Page 2 of 4: 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.
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.
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.