Managing indirect taxes in multi-jurisdictional transactions

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Thomas May, Reza Nader, James Wilson, Howard Weitzman and Lucy Joo Alberto Baker & McKenzie, US, UK and Japan

Thomas Mayis a Partner in New York, James Wilsonis an Associate in London,Howard Weitzman is an Associate in Tokyo, and Reza Nader and Lucy Joo Albertoare Associates in New York for Baker & McKenzie.

The importance of managing indirect taxes in a multi-jurisdictional transaction or internal restructuring is not always apparent to tax professionals. In this article, we describe the types of indirect taxes that can apply in these types of transactions and explain how failure to properly address these taxes can be costly, and in many cases have consequences beyond indirect taxes or the transaction itself. We also review planning considerations which can make these transactions more efficient from an indirect tax perspective.1

While tax directors of US-based multinationals may have previously considered indirect taxes to be more a compliance than a planning issue, the importance of the indirect tax consequences of a multi-jurisdictional transaction or internal restructurings have continued to increase. Concurrently, as tax authorities across the globe look for additional revenue, the number of countries across the globe and local authorities within a particular country imposing such taxes has increased.

For example, more than one type of value added tax (VAT) may apply to a transfer of assets located in Brazil, and transactions that are structured to be favourable from a direct tax perspective may create an offsetting VAT cost as some of these taxes are not recoverable. Similarly, the transfer tax rate applicable to the sale of a factory located in Mexico will depend on where the factory is located, so the parties to a transaction must perform due diligence on the location and value of such property as well as negotiate who will bear the economic costs of the payment. Unfortunately, these and other seemingly idiosyncratic tax rules may become all too familiar during the course of implementing a transaction.

For purposes of providing examples of the indirect tax ramifications of various transactions, in this article we assume that “International Co.”, a US multinational corporation, will be selling its widget business to an unrelated buyer. International Co. manufactures widgets in Mexico and has sales and marketing operations in Latin America, Asia and the European Union (EU). Before examining the challenges faced by International Co., it will be helpful to review some basic concepts.

I. What is an indirect tax?

Although there is no universally agreed upon definition of “indirect tax”, the term is generally understood to refer to a tax that is not directly imposed on the person (such as the consumer) who bears the ultimate burden of the tax, in contrast to income or ad valorem taxes. Within the US, sales tax is the most familiar type of indirect tax while globally, VAT is clearly the most prominent. As a practical matter, the term “indirect tax” is often used to denote VAT and other transaction-based taxes that are imposed on the transfer of property or the provision of services.

The types of property or services that are subject to indirect tax vary widely by jurisdiction. For example, in many jurisdictions the transfer of intangible assets such as accounts receivable and goodwill are subject to tax. Thus, in the sale of its widgets division, the allocation of the purchase price by International Co. to its assets in the various jurisdictions, and the effect of such allocation on the amount of goodwill reported in each jurisdiction, is important not only from an income tax but also an indirect tax perspective. Although the allocation of purchase price will likely be driven in the first instance by income tax considerations, indirect tax considerations, such as taxability of goodwill and any requirement imposed by a jurisdiction relating to third-party valuation, should be taken into account.

Because there is no universally accepted definition of indirect taxes, when separately assigning the task of advising on “indirect taxes” for a transaction, it is prudent to delineate the scope of the taxes to be reviewed to ensure that all relevant taxes are covered. Furthermore, as discussed below, there are important differences between VAT and other types of transaction-based taxes, including in particular the recoverability of taxes paid, that should be considered in any agreement between a purchaser and seller regarding the allocation of taxes incurred in the transaction.


Many jurisdictions impose detailed conditions that must be satisfied before a transaction can qualify for a TOGC exemption.




II. What is VAT?

VAT is a tax on the supply of goods and services (and for this reason is known as goods and services tax (GST) in some jurisdictions). Unlike taxes which are applied only to the final sale to the consumer, VAT is assessed and collected on the value added at each stage in the chain of supply. The government receives tax on the gross margin at each stage. VAT/GST has been adopted by a large number of countries. The European Union (EU), for example, has a largely harmonised system of VAT (although rates of VAT are not harmonised), the adoption of which is a condition of EU membership.

Although specific VAT rules vary in each jurisdiction, and often in each locality of a given jurisdiction, VAT is generally administered by requiring businesses to account to the government for the difference between VAT on the value of supplies made by the business (often called output tax) and the VAT paid by the business in making those supplies (input tax).

