Written by Richard Cornelisse


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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.

But do these taxes and tax planning opportunities get the attention they need, especially in light of increasingly complicated and globalized business models?With indirect taxes intertwining through the day- to-day operations of a company—raising sales invoices, moving inventory, paying suppliers, collecting cash—indirect tax risk can have a distinct and domino-like effect on the commerciality of an organization. The impact can increase exponentially in the event of a merger or acquisition or business model change.

There is one common denominator that is too often missing from the strategic or planning elements of a business model change — indirect tax. And although these tax considerations may not be among the issues that drive a financial transformation, tax can certainly give rise to some significant and costly challenges. That is particularly true of value added tax (VAT), which hits a number of disparate points within the enterprise as diverse as finance, procurement, IT or HR.

One of the most common side effects of an integration that cannot be fully realized surfaces in the realm of invoicing. For example, large numbers of payable invoices are not correctly coded so VAT is not deducted (in time). Or when the legacy system is only half integrated into the new model, incorrect sales invoices are issued, causing problems for customers, incorrect reporting of tax figures, and missed compliance obligations.


Business operating models are evolving


It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.

From a Tax Control Framework perspective, for setting up risk based controls, the more unusual the transactions, the greater the tax risks. An example of non-routine significant business transactions is the change of a company's business model.


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.


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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. 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.

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.


Manage the impact of business transactions


Indirect tax obligations Business model change such as a centralized operating model result often in an increased number of transactions and indirect tax obligations across many jurisdictions.

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.



Involvement during design 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 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 necessity during design.


Operational disruptions


Reputational risks 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.

Some root causes: 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.


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A comparison from a VAT perspective



Explanation of the overviews presented in slides above


LRDs versus Commissionairs For corporate tax reasons, such principals have their residence in low tax countries.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. A sales principal located in non-EU country will create more complex registration and trading issues (see 'Implementation' below).

Tollers are manufacturers that produce on behalf of other parties (e.g. the principal). The toller receives as consideration a tolling fee.

Commissionairs 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 (Limited Risk Distributor/LRD) is part of the supply. The difference is that a resellers becomes owner of the goods. Commissionairs are deemed to be owner from a VAT perspective. From a VAT treatment perspective Commissionairs and LRDs are therefore 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. The commissionair 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 of time.

LRDs and Commissionairs have however neither legal ownership to the inventory during storage nor during transport as the principal is at that stage still the legal owner. Different accounting rules exist for LRDs compared to Commissionair.


Note that commissionairs create a PE issue due to new legislation
see below and chapter BEPS


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 Globalization: 'Drop Shipments' and 'Flash Titles'

Many multinationals operate still a classic Principal structure to allocate profits to low(er) tax jurisdictions. Principals are in the main rule owner of the goods when these are sent to customers. In a strip-buy-sell model a reseller (Limited Risk Distributor: LRD) is part of the supply chain.

A LRD as sales company creates opportunity to have local inventory on LRD books.  However, a LRD becomes owner - via 'flash title' - only for a very short period of time. LRDs have however neither legal ownership to the inventory during storage nor during transport as the Principal is at that stage still the legal owner.

Triangulation is used to describe such an ABC chain transaction, which involves three different parties where the products are shipped directly by for example party A (the 'Principal') to party C (the 'Customer'). Party B (the 'LRD') acts as intermediary, never physically receiving the products.

In practice when two or more other parties are involved in a supply chain it is essential that in every leg of the supply chain the VAT treatment of that transaction is compliant with the VAT rules.

For a correct VAT determination of a cross-border chain transaction, the VAT relevant data in above example of company code A and B have to be linked real time as Standard SAP itself is only processing a transaction within one specific company code (read: either A or B).


VAT automation of complex business models

Technology-related tax risk: understand and address the potential harms and benefits of (new) technology


ERP configuration take aways In practice, ERP configuration - the amount depends - is needed when companies deal cross border and complex business model are set up. Why? It is often the case that the principal delivers the goods physically and directly to the final customer, a so called drop shipment.

This creates only one physical departure of goods - goods issue' - in the ERP system. However, two invoices should be raised:

  1. One from Principal to LRDs or Commissionairs and
  2. One from the LRD/Commissionair to the final customer

In the ERP system, the correct 'ship from' information at the LRD and Commissionair 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. For cross-border transactions that often results when SAP is used in an incorrect VAT treatment. Therefore, in practice, it is not easy to correctly configure the 'tax determination logic' set up.


See chapter: Data and Technology


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Identification, assessment and implementation


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

BEPS and Tax

Action 7 – prevent the artificial avoidance of PE status

The final BEPS report includes changes to the definition of PE for income taxes of Article 5 of the OECD Model Tax Convention. Action 7 broadens the threshold to determine when such PE status exists. Currently such a PE status does not exist for commissionaire arrangements and the specific activity exemptions in treaties, such as warehousing, purchasing and “preparatory and auxiliary activities.

