International Indirect Tax survival in a global supply chain

International indirect tax survival in a global supply chain December 2015

International indirect tax survival in a global supply chain | December 2015

3 © 2015 Grant Thornton UK LLP. All rights reserved.

Contents

Section Page

The supply chain is the cornerstone of business profitability 4

Global complexities demand agile tax structures throughout the supply chain 5

The supply-chain life cycle 6

How does this impact supply chain operations? 7

Procurement 8

Manufacturing 9

Logistics 10

Reverse logistics 11

Sales 12

Retail 13

A seamless international service 14

Contacts 15



The supply chain is the cornerstone of business profitability

The profitability of a business is directly impacted by how its supply chain makes and delivers goods, as well as by how that supply chain is structured to minimize trade and tax expenses

Economic and technical developments drive change for businesses. As a business moves through its own life cycle ,the supply chain will also evolve, as procurement, manufacturing and distribution strategies change.

The pace of change in the international tax environment is accelerating, as governments and tax administrations get to grips with BEPS. These developments will require businesses to react on a strategic and organisational level.

Such changes invariably have an impact on VAT and customs obligations. As the business reacts to changes in the external environment, it needs to revisit the design and operation of the supply chain at transaction level.



Global complexities demand agile tax structures throughout the supply chain

Aside from the economic and technical factors that drive change, the tax environment is evolving fast.

Changes to consumption taxes around the world, eg Japan and Australia

Increased administrative requirements eg e-filing of returns, sales lists

New invoicing requirements eg EU Invoicing Directive 2013

Frequency of tax rate changes eg as austerity bites in the Eurozone

Standard audit file requirements eg France, Malaysia and other places

Use of data interrogation by tax administrations

Senior accounting officer rules eg UK

Impact of transfer-pricing changes under BEPS

Global footprint and international supply chain requiring multiple VAT/GST registrations

Penalty regimes focused on behaviour, systems and controls eg UK

Pace and quantum of tax rule changes eg the EU 'VAT package'

New VAT/GST regimes eg Malaysia GST in April 2014 and GST in India in 2016 or 2017

Increased co-operation between tax authorities eg MOSS and VIES

More aggressive audits by tax authorities hungry for revenue



The supply-chain life cycle

Supply chain

lifecycle

1. Design The supply chain is designed to

optimise revenue, production

and distribution costs across

the supply chain.

2. Implementation The business must

implement the structure,

and ensure that it is

registered for VAT in the

relevant states.

3. Systems Systems must be capable of

recording and processing

transactions in the correct state.

4. Compliance processes Filings should be made on a timely

basis in the relevant states.

5. Tax risk management The business must have

processes and controls to

mitigate risk and deal with

any compliance failures

identified.

6. Audit and disputes The business must be able

to defend the tax structure

from official challenge.

7. Corporate transactions These bring into focus issues of

separation or integration, which may

require redesign of the supply chain.

Supply chains go through a natural lifecycle, initiated by new products,

changes in market conditions, and corporate transactions.



How does this impact supply chain operations?

Every stage of the supply chain has its own indirect tax challenges, risks and opportunities.

Procurement Manufacturing Logistics

Reverse logistics Sales Retail



Procurement

Issue

Procurement

The principal business should ensure that the correct VAT treatment is applied at purchase order stage.

Duty and VAT on import

The importer is usually responsible for declaring:

• VAT on purchases from other EU states, and

• Duty and VAT on imports from outside the EU.

Customs reliefs

Duty and VAT act as a drag on cash flow if the goods are not going to be put into production immediately.

Unfair competition and dumping

The World Trade Organisation allows countries to act against the 'dumping' of product. In the EU, anti-dumping duties can be imposed with little or no warning, leading to increases in costs.

How Grant Thornton can help:

• Automation of tax code determination.

• Obtaining binding tariff information on specific products.

• Advice on valuation methodologies where the price paid or payable cannot be used.

• Advice on customs relief systems such as customs warehousing.

• Advice on anti-dumping and countervailing duties.



Issue

Toll v contract manufacturing

Contract manufacturing allows the manufacturer to a achieve a fixed margin on product sold to the principal business.

With toll manufacturing, the manufacturer is paid a fee. The goods belong to the principal business throughout.

Goods sent for processing

Both the principal business and the processor have responsibilities where goods are sent for processing:

• inside the EU – the principal business may need to register for VAT in the territory of the processor;

• into or outside the EU – the processor can be responsible for declaring the import.

Tooling

The principal business will typically want legal title to the tooling, even if used by third parties in other countries. This can lead to a charge to local VAT, which can take a long time to recover.


• Ensuring that the principal business is registered for VAT in every state where it needs to be.

• Advice on customs relief systems such as:

– inward processing, and

– outward processing.

• Advice on structuring the purchase of tooling in such a way that working capital is not tied up in VAT receivable balances.

Manufacturing



Logistics

Importing goods into the EU

States have a variety of ways of capturing duty and VAT on the importation of goods, with different consequences for VAT in working capital

Moving goods within the EU

Whilst the Single Market requires an absence of internal borders for customs declarations, every intra-community transaction has to be declared for VAT in both the ship-from and the ship-to state. Businesses in complex supply chains need to know who is responsible for each declaration.

