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Top 5 practical tipswhen switching to aCommissionaire or LimitedRisk Distributor (LRD) Model
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Many multinationals have reorganised their legal business structures into so called ‘commissionaire’ or ‘limited risk distributor’ (LRD) modelsMotivated primarily by corporate tax planning, these models usually involve centralising the supply chain through a single legal entity,established in a tax efficient jurisdiction.
The evaluation and planning process required for this organisational change is intensive, and almost always undertaken with the support ofexternal legal and tax specialists, and in cooperation with the respective tax administrations.
But when the corporate decision is finally made to go ahead with the reorganisation, it’s down to the business teams to drive the practicalimplementation activities. As substantial tax savings are at stake, tight deadlines are usually set, with little margin for slippage.
A critical implementation bottleneck is the complex VAT implications that follow changes in the legal supply chain. Failure to address theseearly and holistically (both from a legal and ERP system perspective) will lead to delays and expose your business to significant VATcompliance risk.
As a finance or IT director, you want to ensure that you implement your new business model:
• on time;• on budget; • without exposing your company, your customers or your staff to compliance risk.
To help you achieve this, we’ve compiled a list of the top 5 issues that you should address:
Identify in which foreign jurisdictions your principal legal entity needs to VAT register Why?
Your principal entity will start to conduct taxable activities (previously undertaken by other group entities) in multiple, foreign jurisdictions.Depending on the nature of such activity, the principal entity may have a legal requirement to register for VAT in those foreign countries.
Establishing this up-front is critical in order to:
• Comply with your VAT collection and disclosure obligations, and reduce exposure to: - strict (civil and criminal) penalty regimes across the EU, with sanctions of up to 200% of the output tax concerned; - blocked input VAT deductions associated with trading prior to VAT registrations being put in place;
• Avoid potential bottlenecks - as your business has a legal requirement to have the VAT registrations in place prior to trading under the new model; and
• Plan for inevitable bureaucracy - as the VAT registration process within the EU is not standardised and each jurisdiction has its own procedures, application forms, languages, bank guarantee requirements, processing time-lags, etc.
Identify in which foreign jurisdictions yourprincipal legal entity needs to VAT register(cont’d)
How?
To tackle this issue effectively, we suggest the following approach:
1. The first step is to map out all physical flows of goods and the corresponding invoicing flows. Use this information to determine the precise legal requirements and ‘VAT treatment’ of each flow, in which country it should be disclosed and whether you have additional disclosure obligations such as EC Sales lists or Intrastats. Tip: It is best to conduct this exercise using a ‘workshop’ approach, including key stakeholders from finance, tax, logistics, commercial sides of the business.
2. It is likely that this exercise will generate results that you may not have encountered before, which would add further complexity to your business model. Most central principal models involve complicated VAT flows such as triangulation, extended reverse-charge, drop shipments, consignment stock simplifications, and so on. The next step is to validate the results with international VAT experts who understand your business and know the legal requirements in all the jurisdictions in which you operate.
3. Obtaining VAT ID’s in foreign jurisdictions increases your VAT compliance burden. However, many jurisdictions offer simplification mechanisms which could be used to avoid VAT registration in certain circumstances. Make sure you explore these simplification options fully with your VAT advisors to ascertain if they are relevant to your business.
Prepare your ERP system to embrace your new VAT model
Why?
As explained earlier, your new business model will create complexVAT scenarios that had not previously been managed in your ERPsystem. Whether you run SAP, Oracle, JD Edwards or another ERPsystem, it is essential to ensure that the tax determination on allyour sales and purchases are managed in a fully automated andcompliant way. This is an area where many companies fail, under-estimating the impact the new VAT model will have on their ERPconfiguration, by incorrectly assuming their ERP has pre-existingfunctionality to deliver the required tax determination logic.Preparing your ERP for the changes is therefore critical inorder to:
• Avoid tax compliance risk – associated with an unfit ERP system that relies on manual workarounds by non-tax staff, influencing tax decisions;
• Reduce VAT compliance costs associated with manual processes by the finance and tax teams, designed to mitigate a lack of system functionality;
• Avoid potential delays – which could result from finance or tax delaying project go-live without the appropriate system functionality in place.
How?
To tackle this issue effectively, we suggest the followingapproach:
1. Undertake a ‘requirements gap analysis’ which translates the VAT flows that have already been mapped out, into an ‘ERP VAT design requirement’ , and compare these against your current system functionality, identifying and prioritising any gaps.
2. Next, depending on the gaps identified, investigate potential solutions and if required prepare a business case that considers the options from internal development, to external ERP VAT solutions. Bear in mind that there are a number of powerful third party solutions on the market which deliver all the required VAT functionality, built directly into your ERP system, without the need to develop any modifications yourself. This can have a material cost and resource saving benefit, so it is best practice to task your teams to investigate options early on.
3. Once you have committed to a preferred approach, ensure that you roll-in the solution as part of your core implementation activity. Resist suggestions to defer ERP VAT improvements to a post go-live project. This is because changes to ERP VAT logic post go-live, are highly disruptive to the business, as they require a fresh round of user acceptance and regression testing. Furthermore, failing to go live with a solution in place, exposes your business to the compliance risks outlined above.
