These provide a new form of interface between buyers and sellers. Such exchanges can range from a single company channelling its procurement through the internet to an exchange being created to facilitate common purchasing in an industry.
It now appears the explosion of new B2B exchanges is faltering and existing exchanges are concentrating on consolidating their operations.
Where existing operators in a market develop or merge exchanges they will face regulatory scrutiny. European and US competition authorities are concerned that the participants in B2B exchanges are motivated by anti-competitive goals. However, it is these players who are best suited to building the exchange as they possess the industry experience required.
A recent example was MyAircraft.com which was the first exchange to be approved by the European Commission. This is a joint venture B2B exchange set up between United Technologies and Honeywell International to reduce aircraft component supply costs. The European Commission was notified of the venture on 3 July this year and, as a full-function operation jointly controlled by its parents, it was investigated under the EU’s Merger Regulation.
In August, the Commission concluded the operation would not give rise to competitive concerns as it aimed to reduce prices and was competing with a high number of existing B2B markets in the same sector.
This suggests these exchanges are not anti-competitive although this is not to suggest every exchange can expect automatic clearance.
Not all B2B electronic market places will have to be reviewed under the Merger Regulation. For example, single companies not having the concentration of resources to potentially dominate a market will not be examined. That said, exchanges which do not fall under the Merger Regulation may come under general EU treaty rules on restrictive business practices although there is no obligation to obtain prior clearance.
Whilst the future for exchanges seems uncertain, already we can see merger activity. AirNewco and MyAircraft have announced their intention to combine in a new venture. The purpose of this is to cut costs in the industry, bringing together both buyers and sellers.
In spite of the pressures bought to bear by commercial considerations and regulatory authorities, it is clear a large volume of business transactions will be conducted through B2B market places in order to gain cost savings.
While it is clear, in the development of exchanges, commercial and regulatory issues are paramount, tax issues are also important and are frequently overlooked. Therefore, to ensure the chances of survival in a competitive market, it is vital to plan not only to minimise tax exposures but to make the exchange attractive to use.
There is no standard tax planning for a B2B exchange as the specific circumstances and requirements of the participators need to be taken into account. In general an exchange needs to consider what sort of income it is generating, where it will be subject to tax and whether a taxable presence is created in a particular territory. Transfer pricing is also usually a consideration.
For example, most exchanges operate on a commission basis and for direct tax purposes these revenues are not taxable in any country outside the territories where the exchange operates unless attributable to a permanent establishment. For VAT purposes, the commission income will be subject to VAT where the goods are sold, so that either the exchange in question would have to register for VAT in the supplier’s territory or the customer would have to self-assess for the VAT due.
In addition, the exchange needs to develop billing systems which can deal effectively with multiple VAT rates, electronic invoicing etc.
Having considered all of these issues, the end result will inevitably be a compromise.
- Tony McClenaghan is a VAT partner at Deloitte & Touche.
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