Warehousing costs

Local VAT may be charged on warehousing costs, depending on the location of the recipient of the warehousing services.

Transport and logistics

The related costs tend to be taxable in the state of the recipient. However, who is responsible for organising the transport can affect the VAT treatment of the sales of the goods themselves.

Export of goods

For exports to be free of VAT, the vendor must hold the evidence required to prove that the goods have left the territory.


• Optimising the routing of product to benefit from advantageous import declaration processes such as postponed accounting.

• Building transaction maps to set out the VAT treatment and reporting responsibilities for each type of transaction.

• Advice on transport and logistics, to ensure that particular transport arrangements do not make the business liable for VAT registration where it does not expect.

• Advice on the export evidence required state by state. Germany and Hungary have recently introduced strict rules about the documents exporters must hold.



Reverse logistics

Returns

Goods returned by customers may not follow the route taken by the original sale. For example, goods may be returned direct to the factory, rather than to the warehouse from which they were shipped originally.

Service contracts

Multi-territory service contracts can cause problems, as the shipment of spare parts and/or replacement goods into the customer's state for the purposes of a service call may lead to the need for the business to register for local VAT.

Warranty costs

Warranty risk normally lies with the manufacturer, but this may not always be the case. The VAT treatment of warranty costs can vary state by state.

Return of goods/resale of refurbished goods

Worn core is often returned to the manufacturer for refurbishment before distribution into the aftermarket.


• Ensuring that the transaction map correctly reflects how returns are dealt with, so that the movements can be accounted for correctly.

• Review of service transaction chains to ensure that the arrival of goods in the customer's state can be accounted for appropriately.

• Advice on the treatment of warranty costs state by state.

• Ensuring that customs valuations correctly reflect where the warranty risk lies, if not with the manufacturer of the goods.

• Advice on the resale of refurbished goods to ensure that valuation of the relevant movement of goods is based on the refurbishment costs only.



Sales

Distribution models and how they differ for VAT

Sales agency, commissionaire and limited-risk distributor have different consequences for tax purposes. Sales agencies provide services, but commissionaires are treated for VAT purposes as supplying goods.

The importance of Incoterms

Incoterms and transport arrangements can affect who is responsible for VAT and customs declarations in transaction chains.

Problem areas:

• Drop shipments – can lead to the intermediate supplier needing VAT registration in either the ship-from or the ship-to state.

• Call-off stocks – unless the state concerned operates a relief, holding call-off stocks in another state, eg at customer premises, will make the business liable to VAT registration.

• Installed and assembled goods – again, unless the state operates a relief – the supplier of installed and assembled goods will have to register for local VAT.

• Bad debts – there is a danger of loss of Bad Debt Relief with commissionaires and limited-risk distributors.


• Structuring complex supply chains to ensure that the business does not have to register in multiple states.

• Advice on available reliefs state by state to minimise the need to register for VAT in relation to call-off stocks and installed and assembled goods.

• Advice on the detailed rules on Bad Debt Relief state by state to ensure that VAT can be recaptured where debts are not recovered.

• Implementation of tax engines to ensure:

– correct tax code determination,

– tax data integrity and updating, and

– automated production of VAT returns, EC Sales Lists and Intrastat declarations.



Retail

In-store or internet sales?

Many 'bricks and clicks' retailers offer a mixture of in-store sales, internet sales with home delivery, and internet sales with pick-up in store.

Low-value consignment relief (LVCR)

Sales to EU-based customers from non-EU on EU non-VAT territories can reduce costs by taking advantage of LVCR.

Electronically-supplied services

Increasingly, the sale of electronically-supplied services is taxable in the state of consumption. Japan and Australia have recently introduced 'Netflix taxes'.

Payment handling fees

There is little consensus within the EU, or between businesses and tax authorities as to whether payment handling fees should be subject to VAT or treated as an exempt financial service.


• Transaction mapping, and automation of tax code determination for in-store and internet sales.

• Advice on structuring of postal distribution to use LVCR.

• Advice on the content and mechanics of customs declarations made on behalf of postal customers.

• Advice on VAT reporting obligations and the use of the EU Mini-One Stop Shop (MOSS) for electronically-supplied services.

• Advice on the structuring of payment handling services to optimise the availability of VAT exemption, including defence of the structure as necessary before the tax authority.



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Contacts

Karen Robb Partner – International Indirect Tax Chair of the International Indirect Tax Committee EMEA and member of the Global Committee

T +44 (0)20 7728 2556

E [email protected]

Alex Baulf Associate Director – International

Indirect Tax

T +44 (0)20 7728 2863

E [email protected]

Henry Cairns-Terry Senior Manager – International Indirect

Tax

T +44 (0)12 1232 5173

E [email protected]

Ian Worth Associate Director – Customs & Global

Trade

T +44 020 7728 2174

E [email protected]

mailto:[email protected]

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International Indirect Tax survival in a global supply chain