Reimbursement Arrangement

1.    Introduction

Multinational Enterprises’ (MNEs) transactions include the allocation of common costs such as those related to IT, cross-charge of personnel and other types of cost-sharing arrangements. Such recoupment of expenses are commonly known as “reimbursements”.

In this article we shall highlight the tax impact on reimbursement arrangements from a direct tax and indirect tax standpoint.

2.    Overview

• Reimbursements are considered repayment for what has already been spent or incurred.
• A receipt without any element of profit should not treated as income subject to tax.
• Withholding tax may not apply as such receipts are not deemed as income.
• Subject to Transfer Pricing (TP) - any transaction or arrangement with related party must be at Arms’ Length Price (ALP).

3.    Approach

• In cases of pure reimbursements of third-party costs, where the taxpayer adds no value, the ALP is generally accepted, even without any mark-up.
• Expenses reimbursed on a cost-to-cost basis, may not require an independent benchmarking.
• Taxpayers are expected to demonstrate actual receipts of  services and the benefits derived.

4.    Risk & Consequences

• Authority may make adjustments resulting in additional tax liabilities.
• Inconsistency across jurisdictions could result in double taxation.
• If not as per ALP, may not be fully deductible for tax purposes.
• Non-compliance can trigger closer scrutiny of other related party transactions.

5.    How can Crowe help?

• Identifying potential TP risks, offering strategies to proactively manage and mitigate these risks, which can safeguard the client's financial interests.
• Assist in documentation and transaction structuring, minimizing the risk of non-compliance and associated penalties.