Skip to main content

Change of a company's business model

The Importance of a Relevant VAT/GST Strategy

A well-implemented indirect tax strategy is essential for the effective functioning of a new business from the go-live stage, both from tax and commercial perspectives. This ensures smooth inventory movement, efficient sales and invoicing, reduced disputes with non-paying customers, ongoing tax compliance, and timely, on-budget business integration.

Indirect taxes play a vital role in the daily operations of a company, impacting various activities including invoicing, inventory management, supplier payments, and cash collection. As a result, the risks associated with indirect taxes can significantly affect an organization’s commercial viability, especially during mergers, acquisitions, or changes in the business model.

One critical aspect often overlooked in strategic planning for business model changes is indirect tax. Although tax considerations may not be the primary focus during financial transformations, neglecting them can lead to substantial and costly challenges—particularly concerning value-added tax (VAT), which influences multiple departments within the organization, including finance, procurement, IT, and HR.

Incomplete integration during transitions often leads to invoicing issues. For example, if many payable invoices are not correctly coded, this can cause delays in VAT deductions. Additionally, if a legacy system is only partially integrated with the new model, it may result in the issuance of incorrect sales invoices, leading to customer disputes, inaccurate tax reporting, and missed compliance obligations.


Using a Classic Principal Structure to Optimize Profits in Low-Tax Jurisdictions

Will employing a classic principal structure in the new entity help maximize profits in low-tax jurisdictions? If so, one entity would hold the title to the inventory across various locations, necessitating VAT registration in each jurisdiction where the inventory is stored. Addressing indirect tax issues during the design phase is crucial to ensuring the effective implementation of indirect tax planning, as any changes can significantly impact current processes, controls, and their overall effectiveness.

Effective tax planning is enhanced when the business model assigns profit drivers—such as value-added functions and associated risks—to low-tax jurisdictions.

Managing the Impact of Business Transactions

Changes in the business model, such as adopting a centralized operating structure, often lead to an increase in transactions and indirect tax obligations across multiple jurisdictions.

It is vital to ensure that the new operating model is not only implemented correctly from a corporate income tax perspective but is also aligned with indirect tax requirements. This alignment supports the business across various areas, including compliance, finance and accounting, legal, IT systems, and regulatory matters. Collaborative engagement with these work streams is essential during the design process.

Risks Associated with Changing a Business Model

Modifying a business model can introduce various risks, including VAT risks and commercial challenges. Potential issues may arise in logistics, such as customs delays that hinder the clearance of goods in certain countries, difficulties in importing products, and shipment delays. Such disruptions can adversely affect daily operations, leading to invoicing errors that necessitate the re-issuance of invoices and delays in cash collections. Misclassified transactions can complicate VAT compliance, resulting in payment and reporting errors that may incur penalties.

Common root causes of these challenges include failing to register for VAT or a lack of coordination between procurement teams and suppliers responsible for importation.

These issues can also damage the company's reputation, as stakeholders—including customers, suppliers, external auditors, senior management, tax authorities, and shareholders—are affected when problems arise.


Adapt to change in time

Determine the impact of such changes on 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

Key considerations

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

  • Corporate Income Tax - e.g. assess impact on 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

The Importance of Data Access for Finance and Tax Functions

Both finance and tax departments need access to comprehensive data that illustrates how transactions are processed and how IT systems are organized. Data integrity becomes a significant operational risk when transactions booked in a particular country are not adequately evaluated for tax purposes.

There are instances where the financial data within the system fails to accurately represent the business model design, or changes are not effectively managed. Additionally, current processes often make it challenging to access the relevant tax data necessary for reporting to regulators, investors, and tax authorities in each business unit and country where the company operates.

Furthermore, the VAT work stream should be seamlessly integrated with technology initiatives and finance projects. This integration may pose challenges, as many projects related to system development and technological advancements often remain opaque to the tax function. This highlights the critical need for transparency and proactive communication across departments.

If the tax function does not align with initiatives that may impact VAT processes, it risks creating a VAT design that is inefficient and not ideally suited for the business's needs. Implementing effective alignment measures is essential to ensure a streamlined VAT process that meets regulatory requirements and supports the overall business objectives.


Some of the questions that can help you determine the impact of VAT before 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 for 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?