As an example, in its daily operations, consider the purchase by International Co. of raw materials from its supplier for $100 plus VAT at the rate of 10 percent. International Co. will pay $110 to the supplier, who will keep $100 and account for $10 to the government (the $10 being the supplier's output tax). If International Co. then sells the widgets manufactured out of the raw materials to a wholesaler for $200 plus VAT, International Co. will have output tax of $20 (being 10 percent VAT on $200), and International Co. will be able to deduct the $10 VAT paid to the supplier as input tax. International Co.’s net remittance of tax to the government is therefore $10, or 10 percent of the $100 “value added” by International Co.

From an administrative perspective, the right to claim a credit for input tax incurred by the business is often dependent on the business being able to produce evidence of having incurred the input tax, normally in the form of a VAT invoice from the supplier (certain VAT systems, such as that of Japan, are not invoice-based, rather the company's books and records are used to document the amount of credits claimed). Asset purchase agreements should therefore clearly address issues involving invoices, including the need for a seller to issue an invoice and the deadline for doing so. While the parties to a transaction may prefer that one uniform style of invoice be used for every jurisdiction, the law of particular jurisdictions, especially Asian jurisdictions, requires that specific invoice forms, using a pre-determined template, be used. Additionally, countries differ on the type and amount of information they require on an invoice. Because adherence to these rules may be time-sensitive, the parties to a transaction should factor proper invoicing procedures into their timeline for implementing, and reporting the effects of, any transaction.

The European Commission has approved Council Directive 2010/112/EC to harmonise and simplify invoicing regulations. Member States were obliged to implement the Directive's provisions before January 1, 2013. Therefore, as of that date, local invoicing regulations in EU Member States should be very similar. In spite of this, regulations may include additional requirements that need to be verified on a local level. In particular, the referred Council Directive was intended to harmonise the requirements to use electronic invoicing, in order to remove existing burdens and barriers and to ensure that paper invoices and electronic invoices were treated equally. However, in practice, we note that the tax authorities of EU Member States are still far from taking a single approach regarding the requirements of electronic invoices.

III. Implications of VAT in the business reorganisation context

VAT is typically implicated in the context of a business reorganisation. Firstly, the transfer of business assets from one entity to another will often represent a taxable supply of goods that is subject to VAT. Secondly, business reorganisations often involve the seller of assets agreeing to provide transitional services (e.g. IT or accounting support) to the purchaser. Such services can often be subject to VAT. Thirdly, a complex business reorganisation invariably involves the receipt of services from third parties, such as lawyers and accountants, who may charge VAT on their fees. In each case, the goal of the taxpayer is generally to avoid triggering a VAT liability where such liability could otherwise be avoided or, failing that, to ensure that any VAT incurred on the transaction can be recovered as input tax.

A. TOGC or not TOGC?

Many jurisdictions provide for an exemption from VAT where a transfer of assets amounts to the transfer of a business as a going concern (TOGC exemption). If a TOGC exemption applies, the compliance issues involved with a transaction with respect to that jurisdiction should be significantly simplified; ensuring of course that the requirements of the TOGC exemption, including issuance of a zero-rated or exempted invoice, are met.

Determining when a TOGC exemption applies, however, is not always easy. Many jurisdictions impose detailed conditions that must be satisfied before a transaction can qualify for a TOGC exemption. Moreover, an incorrect categorisation can lead to an assessment of VAT on the seller of assets (together with interest and penalties) that often cannot be recovered from the purchaser until potentially long after the transaction has closed.

There are a number of practical steps that can be taken to reduce the risk of such an unwanted assessment. First, the detailed conditions for the TOGC exemption in each relevant jurisdiction should be carefully considered and applied to the specific facts of the transaction. Such conditions vary by jurisdiction. Therefore, before taking the position that the TOGC will apply to the transaction in a particular jurisdiction, the seller should complete its due diligence. Such due diligence on the front-end of the transaction will undoubtedly be preferable to considering the issue after the transaction has closed, perhaps on audit. Second, language should be inserted into the transfer agreement providing that the seller can later charge VAT on the asset sale in the event that the local tax authority assesses VAT on the seller because the tax authority believes that the TOGC exemption does not apply.

