Even as the world is shrinking, businesses and their growth strategies are becoming more complicated. A schematic drawing of the functions of a typical multinational today might look like a Rube Goldberg contraption—a complex of moving parts that must connect one to another for tax, regulatory, and reporting purposes.
And unlike the more contained structure for handling income-based taxes, responsibilities and key drivers for indirect taxes may be spread throughout the enterprise, residing not just in the tax department but in any of such diverse departments as finance, information technology, supply chain management and logistics, human resources, and beyond.
Added is the growing trend toward shared service centers (SSCs) that are responsible for operational processes including accounts payable and accounts receivable as well as other outsourced functions for tax, finance, and treasury. Tax determination and reporting for the entire operation may be governed by one or more enterprise resource planning systems, which in turn may be integrated to varying degrees, with or without the benefit of sophisticated technology tools.
All these factors make for a changing and increasingly sophisticated business environment that requires a different approach to business indirect tax advice.
Although fundamental tax due diligence is still a requirement for the purchase of a company or assets, it is only the opening chapter.
Equally important are exploring and thinking through options for structuring the indirect tax profile and how it will function in the organization post acquisition and throughout implementation and integration.
A Look at Some Critical Questions
Asking the critical questions—whether of outside advisers or company leadership—can help focus on the relevant issues in these areas of particular importance.
Processes and Controls, History and Knowledge
- What are the new processes and controls going to be?
- Who owns these controls?
- Will the tax knowledge of the acquired business be retained or will there be key staff resignations?
- What technology will be retained?
- Who is aware of the tax planning history and can help make sure that the proper structures are maintained?
- How will the seller’s processes and systems be integrated?
The New Structure and VAT
- Should VAT be charged on the sale? If so, what country’s VAT should be applied and at what rate?
- Who is liable for any VAT chargeable, and if chargeable can this be deducted?
- Who is responsible for VAT errors and penalties?
- How will inventory be integrated into the new purchaser’s supply chain?
- 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.
- Where will the regional inventory hubs be located? Careful planning of the hub locations will al- low VAT on import to be deferred to a point where it no longer represents a cash flow cost to the business. Conversely, poorly implemented ‘‘virtual’’VAT inventory systems can have the opposite effect: With each national entity able to move its own goods to a foreign jurisdiction, ostensibly to maintain a minimal level throughout the region, the actual result could be that every national subsidiary would require a VAT registration in every other European jurisdiction.
- Are U.S. foreign tax credits to be used with transactions occurring outside the United States? A VAT registration is generally needed where inventory is held. In some countries, particularly those in Asia and Latin America, a VAT registration will crystallize a permanent establishment for corporate income tax purposes. This would mean a massive increase in the U.S. corporation’s foreign tax compliance obligation and could substantially increase the amount of tax due as well as the workload.
- Where will the deal costs sit? Deal costs are generally cascaded so that the corporate income tax deduction can be taken at the appropriate entity. But when the cost remains in a holding company, VAT will be an absolute cost to the transaction.