As one consequence of tax changes, the recently enacted multilateral instrument convention will have an impact on procurement.
Businesses have been confronted with many new tax developments demanding headline attention such as the tariff proposals in the US, mandatory disclosure rules and the digital tax phenomenon in the EU.
But there are also many tax changes underway that don’t draw the same media focus but can nevertheless significantly affect the global business operations of multinational enterprises (MNEs). The impact the recently enacted multilateral instrument (MLI) convention will have on procurement is one consequence of those changes.
In the last three decades, procurement has evolved from a business support function focusing mainly on cost management to a key value driver for many MNEs.
Procurement teams are now engaged in managing group demand, maintaining supplier relationships and strategically sourcing inputs or overseeing quality control, and are also increasingly influencing product design and supplier integration in the supply chain to more strategically drive long-term cost leadership.
The increased importance of the procurement function has not escaped the attention of tax authorities. For example, the country-by-country report (CbCR) that multinationals were obligated to file in many countries for the first time by 31 December 2017 specifically required multinationals to indicate which entities are involved in procurement functions.
Also, the CbCR handbook on effective tax risk assessment from the Organisation for Economic Co-operation and Development (OECD) mentions “procurement entities in jurisdictions other than its manufacturing locations” as a risk indicator to which countries’ tax authorities should pay special attention.
Additionally, the master file demands a special section be completed in which the multinational must describe its supply chain and provide an analysis of the various functions performed along the supply chain.
The CbCR and the master file are not the only instruments available to the tax authorities. The 2017 change of the OECD model treaty and commentary strips procurement of its “automatic” preparatory and auxiliary status and consequently from the automatic application of the exemption from the creation of a taxable presence.
Furthermore, even when the activities of a single entity are preparatory and auxiliary, countries may now elect to ignore this exemption if the procurement activities are part of a cohesive business operation with other group entities in the jurisdiction of the procurement activity (the so-called anti-fragmentation rules).
Separately, a change in the OECD model treaty concept of agency permanent establishment (PE) will affect procurement operations, as agency was previously limited to “concluding contracts” but now more broadly includes activities “leading to the conclusion of contracts.”