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What needs to be taken into consideration from an indirect tax perspective when company is planning to migrate to a new jurisdiction?

Indirect Tax Tax Planning Worldwide Effective Tax Rate
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Richard Cornelisse
Migration And Indirect Tax

Migration to a new jurisdiction will inevitably involve dealing with VAT. For some migrating corporations it may mean having to deal with VAT for the first time although probably for most, VAT will be a familiar concept albeit with variations from the ‘old’ jurisdiction.

Assessing the VAT treatment of the migration itself and the subsequent activities in the new jurisdiction is a necessary work stream that should run parallel other disciplines/work streams, primary because VAT is a transaction tax affecting both costs and revenue, and there will invariably be many transactions happening to achieve the migration and the on-going activities.

Misunderstanding or not recognizing the VAT implications of the migration and subsequent activities in the new jurisdiction could result in unexpected cost.

It is very much a question of assessing the VAT position of the entities affected by the migration as it is currently and determining whether the future position will be better, neutral or negative. If it is the latter, determine whether and how the VAT cost may be mitigated.

VAT Status Of The Entity(ies) Migrating

Assessing the VAT status of the entity or entities migrating to the new jurisdiction is the starting point as that will give us a good indication as to whether the migration itself and the subsequent activity in the new location will be VAT neutral, beneficial to the current position or result in a VAT cost.

The process to assess the VAT status of the migrating entity or entities is to review the current treatment of its activities from a VAT perspective.

If it is a pure holding company i.e, its activities are purely passive, its activities (certainly from a European VAT perspective) will be outside the scope of VAT with the result that it will not on its own account be able to register for VAT.

Thus, VAT that it incurs on its costs will be an additional cost as it will not be able to deduct that VAT.

In practice, depending on the company’s flexibility (establish VAT entrepreneurship) or local tax possibilities (e.g. VAT grouping) such a VAT burden could be limited or even avoided.

This is, however, often only possible if VAT planning is considered at the right time.

One area for particular attention is to plan how external fees are purchased i.e. which legal entity should enter into the engagement with the different external vendors/ consultants. This can be an area of contention with the VAT authorities over the deduction of VAT on these costs.

Mechanism Of Migration

The method of migration can be undertaken in a variety of ways.

Thus, from a VAT perspective, the VAT consequences of the method of migration need to be determined to assess whether or not VAT incurred on the costs associated with the migration will be real cost or just a cash flow cost.

This will mean looking at the micro legal step plan to ensure that such steps are carried out in the most VAT effective manner, subject to commercial and other factors.

Certain means of achieving the migration may enable advantage to be taken of particular VAT reliefs e.g. many countries allow a VAT relief of the transfer of a business as a going concern.

An Indirect Tax Checklist:

- Set up a project charter that will take effect as of the very first planning activities.
- Validate due diligence findings and define priorities.
- Make an indirect tax integration plan and ensure that the right sponsors provide buy-in.
- Map out the current state upon acquisition and identify key risk areas, opportunities, and people in the organization acquired.
- Jointly validate and refine the integration plan and develop a road map to success.

A relevant indirect tax strategy—correctly implemented—will allow the new business to function effectively from go-live, from both a tax and commercial perspective, so that it can move inventory, generate sales and invoices, face fewer disputes with non-paying customers, remain tax compliant, and integrate the business on time and on budget.
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