More than ever, the business is impacted by procurement activities, which touch practically every part of the company. These interconnected procurement functions have already begun to speak up in matters like controlling group demand, upholding relationships with suppliers, monitoring the quality of raw materials, and strategically acquiring goods and services.
The design of an expanding procurement function directly affect your tax risk profile.
The participation of procurement functions in specification optimisation, new product development, and innovation has been noted to significantly rise in recent years, frequently enabling them to encourage supplier integration throughout a supply chain that is becoming more interconnected.
How Procurement is Impacting Tax
Tax authorities and the Organization for Economic Co-operation and Development have taken note of this development in the procurement function (OECD). Therefore, it should come as no surprise that tax authorities are also questioning the propriety of the remuneration models (transfer pricing) used for MNE procurement functions more frequently.
Understanding the nature of their operations and the value they provide is of special interest to tax authorities. More importantly, the OECD has lately advised nations to tighten existing PE exemptions and broaden their permanent establishment (PE) concepts and definitions. It may be necessary to identify, comprehend, and manage the corresponding tax implications in order for countries to integrate these recommendations into their local tax laws without creating new PEs for any already-existing MNE procurement responsibilities.
The compliance and financial burden of these PE developments could be significant for some MNEs, ranging from new tax liabilities, individual income tax compliance, and social security obligations for business travellers, to corporation tax and value added tax (VAT) registrations and returns, transfer pricing reports, country-by-country reports (CbCR), and master file obligations.
Permanent Establishments
A permanent establishment (PE) is a taxable presence beyond the state in which your firm is incorporated. Beyond the "bricks and mortar" concept, tax authorities are adjusting by identifying PEs brought on by international contractors, transient business travellers, warehouse space, digital activity, and more.
It is important to note that the CbCR that MNEs are now obligated to file requires that MNEs specify which of their entities are involved in performing procurement functions. This is important for those who believe that this is more about being caught in a "storm in a teacup" than being caught in "the eye of the storm." The MNE can disclose its supplier chain and give an overview of the various functions carried out along that supply chain in a dedicated area of the master file, giving tax authorities more access into the MNEs' procurement processes.
MNE procurement functions are anticipated to face greater levels of scrutiny from tax authorities around the world as a result of increased visibility into the function and changes to PE ideas, definitions, and exemptions, with a corresponding increase in the possibility of a tax controversy.
Understanding the Tax Risk Profile of Procurement
Risk-wise, if tax authorities are successful in locating PEs that taxpayers have not, this might result in a considerable rise in tax expenses, which would diminish the value provided by procurement teams. This is possibly a direct result of how the MNE procurement function operates, including how its personnel is organised, where they work, and how they make choices.
However, there is a chance to maintain the success of the procurement operating model if MNEs proactively take these new PE developments into account while designing their procurement function. The value that the procurement function provides and the outcomes for tax optimisation that the operational model aims to obtain can even be improved.
Ignoring the new normal could have an expense: a lost chance to boost value and control risk. MNEs must assess the effects of these modifications to maintain the operational efficiency and tax compliance of their procurement operating models.
If you believe it is time to examine the tax effectiveness of your procurement structure, contact us.
