| Commissionaire arrangements |
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| Commissionaire arrangements have been the fashion of the last decade for US multinationals. Many US multinationals with Irish operations operate a commissionaire arrangement. What are they? |
In English speaking countries a commissionaire might be mistaken for a portly gentleman in a Rurethanian admiral’s uniform who opens the door in a plush hotel, or calls for someone’s taxi. In continental Europe the word conveys a form of agent.
Undisclosed agent
The form of agent in question is somewhat akin to what is commonly called ‘an undisclosed agent.’ In other words if you are dealing with this agent, you think you are doing business solely with him. He does not tell you that the goods he is purporting to sell you are not his and never will be his, and that he is merely acting as a front for a third party who will actually supply the goods.
In most common law countries (ie broadly English speaking countries) such an undisclosed agent gives the customer with whom he deals rights against not only himself, but also against the third party or principal for whom he is dealing, should the customer manage to discover the principals identity.
In civil law countries (ie continental Europe broadly speaking) the undisclosed agent does not give the ultimate customer any rights against the third party for whom he is acting. The law treats the transaction as being a transaction solely between the commissionaire and the customer but not between the customer and the commissionaire’s principal also.
Why does any of this matter?
A multinational may face tax bills in several countries in relation to a single transaction. It may manufacture goods in one country, have the goods sold to a sales subsidiary in a second country, and have the sales subsidiary sell to the ultimate customer in that second country. Both the country of manufacture and the country in which the goods are sold will levy taxes. The multinational may choose where to manufacture and will typically choose a low tax jurisdiction. But it cannot determine where its customers may be and therefore may make sales in a high tax jurisdiction. The key issue is ensuring that little or no part of the multinational’s profits are subject to tax in that high tax jurisdiction.
Buy sell arrangement
The traditional arrangement where the manufacturing company sells to its sales subsidiary abroad means that the sales subsidiary performs substantial functions. It finds customers, it buys goods, delivers them to the customer, bears the risk of bad debts, has to collect the debts etc. All of these functions legitimately attract reward in the shape of profit which will be taxed in the high tax jurisdiction. Even if the accounts don’t reflect that profit, there will usually be transfer pricing rules in the high tax jurisdiction to attribute a reasonable level of profit to the local operation. This traditional method of doing business is therefore not favoured any longer by multinationals.
If instead the foreign sales subsidiary acts as a disclosed agent for the manufacturing operation, it is likely to be regarded as a permanent establishment of that manufacturing operation in the high tax jurisdiction, with all the same transfer pricing and other implications leading to part of the profits being placed in the high tax jurisdiction.
Few functions, little profit
The commissionaire arrangement resolves these problems.
The commissionaire performs few economic functions. He collects an order and transmits it. But the delivery of the goods, the possibility of bad debts etc, are all problems for the manufacturing operation in the low tax jurisdiction. The profit that need be attributed to a commissionaire can be quite modest since the functions are modest.
Where the commissionaire scores over the disclosed agent is that a commissionaire is not treated in Continental European countries (in most instances) as being a permanent establishment of his principal. Because he does not enter into contracts in the name of the principal, and because he does not bind the principal to any of those contracts, his agency status is effectively disregarded. He is seen as somebody in business on his own account solely. Thus he is entitled to minimal profits because he does minimal functions, but he does not expose the manufacturer to permanent establishment issues in the customer’s country.
Cost savings
Apart from these tax considerations, it is claimed that commissionaire arrangements enable all administrative functions to be centralised in one area, resulting in cost savings. They ensure that the commissionaires in the various countries have a very precise focus ie selling, and don’t get distracted by HR issues, warehousing management etc.
Shaun Murphy is a Partner in KPMG. |
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| Article appeared in the December 2000 issue.
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