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 recovery of expenses incurred as a principal and may have the following features:
• Supplies are received by the principal in its own name.
• The supplier’s contract is under the principal’s name.
• The supplier’s tax invoice is issued under the principal’s name.
• The principal is obliged to pay the supplier’s tax invoice.

3.    Approach

• The recovery of expenses as reimbursement by the principal constitutes consideration for a taxable supply.
• The recovery of expenses may follow the same VAT treatment as the main/wider supply by the principal.
• Use of market value for the recovery of expenses in specific cases.

4.    Risk & Consequences

• The recovery of expenses is incorrectly treated as non-VAT taxable disbursement.
• The recovery of expenses is not defined in agreements between two parties.

5.    How can Crowe help?

• Assess whether a recovery of expenses qualifies as a “reimbursement” or “disbursement” and determine the correct the VAT treatment.