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Is the Indirect tax automation of ERP systems plug and play or is tailor made configuration needed to manage risks and opportunities?

Value Added Tax (VAT) Tax Automation
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Richard Cornelisse
THE PERCEPTION OF PLUG AND PLAY
If you provide goods and/or services locally subject to the standard VAT rate it might be 'Plug and Play'. That is the most simple VAT business model I could come up with.

In practice, configuration (the amount depends) is needed when companies deal cross border and/or complex business models are set up such as a centralized principal structure with for example a "Limited Risk Distributor" or a "Commissionaire".

VAT AUTOMATION OF COMPLEX BUSINESS MODELS
There are all kinds of business reasons for centralizing supply chains and set up models like "Limited Risk Distributor" or "Commissionaire". The challenge from an implementation perspective is indirect tax.

WHAT MAKES IT COMPLEX
Lets take LRDs/Commissionaires as an example.

LRDs/Commissionaires have neither legal ownership to the inventory during storage nor during transport as the Principal is at that stage still the legal owner.

It is often the case that the Principal delivers the goods physically and directly to the final customer. This creates only one physical departure of goods (`goods issue') in the ERP system.

However, two invoices should be raised (one from Principal to LRDs/Commissionaires and one from the LRD/commissionaire to the final customer.

In the ERP system, the correct 'ship from' information at the LRD/commissionaire level is missing so that the VAT treatment by the system is determined based on the 'ship from' and 'ship to' information present at the Principal level. In principle, for cross-border transactions this results in an incorrect VAT treatment.

Therefore, in practice, it is time consuming to correctly configure the 'Tax determination logic' set up. You need to know your practical workarounds, preferable in the design stage.

EVEN MORE BOTTLENECKS IN CASE OF A COMMISSIONAIRE STRUCTURE
A "Commissionaire model" has some more bottlenecks. A "commissionaire" is never the legal owner of the goods.

From a VAT perspective, the commissionaire acts as though he were the owner and a fictitious supply takes place to and subsequently by the commissionaire.

Since according to civil law, the commissionaire does not have ownership, the commissionaire does not own any inventory not even temporarily.

That is different with the LRD as normally LRD gets ownership via flash title for a very short period. Tax technical risk analysis about e.g. "flash titles and transfer of economic ownership" should be investigated.

Based on the above the commissionaire has to issue invoices in his own name which can create problems if there are no bookings with respect to inventory.

There are all practically workarounds of course but that needs planning in time again preferably in the design phase.
Leave a Comment 614 weeks ago

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Kat Jennings, CEO
Richard,
You are sincerely an outstanding contributor on TaxConnections. You are an extraordinary tax professional who shares your knowledge and expertise. The TaxConnections Team gives you a FIVE STAR rating and highly recommends your tax services to everyone.
Kind regards,
Kat Jennings, CEO
TaxConnections
Reply 572 weeks ago
 

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