Long considered a support function for reducing and controlling costs, procurement is now a strategic function for many multinationals.
Procurement functions are more connected to the business than ever before and impact almost every aspect of the organization. These connected procurement functions have already gained a voice in areas such as managing group demand, maintaining supplier relationships, overseeing raw material quality, and strategically sourcing goods and services.
In recent years, there has been an observed marked increase in the involvement of procurement functions in specification optimization, new product development and innovation, often empowering them to promote supplier integration throughout an increasingly connected supply chain.
In the eye of the storm
This evolution of the procurement function has not gone unnoticed by tax authorities, nor by the Organisation for Economic Co-operation and Development (OECD). It should, therefore, come as no surprise that tax authorities are also increasingly challenging the appropriateness of the compensation models (transfer pricing) applied for multinational enterprise (MNE) procurement functions.
Tax authorities are particularly interested in understanding the nature of their activities and the value they deliver. However, and more significantly, the OECD has recently recommended countries expand their permanent establishment (PE) concepts and definitions, and tighten existing PE exemptions. The adoption by countries of these recommendations into their local tax law may result in the creation of new PEs for some existing MNE procurement functions, and the related tax implications will need to be identified, understood and managed.
From corporation tax and value added tax (VAT) registrations and returns, transfer pricing reports, country-by-country reports (CbCR) and master file obligations, to new tax liabilities, individual income tax compliance and social security obligations for business travelers, the compliance and financial burden of these PE developments could be significant for some MNEs.