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Prepare your new VAT reporting and compliance process
Why?
Preparation and timely submission of periodic VAT returns,Intrastats, EC Sales lists and other supporting declarations, requirein-depth technical knowledge of the legal rules, VAT return forms,submission deadlines and procedures, and communicationlanguage of each jurisdiction. The greater the extent andcomplexity of your foreign VAT registration footprint, the greater the compliance burden on your tax and finance staff.
Unlike direct tax – which is managed exclusively by senior financeexecutives – most businesses view the VAT compliance processas an ‘operational function’ – often delegated to junior financestaff. With ever stricter penalty-regimes in place for VAT reportingerrors or delays, this is an area where you can’t afford to be lax.
To limit risk and ensure business continuity, task your finance or taxteams to address the following key questions:
• How do you distribute the increased work burden?
• How do you up-skill ‘operational’ staff to manage multiple jurisdictions?
• How do you retain and update your knowledge-base to ensure compliance?
• What tools and solutions should you deploy to support your new process?
How?
Follow these 6 steps to answer these questions and make a decisionon how to organise your new VAT reporting and complianceprocess:
1. Firstly, commence by mapping out the VAT compliance process from ‘record to report’ stages, specifying all key tasks and activities that need to be undertaken to ensure accurate and timely submission of all VAT declarations.
2. Next, define the ‘skill set gap’ for each task by comparing the required skill set to what you currently have available across your business.
3. Determine the ‘resource gap’, by overlaying current resources and skill sets against requirements.
4. Then determine your compliance risk profile in respect of each step in the process. When doing this, consider factors such as:
• resources and skill set gaps;
• volumes and complexity likely to pass through each VAT return;
• the strictness of each tax regime in which you are required to comply;
• acquisition and retention of VAT knowledge among staff.
5. Evaluate specific VAT compliance solutions and tools that are available in the market to leverage added benefits and efficiencies to your process. When doing this, consider outsourced services, co-sourced solutions as well as automation tools, as each has a role to play depending on your preferences. Most importantly, speak to other companies who have gone through a similar change, to learn how they tackled this issue.
6. Finally, decide on the approach that best suits your company and implement a parallel project to realise and test your new compliance infrastructure before go live.
Avoid negative cash-flow impacts
Why?
Your new business model effectively introduces a principalentity into the supply chain which, in many cases, will not beestablished in the country of supply. Most European jurisdictionshave specific VAT rules known as the ‘extended reverse-charge,’which forces the non-established principal in certain cases toinvoice its customers without charging VAT. While this is intendedas a simplification mechanism to alleviate a compliance burden,there are some negative consequences: if the principal importsgoods into a jurisdiction, or buys and sells goods in that foreignjurisdiction, then it will incur import and/or input VAT, but have nocorresponding output VAT against which to offset these credits.
Depending on the values and the countries involved, this maycrystallise a large VAT receivable on your balance-sheet which maybe difficult and time consuming to recoup.
How?
There are 3 approaches that you might be able to utilise to avoidthis situation.
1. Firstly, avoid the importation VAT charge, either by taking advantage of postponed accounting arrangements, where these exist, or by designating another party to be the importer of record where possible.
2. Next, consider whether you qualify for the ‘Usual Exporter’ arrangements, and use this as a mechanism to avoid local VAT being charged to you in the first place.
3. If 1 and 2 don’t apply, consider changing your physical and/or invoicing flows either:
• to remove the problem altogether; or
• to crystalise VAT outputs that can be used to offset the inputs.
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© 2013 Meridian Global Services. Published in Ireland. All rights reserved. 213.indd(Ireland) 11/13. Artwork by marketing department (NS).
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Post go live Audit
Why?
You’ve planned, designed, built, tested, tweaked and finally gone live with your neworganisational model, and it’s now time to start reaping the benefits of your labour. But nomatter how comprehensive your preparation activities and testing phases are, you can relyon two certainties:
1. There will always be certain details and requirements that ‘slipped through the net’ and weren’t dealt with during the implementation phase; and
2. Your business is not static and will start to adapt the minute you go live.
Early detection and rectification ensures that these are ‘nipped in the bud’ before they growinto larger issues affecting your compliance record and process efficiency.
How?
The best approach to early detection and rectification, is to conduct a focused post go liveaudit, which should initially take place between 3 – 6 months after go-live. The audit shouldbe resourced by individuals independent of the core implementation team, or alternatively,by a third-party provider with expertise in this area.
The scope of the review should encompass the following core areas:
1. Reporting and strategic VAT compliance processes;
2. Account receivable processes (O2C);
3. Accounts payable processes (R2P)
4. ERP tax determination logic;
5. Impact of legislative changes.
Additional periodic audits (with a sharper, more limited scope) should be undertaken toachieve continuity in your compliance, identify and rectify any new issues, and maintaincritical knowledge in-house.
