www.pwc.com NPO VAT Community Restructuring your organization What about VAT?
Today s Programme 01 Introduction or why we chose this topic 02 Review of different restructuring examples 03 Q&A 04 Key take away points 2
Introduction or Why we chose this topic? 3
Introduction Current situation For more that 60 years now, the non-profit organisations (NGOs) country office model has spread out and multiplied across different countries Different tasks and functions are handled internally in each NGO entity (e.g. fundraising, HR, IT, Finance and accounting, etc.) It still remains the most widely applied operating model amongst NGOs acting globally Is this model UK Netherlands sustainable for the US future? Switzerland Middle East India China Brazil Australia 4
Introduction Trends The increased pressure from governmental and private funders on NGO s efficiency are pushing organizations to revisit their operating model and to consider more flexible operating concepts. Efficiency and flexibility are leading drivers towards seeking of more innovative ways of operation. Reduction of costs and Russia economies of scale US EU country Simplification India Operational efficiency Brazil Africa Transparency But have you considered the VAT impacts? 5
Introduction The NGO status myth NGO not necessarily VAT EXEMPT A legal status non-profit is not alone sufficient to determine if from a VAT perspective the organisation is carrying out VAT exempt or activities outside the scope of VAT. Indeed, an association or foundation could be fully taxable if not all of the activities it carries out fall within the scope of the exemptions provided in the VAT legislation. 6
Introduction Potential impacts VAT to be invoiced by the entity centralizing the services to the different entities? or VAT to be self-assessed at the level of the entities receiving the services? Example Services centralized in Switzerland are supplied from NGO entity A to the French NGO entity B of the same organization network. French entity A is paying CHF 10,000 to B for the services supplied. => Leading to additional costs for the NGO network due to limited or no recoverability of VAT Potential double taxation depending on the VAT rules of the country of establishment of the supplier/beneficiary of the services. Additional VAT compliance obligations Corporate tax, transfer pricing, legal implications? B may have to self assess 20% French VAT on the services received CHF 2,000 may be partially / totally irrecoverable and be a final cost for B Other impacts? (Transfer pricing, corporate tax, compliance ) B Services 20% VAT? A 7
Review of different restructuring examples overview of alternatives how the VAT impacts related to NGO s activities restructuring could potentially be limited 8
Review of different restructuring examples Alternative models The current economic climate and funding stringency has intensified the need for NGOs to find new delivery models of their services as a way of creating greater efficiencies and reducing costs. Great consideration is given to improvement to their back-office operations as one way of addressing overheads so that NGOs can continue to focus on their core activities. Shared services within an organisation Dedicated shared service centre Merger into larger organisation Peak body support Outsourcing to specialist providers Allocate to a single unit functions that were previously carried out by different units Separate organisation or entity subcontracted to perform specific functions to a group of NGOs working in a network Different NGOs sharing mission and purpose combining their activities in order to foster economies of scale and efficiency In return for membership fee or subscription an NGO provides a range of services to members In return for service fee a specialized service provider (3 rd party) provides range of services to NGOs network 9
Review of different restructuring examples Setting up of a Cost Sharing Group (CSG) What is a CSG? EU concept (based on art 132 (1)(f) of the EU VAT directive 2006/112/EU) to exempt from VAT services supplied between entities performing activities which are out of scope (non-business activities) or exempt from VAT. It allows to avoid additional costs related to irrecoverable VAT. Conditions detailed in national law of each EU member state vary (e.g. % of VAT exempt activities, possibility to setup the CSG under contractual form, ). Transfer pricing consequences should be considered. A country by country feasibility study should be performed. Conditions to set up a CSG CSG should be separate from its members (e.g. legal person or agreement) supplying services to the members of the group Members of the CSG must be carrying out VAT exempt activities or activities out of scope of VAT Services provided by the CSG to the members must be directly necessary for the exercising of the VAT exempt/out of scope of VAT activities GSC must claim to the members only the exact reimbursement of their share of the joint expenses (i.e. no profit making) The application of the exemption must not lead to distortion of competition 10
Review of different restructuring examples Setting up of a Cost Sharing Group (CSG) No VAT NGO Network NGO A Service CSG NGO B No VAT Example A and B are entities members of the same NGO network. They set up a CSG to provide services through it. Services provided through the CSG are VAT exempt: no additional VAT cost No VAT applies on the reimbursement of costs to the member providing the services through the CSG 11
Review of different restructuring examples Cost Sharing Group (CSG) CSG MEMBER 1 3rd Party Supplier Normal VAT rules CSG MEMBER 2 CSG MEMBER 3 VAT exempt VAT exempt Cost Sharing Group (owned by members 1, 2 & 3) VAT exempt Normal VAT rules Non CSG MEMBER Normal VAT rules 3rd Party Supplier 12
Review of different restructuring examples One single entity with separate branch offices NGO s Branch office A VAT? NGO (HQ) VAT? VAT? NGO s branch office B Services provided by an NGO to its Branches Company and its branches can be considered as one single entity from a VAT perspective From an EU perspective services provided by the company to its branches are in principle considered as out of scope of VAT (CJEU case FCE Bank C-210/04), i.e. not subject to VAT VAT is however applicable where a branch is member of a VAT group to which the company does not belong (CJEU case Skandia C-7/13) In Switzerland services provided to/by branches located abroad are VAT taxable, unless falling under a specific exemption VAT treatment of the services provided between NGO and its branches should be analysed on a country by country basis to determine the applicability of the solution 13
Review of different restructuring examples Umbrella (Peak) NGO with members other NGOs No VAT NGO Member A NGO Peak body Services Membership fee NGO M B No VAT Services provided in consideration of a membership fee Article 132(1)(l) of the EU VAT directive 2006/112/EU provide for a VAT exemption for services provided by NPO to their members in their common interest in return for a subscription fixed in accordance with their rules. The application of the exemption must not cause distortion of competition VAT treatment of the services provided from NGO to its members should be analysed on a country by country basis to assess the applicability of the solution 14
Other points of attention Look from different angles Tax and Legal The different alternatives should be analysed from both tax and legal perspective It s important to align the organisational structure and contracts that need to be put in place to secure successful implementation of desired structure Other taxes should be considered when determining the feasibility of an alternative (corporate tax, transfer pricing, payroll taxes and social securities contributions, etc.) Other considerations For each alternative option carry out costs vs. benefits assessment Do not underestimate HR matters 15
Q&A 16
Key take away points 17
Key take away points Тhere is no one fits all solution Be clear on what is the goal/aimed result of the restructuring and keep your focus there Getting the basics right Look for different alternatives Look from different angles Assessing Feasibility Don t forget to do a tax impact assessment study Get all stakeholders opinion Be transparent Get buy in / sign off from all stakeholders Building the business case Anticipate and prepare for what was foreseen during the impact assessment Implementing it right and Creating value Spend time/resources for proper planning of implementation Enjoy the benefits and aimed results Ensure key dependencies are managed and do not impose risks to the desired 18 structure
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