Fixed versus permanent establishmentThe indirect tax definition of a fixed establishment (FE) is different from a PE and has its foundation in EU VAT law and should therefore not be affected by the BEPS initiative or OECD definition. Some countries however do (still) not accept the absence of a FE once a PE has been established.

Note that the amount of PEs will increase when "Action 7" is in force (e.g., commissionaire, overseas warehouses, toll manufacturing, marketing agents, consignment stock). For example this risk of PE increases when an agent is actively involved in generating sales locally and that activity directly results in a binding contract.

Moving away from commissionaire structure

As businesses are facing global challenges it makes sense that the existing business model is reevaluated and amended when necessary to meet the new PE environment. That most likely means moving away from a commissionaire structure. Principal company sells to a master sales company (e.g., in the same country as the principal company) under a LRD agreement, and the master sales company resells through its local branches.


Adapt to change in time


Determine impact of such changes of the company's supply chain and/or location of its tax functions. 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: '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

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Commissionaire 1

The objective is to bring commissionaire arrangements within the framework of dependent agency PE

Converting the sales middleman function from Commissionaire to LRD

Start point from an ERP perspective is to investigate how the commissionaire is set-up from a current operational state.

Below 2 different ways how a commissionaire could have been implemented in SAP:

  1. Revenue of the commissionaire is directly booked by the principal.  The principal has set-up all master data. Manual corrections were made for VAT reporting. VAT is in that set-up a real botteneck and the root cause is that for VAT purposes a commissionaire is deemed to be a buy/sell.  VAT treatment for Commissionaires and LRDs in principle similar (buy and sell), but with different legal flows. That VAT qualification is however in conflict with the legal reality as the commissionaire sells in its own name but on behalf the principal; legal title of the goods transfers directly from Principal to the customer. This VAT bottleneck often results that lots of manual corrections have to be made to facilitate correct VAT reporting
  2. Commissionaire is set up as a buy-sell and the master data of the commissionaire is used. VAT correct, but legally - as mentioned above - wrong as the revenue belongs to the Principal and the commissionaire receives a commission from the principal.

When option 1 has been implemented and the commissionaire model will now be converted to a LRD, the consequence is that the master data has to be transferred from the Principal to the local LRD and thus the VAT determination logic for the LRD's business transactions has to be designed and properly tested before the LRD can become fully operational.

As a LRD has revenue in its books, option 2 above might make conversion to a LRD a bit easier as in a business transaction the Principal to LRD and LRD to Customer will transfer legal title.

convert Commissionaire to LRD

Key considerations

Below the relevant work streams and an example each to consider:

  • Corporate Income Tax - e.g. assess impact local direct taxes
  • Transfer Pricing - e.g. amend current TP documentation to reflect change of CMRs to LRDs
  • VAT - e.g. different accounting rules for LRDs compared to Commissionaires may significantly impact current SAP logic
  • Customs - e.g. need to investigate impact of adjusted transfer prices to Customs valuation
  • Legal - e.g terminate commissionaire agreement
  • Technology - e.g. implement LRD in SAP and be aware that full VAT AP and AR automation for also the most complex transactions, real time access to numbers / blueprint of business model (integrated in SAP: data analytics) and automated VAT controls are all possible

Financial data reflecting business model designed Not only finance but also tax needs access to data that shows how transactions are processed and how IT systems are set up. Data integrity is an operational risk factor when transactions are booked in any given country and are not properly evaluated for tax purposes.

It could be that the financial data in the system does not reflect the business model design or that change is not properly managed. Besides that in the 'as is' it is often a challenge to get access to the relevant tax data that must be reported to regulators, investors and tax authorities in every business unit and country in which a company operates.

Cross-functional teams Likewise, the VAT work stream should be integrated with contingent technology and finance projects. This may prove challenging as a number of initiatives, particularly those that deal with systems development and technology enablers, are often not visible to the tax function — another point that underscores the need for transparency and upfront communications.

Failure to align with initiatives that can intersect with VAT can result in a VAT design that is inefficient from a process perspective and not a “best fit” for the business.

Cross border movements in SAP


Some of the questions that can help you determine the impact of VAT prior to migration


  • 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?

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Written by Richard Cornelisse
 Richard LinkedIn

Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.

He started his career as a manager at Arthur Andersen and then became a partner in EY where I led the indirect tax performance team for Netherlands and Belgium. Currently he is a senior managing director of Key Group.

Richard has over 20 years’ experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service centre migration, and post merger integration work. Richard is also somewhat of a mentor, giving back to the profession. If you are interested in conversation and discussion, please feel free to contact him.