Geographic footprint of a multinational
If the reason of a business model change is to optimize the company's effective tax rate (ETR), minimizing cash tax effects or cost reductions or realize efficiency overall, it is important that with regard to managing such change the indirect tax function is timely involved.
Will using a classic principal structure in the new entity help keep maximum profits in low tax jurisdictions?
Tax planning is benefited when the business model has as outcome that the profit drivers such as the 'value added functions' and 'risk', are assigned to a low-tax jurisdiction.
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. Indirect tax issues should be addressed upfront during the design phase for proper implementation and executing of indirect tax planning as any change has impact on current processes and controls and its effectiveness.
Manage the impact of business transactions
Business model change such as a centralized operating model result often in an increased number of transactions and indirect tax obligations across many jurisdictions. 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.
The change of a business model can create not only VAT risks, but as well commercial risks such as logistics problems - customs not allowing goods to clear in a country - in getting goods into a country and delays and hold off of shipments resulting in disruption of daily business to invoicing errors (invoices needing to be redone and cash collections delayed), from incorrect tax treatment on transactions to difficulties in VAT compliance that can result in payment and reporting errors and penalties.
A root cause of 'delays and hold off of shipments' was that the company forgot to register for VAT or procurement forgot to agree with supplier who was importing the goods.
It could therefore also impact the company's reputation as also customers, suppliers, external auditor, senior management, tax authorities and even shareholders could become stakeholders when it goes wrong.
Important is to ensure that the new operating model is not only implemented correctly from a corporate income tax perspective, but also ensures that business processes are indirect tax aligned realizing support of the business in the areas of compliance, finance & accounting, legal, IT systems and regulatory matters. That means teaming with these work streams is a critical condition for success during design.
Adapt to change in time
It is recommeneded that the impact of such changes of the company's supply chain and/or location of its tax functions are determined in time. This could result in new set-up of ERP system and invoicing, new contracts, pricing procedures, processes and controls. Critical success factors are:
- Senior management support for change: 'the tax model should be based on business case and not vice versa'
- Existence of a solid and compelling integrated business case for the structure
- Sound, structured and proven design and implementation process driven by rigorous Project Management
- Complete understanding of the facts, objectives, transaction flows, business process and legal structure
- Early focus on integration with IT systems and operations
- Early buy-in to the “transformation” by management and those groups affected ('Change Management')
- Allocation of adequate resources by the company to manage and implement the project
How to determine the impact of VAT prior to migration
Some questions that might help in the right direction:
- Do we have sufficient insight into current VAT processes including all manual adjustments, workarounds and internal quality assurances processes?
- Are the processes specific and well-documented and are they adequate to the new environment?
- Do we understand the scope of personnel changes that may occur as we migrate?
- Have we captured all the relevant knowledge from personnel who may decide to leave the organization?
- Are we retaining access to and information about existing manual processes and procedures and offline solutions?
- To what extent do current processes depend on local VAT expertise and technology? How much will be lost in the event of a change or transfer?
- To what extent are different processes required from one jurisdiction to another?
- Who has final responsibility for the VAT compliance process at present and who will own it upon transfer to the new model?
- Where are the essential process controls being carried out?
- How does the new model deal with local VAT risks in terms of internal communication and coordination?