For instance, in the context of International Co.’s disposition of its widgets business in the UK, determining whether the UK TOGC exemption applies would involve an analysis of a number of factors, including the VAT registration status of the seller and the purchaser, the nature of the assets transferred, and whether those assets, taken together, represent a business capable of separate operation. It is relatively common in the sale of a business for certain assets of the transferred business (e.g. real property or intellectual property) to be transferred to one purchasing entity and other assets to be transferred to another purchasing entity. Such bifurcation can have an impact on the availability of the TOGC exemption if neither purchaser, viewed in isolation, acquires a business capable of separate operation. Often, however, pre-transaction planning (such as ensuring that property leases or intellectual property licenses are in place) can preserve the availability of the TOGC exemption.

B. “Sticking VAT” and recoverability issues

In cases where a TOGC exemption or similar exemption from VAT is not available on a business transfer, the purchaser will incur a VAT charge. A key issue where there is a VAT charge is ensuring that the VAT charge is recoverable by the purchaser as input tax because, where such VAT is not recoverable, it will represent a real cash cost. Such VAT is often called “sticking VAT” because it is VAT that “sticks” to the business rather than being a flow-through cost.

In the case of a transfer between two entities in the same jurisdiction, recovery of input VAT is often straightforward and merely requires that the purchaser is registered for VAT in the relevant jurisdiction and that the seller provides the purchaser with a valid VAT invoice with respect to the asset transfer. Problems can arise, however, where these requirements are ignored or left to the last minute. In the UK, for example, as a result of increased scrutiny of VAT registration applications, such applications can take up to 12 weeks to be approved. It is important, therefore, that any necessary VAT registration applications are made comfortably in advance of the relevant asset transfer.

Matters become more complicated where the seller and purchaser are not resident in the same jurisdiction. In such cases, the purchaser will often not be registered for VAT in the seller's jurisdiction (and potentially not entitled to register), which can often lead to the purchaser not being entitled to recover VAT incurred on the asset purchase. Although the VAT rules of many jurisdictions make alternative provision for recovery of VAT in such cases, the recovery process may be time-consuming and potentially costly.

The problem of “sticking VAT” can be more acute when holding companies are involved in the contemplated transaction. In many jurisdictions, entitlement to register for VAT is dependent upon a company carrying on a “business”. The passive holding of investments in subsidiary companies is often not regarded as a “business” for this purpose. Accordingly, holding companies are often not entitled to register for VAT, and as a result are often unable to recover VAT incurred on services supplied to them. Because the holding company of the group often incurs costs associated with the transaction (such as legal costs), this can often result in a material unrecoverable VAT.

There are a number of planning techniques that can be employed to minimise this problem. One is to ensure, to the extent possible, that legal and other fees are incurred directly by the (VAT registered) business that is purchasing the assets, and not by a holding company. If this is not possible, it may be possible to have the holding company carry on a business (such as provision of management services) that puts it in a position to register for VAT in its home jurisdiction. In all cases, however, it is important that this issue be considered in the early stages of the transaction. It is much easier to reduce the impact of VAT where planning techniques are implemented before the service giving rise to the VAT is performed. Once the holding company has received the service and a VAT invoice, it is often too late to make alternative arrangements to reduce VAT costs.

IV. What are transfer taxes?

In addition to VAT, the transfer of property or services can give rise to various other indirect or transaction-based taxes which may generally be referred to as “transfer taxes”. The types of transfer taxes that apply can vary greatly according to the jurisdiction, the type and location of the property or services to be transferred, and the method of transfer.

In the US, transfer taxes are generally applied at the state and local level - the most common being state-level sales or use taxes, or real estate-related transfer taxes. Outside the US, transfer taxes come in many forms. Transfer taxes include stamp taxes or duties, sales taxes, excise taxes, entry taxes and business taxes, among many others. They can apply to the transfer of a wide variety of different assets including shares of stock, automobiles, factories, land, leases and accounts receivable. They can be applied at the national level or at the local level to varying degrees.

Returning to our example, International Co. and the purchaser of its widgets division would need to consider, in addition to VAT imposed at the national level, transfer taxes applicable at the local or regional level in Mexico and Australia. The transfer by International Co.’s Mexican subsidiary of plants and equipment may give rise to the application of real estate transfer taxes on the transfer of the factories.

As the tax on real property transfers in Mexico are applied at the local level, the application of the tax, including the applicable rate would vary depending on where the property was located. Similarly, the transfer of widgets' assets by International Co's Australian subsidiary may be subject to stamp duty at the Australian state-level. Because some states impose stamp duty on both accounts receivable and goodwill, some states impose duty on goodwill but not on accounts receivable, and others on neither goodwill nor accounts receivable, it is important to properly locate (or allocate) the Australian widgets assets among the states in which the business derives sales. The transfer of the widgets business in other jurisdictions, such as Argentina or Thailand, for example, would implicate other types of transfer taxes such as a stamp tax imposed on transfer documents and a gross receipts tax.

