Thursday, February 10, 2011

Thoughts on Negotiating Taxes

There could be a number of potential taxes that relate to a product or services. Buyer’s want to make sure all of those taxes, with the exception of taxes that are based on the sale of the product or service are included in the price they pay for the product or service to avoid taxes being a hidden extra to their cost.

Except for products purchased for internal consumption of the Buyer, in most cases the Buyer would normally be able to be exempt from paying sales taxes provided it provides the Seller with what is called a statutory resale certificate. In locations where there is value added taxes the rules are different and each country may be unique in how they are implemented.

In most tax provisions the things that get negotiated are:
1) Who is responsible to pay?
2) What are the responsibilities if the tax is incorrect, not paid, other there is a problem with the tax exemption. 

Buyer’s want all taxes that would be required prior to delivery to them in accordance with the agreed delivery terms to be paid by the Supplier and be part of the purchase price. Taxes that are to be collected in conjunction with the actual sale of the product or service are then the Buyer’s responsibility to pay, although it may be Supplier’s responsibility to actually collect the taxes.

Other than determining whose responsibility it is to pay the tax, tax provisions also address the things that can go wrong:
1) The Supplier could collect it, but not remit it to the taxing authorities or it could be remitted late.
2) The amount collected could be incorrect,
3) There could be a problem with Buyer’s exemption.

All of these could subject the parties to fines, interest and penalties from the taxing authorities so part of the negotiation is determining responsibility for those costs if any of those problems occur. For the first problem Buyer’s want to be indemnified by the Supplier for such claims as the Buyer already made the payment and it was the Supplier’s fault in not paying it or not paying it in a timely manner. As to the incorrect amount, Buyer’s would want to pay only the incremental amount of the tax, but not any interest, penalties or fines because it was the Supplier’s responsibility to properly calculate it.  As to the last point Suppliers would expect that all costs associated with a Buyer exemption be borne by the Buyer as the Supplier did nothing wrong.

In negotiation of taxes provisions it’s more of a positioning costs to responsibility. If they cause the problem, they should pay. If you cause the problem, you should pay. Having a tax term that would require the Supplier to pay what the Buyer should have paid if the tax had been correctly calculated probably would not be enforceable as it would be what the courts call “unjust enrichment” and the courts would look upon it as a penalty.

In locations where there are Value Added Taxes that need to get negotiated you need guidance from your local legal and tax personnel as the requirements will be different.

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