From a Tax Control Framework perspective, for setting up risk based controls, the more unusual the transactions, the greater the tax risks. Migration to a new jurisdiction will most likely 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 with some 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 with other disciplines, 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 ongoing activities.
Disruption of dialy business 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. However, the change of a business model cannot only create 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.
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 reduced.
VAT status of the entity migrating
Avoid VAT costs 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 be able to register for VAT. VAT that it incurs on its costs will be an additional cost as such holding company will not be able to deduct that VAT. That hits bottom line.
It is essential that from a VAT perspective, the VAT consequences of the method of migration is determined on time.
Planning before and not after the facts In practice - depending on the company's flexibility of course - VAT entrepreneurship might be achieved via restructuring to avoid or limit such a VAT burden. This is, however, only possible if VAT planning is considered at the right time, as correcting status retroactively does not work.
One other 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 vendors. This is an area of contention with the VAT authorities over for example the VAT deduction on these costs.
Project plan and VAT effective manner 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 project 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.
- How is the tax function involved in the legal structure and transactions?
- How is the tax function involved in operational changes in ERP implementation and cost reduction?
- Who is taking care of filing of the VAT registration?
- When should you apply for VAT registrations, since average lead times in jurisdictions can be several months?
ERP setup or changes The migration will result in that ERP systems have to be updated and tested to reflect new contracts and billing flows. Ownership of these tasks must be determined and communicated upfront, so that the ERP system can accurately issue invoices from day one.
Historical local knowledge People might also have left the company due to the migration and historical VAT knowledge - such as knowhow about the practical workarounds - might get lost. This becomes often in practice visible during a tax audit a couple of years later and questions raised by the authorities are then not easy, if at all, to answer.
Processes and controls, roles and responsibilities
- What are the VAT processes and controls going to be for the migrating entity?
- Who owns these controls?
- Will the tax knowledge of the migrating business be recruited, outsourced or considered a responsibility of central tax function?
- What technology will be purchased or reused?
From concept through completion and beyond
It is all managing change by design - looking at every process and transaction from start to finish and factoring in all the requirements and controls, essential to designing and optimizing a compliant VAT process. VAT should be considered in every aspect of the migration process, from concept through completion and beyond. Managing by design — looking at any process or transaction from end to end and factoring in all the requirements and controls essential to designing and optimizing a compliant VAT process.
Written by Richard Cornelisse
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 an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.