Real estate transfer tax is one of the most prominent types of transfer taxes. Of course, in most jurisdictions, the transfer of real estate by itself as part of an asset deal would implicate the tax. The main issue often becomes whether it's necessary to obtain a third-party valuation, or whether local law permits an allocation of the purchase price of the entire business by the parties to the real estate. In some jurisdictions, the transfer of stock of a company that holds substantial real estate or long-term leases could also attract real estate transfer tax.

Planning opportunities exist that could mitigate or eliminate the transfer tax liability in many instances. For example, in certain countries (e.g., Italy, Poland, or Spain), transfer taxes generally apply only where the transfer is exempt from VAT. In these cases, the (non-recoverable) transfer tax cost must be weighed against the compliance benefits that can be gained from structuring the transaction to be exempt from (recoverable) VAT. In some cases, a transaction may be structured so that a TOGC exemption from VAT does not apply, thus resulting in recoverable VAT and the non-applicability of transfer taxes. Additionally, in those jurisdictions that do not impose stamp duty on the transfer of shares, structuring a transaction as a stock transfer instead of an asset transfer may avoid the application of transfer taxes entirely. Furthermore, in those jurisdictions that impose stamp tax on transfer documents, it may be possible to avoid the imposition of tax by proper drafting and execution of the documents (e.g., outside of the jurisdiction). In certain cases, documents need to be signed at the time of transfer or shortly thereafter by both the seller and the buyer so the parties should make sure such documents are a part of the closing checklist.

Unlike VAT, transfer taxes are generally not recoverable, and are therefore permanent costs that generally must be borne by party to the transaction. Although the applicable law may impose responsibility for remitting transfer taxes on one of the parties to a transaction (likely the transferee), the parties should always agree on who should bear the burden of VAT and transfer taxes. However, in drafting the transfer tax allocation provision in a global transaction agreement, it is advisable, at least from the perspective of the transferor, to make clear that recoverable VAT is not treated the same as other transfer taxes since “input” VAT paid should in principle be paid and recovered by the transferee.


Many jurisdictions impose detailed conditions that must be satisfied before a transaction can qualify for a TOGC exemption.




V. What transactions require managing indirect taxes and what challenges must be overcome?

There are numerous types of transactions that can result in the imposition of indirect taxes, including not only a third party disposition or acquisition of businesses or assets, but also restructuring of business divisions before a spin-off or initial public offering, as well as purely internal reorganisations. Although the specific indirect tax planning considerations will vary depending on the type of transaction, there are several common issues to be considered in the management of indirect taxes in a multi-jurisdictional transaction.

A. Decentralised v. centralised management of
indirect tax

It is not unusual for US multinationals involved in a multi-jurisdictional project to attempt to manage these projects centrally from the US, and there are many very good reasons, such as administrative convenience and consistency, for doing so. In view of the extent to which indirect tax rules can vary from jurisdiction to jurisdiction, however, sufficient flexibility and responsibility should be given to local management or local advisors to ensure that local legal nuances are considered and adequately addressed in the transaction documentation.

For example, provision is often made in US-drafted local transfer agreements for the enforceability of the agreements to be contingent upon the rules of local law. However, such provisions may not be sufficient to bind the parties with regard to certain elections or exemptions from VAT or other transfer taxes. Also, it is common, in the interest of consistency and efficiency, for corporate counsel in a multi-jurisdictional transaction to use a single “template” agreement to give effect to the transaction in various jurisdictions. Although this approach has obvious efficiencies from a timing and cost perspective, the US multinational should ensure that local counsel has the opportunity to review any such template agreement and to incorporate any jurisdiction-specific language necessary to satisfy local indirect tax requirements, and to ensure that the indirect tax strategy for the jurisdiction (e.g., TOGC or no TOGC) will have effect.

Returning to our example: should International Co. engage its US corporate counsel to draft local asset sale agreements, it is possible that such agreements will not at first instance include the language necessary to allow the parties to qualify for certain beneficial GST and QST elections in Canada. To consider another example, in Italy, International Co. should generally be mindful not to make reference to a global transfer agreement in the local agreement, as doing so may encourage the Italian tax authorities to assert that transfer tax should be levied on the value of the entire transaction, rather than just the value of the transaction in Italy. In Brazil, local counsel would in most instances request that the local agreement be translated into Portuguese so that tax authorities can easily review and understand the transaction and its indirect tax ramifications.

