VAT purposes in order to ensure that the migration will take place in the most effective manner from a VAT perspective.

It is very much a question of assessing the VAT position of the entities affected by the migration as it is currently and determining whether the future position will be better, neutral or negative. If it is the latter, determine whether and how the VAT cost may be mitigated.

VAT Status Of The Entity(ies) Migrating

Assessing the VAT status of the entity or entities migrating to the new jurisdiction is the starting point as that will give us a good indication as to whether the migration itself and the subsequent activity in the new location will be VAT neutral, beneficial to the current position or result in a VAT cost.

The process to assess the VAT status of the migrating entity or entities is to review the current treatment of its activities from a VAT perspective.

If it is a pure holding company i.e, its activities are purely passive, its activities (certainly from a European VAT perspective) will be outside the scope of VAT with the result that it will not on its own account be able to register for VAT.

Thus, VAT that it incurs on its costs will be an additional cost as it will not be able to deduct that VAT.

In practice, depending on the company’s flexibility (establish VAT entrepreneurship) or local tax possibilities (e.g. VAT grouping) such a VAT burden could be limited or even avoided.  This is, however, often only possible if VAT planning is considered at the right time  (see paragraph ‘Related Topics’ and ‘Indirect Tax Checklist below).

One area for particular attention is to plan how external fees are purchased i.e. which legal entity should enter into the engagement with the different external vendors/ consultants.

This can be an area of contention with the VAT authorities over the deduction of VAT on these costs.

Mechanism Of Migration

The method of migration can be undertaken in a variety of ways.

Thus, from a VAT perspective,  the VAT consequences of the method of migration need to be determined to assess whether or not VAT incurred on the costs associated with the migration will be real cost or just a cash flow cost.

This will mean looking at the micro legal step plan  to ensure that such steps are carried out in the most VAT effective manner, subject to commercial and other factors. Certain means of achieving the migration may enable advantage to be taken of particular VAT reliefs e.g. many countries allow a VAT relief of the transfer of a business as a going concern.

Related Topics

From Merger and Acquisition – Integration And Indirect Tax: Managing the Moving Parts Before, During, And After a Transaction

An Indirect Tax And Acquisition Checklist:

Indirect tax risks are prevalent throughout the entire M&A and integration process. Here are some of the leading practices, lessons learned, and perspectives to keep in mind so that they do not become stumbling blocks:

  • Set up a project charter that will take effect as of the very first due diligence activities.
  • Validate due diligence findings and define priorities.
  • Make an indirect tax integration plan and ensure that the right sponsors provide buy-in.
  • Map out the current state upon acquisition and identify key risk areas, opportunities, and people in the organization acquired.
  • Jointly validate and refine the integration plan and develop a road map to success.
  • A relevant indirect tax strategy—correctly implemented—will allow the new business to function effectively from go-live, from both a tax and commercial perspective, so that it can move inventory, generate sales and invoices, face fewer disputes with non-paying customers, remain tax compliant, and integrate the business on time and on budget.

From: VAT Rate Increase Results In Extra Saving:

It might still be interesting – especially as VAT rates are increasing – to move the B2C e-business to countries with low VAT rate(s). Luxembourg has a 15% standard VAT rate and for certain supplies reduced rates of 3%, 6% or 12%.

Calculation Of The Saving

Assume that France – as mentioned in the newsletter – has already increased its VAT rate to 21.2% (planned for October 2012). The standard VAT rate in Luxembourg is still 15%. That means at least a VAT saving of 6.2% per transaction. “At least” as lower reduced VAT rates might be applicable (e.g. 3%).  The total saving will be 6.2% times net “French allocated” turnover from moment of implementation until January 1, 2015 minus of course any implementation costs. That could be substantial and even higher if you also operate in Denmark (standard rate 25% since 1992: 10% saving) or Hungary (standard VAT rate of 27% per January 2012: 12% saving) etc. What is the companies current profit margin in relation to these savings? Do your  competitors supply from low rate countries? For companies that already moved to Luxembourg such an increase in France would result in an extra “saving” of  1.6% if you compare positions with local operating companies.

From: Systems: ‘Indirect Tax Automation’ And ‘Plug And Play’:

There are all kinds of business reasons for centralizing supply chains and set up models like “Limited Risk Distributor” or “Commissionaire”. The challenge from an implementation perspective is indirect tax.

Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.

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