Page 4 of 6: What happens to VAT when the business model changes?
A change in the business model can actually create VAT risks. For example, the selling arrangement may change from a buy/sell to broker/agent or vice versa. Goods purchasing may become centralized. The flows and storage locations of goods may change.
In any of these cases, new VAT registration obligations may be created in different countries. Likewise, VAT could be chargeable by different entities and the recoverability of the VAT could change, and different billing flows are created.
As the acquisition integration continues, something as basic as a billing error leading to invoices issued in the wrong name could not only delay revenue receipt but also result in nonrecoverable VAT.
The penalties for incorrect invoicing can be a percentage of the turnover, so amounts can quickly become material—up to 25 percent VAT in Europe (Hungary 27%) on the turnover plus penalties.
One of the fundamental questions to answer is where the ownership of intangible assets will sit in the new structure and whether it will be migrated to a low-tax jurisdiction.
We have seen VAT charged on the sale of intangible assets from one U.S. corporation to another because the assets were exploited in Europe and the acquiring company had not planned ahead to assure proper registrations were in place.
In one case, VAT was not recoverable and the company incurred an unexpected cost to the transaction of about 20 percent of the value of the intangible asset. This is a prime example of relying on due diligence from a historical perspective.
If intangibles were not an issue before, the historical risk would not show up but the current and future risk would loom large.