Although a US multinational will usually engage in transaction-related negotiations through its headquarters (using US-based corporate counsel), VAT and transfer tax exposure cannot be easily calculated without local review of the transaction. Local management will usually be most knowledgeable of the type of information required to calculate the exposure, including the nature of the assets being transferred, the existence of any real estate, the location of assets, registration codes, etc. This information will advance the VAT or transfer tax exposure analysis because it identifies the applicable tax rate, book or fair market value of the assets, and any applicable exemptions. One way to accomplish this would be to prepare a simplified chart that demonstrates the VAT and transfer tax exposure in the specific jurisdiction. Because access to information is always a valuable asset, this chart can be used as an important negotiation tool.

B. Integration with direct tax and corporate considerations

It is important for indirect tax advisors to be involved in all facets of a transaction from the transaction's early stages and to remain involved throughout the project's development. Key items in master transfer agreements, such as whether the purchase price should be exclusive of indirect taxes or not, can result in documentation executed early in the transaction that will have long-term effects. In addition, as previously mentioned, the preparation of invoices, exemption certificates, bills of sale, and transfer agreements are all dependent upon local law.

It may also become necessary at some stage to alter the form of the transaction, either due to a business decision by management or in light of regulatory issues that only become apparent as the transaction develops. If a new agreement or structure is put into place midstream, any prior analysis provided by the indirect tax advisor may no longer be relevant. Assume, for example, that after International Co. has found a purchaser and has completed drafting transfer agreements for the local jurisdictions, the parties become aware that the purchaser is not able to sell widgets in particular jurisdictions because of regulations that require the purchaser to obtain certain licenses.

Furthermore, the licensing process takes eight months, which is five months after the date the parties intended on closing. To accommodate this situation, the parties agree to enter into a structure whereby International Co. will not transfer legal title to the assets and will sell the widgets to third party customers on behalf of the purchaser in exchange for a service fee. In the jurisdictions where this sale structure is implemented, there may be significant indirect tax ramifications. In Brazil, for instance, the parties will have to consider whether the transaction should be structured as an advance sale, or a sale for future delivery, and must be certain to issue the appropriate invoices. In every jurisdiction, International Co. will need to examine whether the transfer of economic rights or legal title triggers VAT and transfer tax obligations, whether and when it will be necessary to issue an invoice or to make elections for certain exemptions.

C. Importance of communication

Another consequence of the wide variety of rules in the indirect tax arena is that it is often difficult (absent specialist local knowledge) to know what information is pertinent to the indirect tax analysis and what is irrelevant. Although companies are sometimes keen to limit the amount of information and documentation they provide to their advisors, this strategy can often be more costly in the long run. If information comes to light late in the day that is relevant to the indirect tax analysis, this can often result in the need for costly and time-consuming changes to the transaction structure. In many cases, trusting the advisor to quickly separate relevant from irrelevant information is the more cost-effective approach.

VI. Conclusion

Today's multinational transactions are more global than ever. The reality is that there is a huge variety in the methods through which different countries levy indirect taxes on such transactions. As seen in the example of International Co.’s divestiture of its widgets division, proper planning and implementation of these transactions will require an understanding of the applicable indirect taxes and the planning opportunities available. The involvement of local counsel in this exercise will help to ensure that the applicable taxes, opportunities and issues are identified prior to the transaction, and thus minimise the risk that significant additional costs would be incurred later upon examination by the taxing authorities.

Thomas May is a Partner with Baker & McKenzie in New York. He may be contacted by email at

Reza Nader is an Associate with Baker & McKenzie in New York. He may be contacted by email at

James Wilson is an Associate with Baker & McKenzie in London. He may be contacted by email at

Howard Weitzman is an Associate with Baker & McKenzie in Tokyo. He may be contacted by email at

Lucy Joo Alberto is an Associate with Baker & McKenzie in New York. She may be contacted by email at


1 The authors wish to thank the various advisors in the non-US offices of Baker & McKenzie who have graciously reviewed and contributed to portions of this article. The discussion in this article of the tax laws outside the US are based on the authors' experience in advising on multi-jurisdictional transactions, and the discussion should not be viewed as authoritative.

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