DTC26
A comprehensive guide for tax authorities on implementing artificial intelligence and understanding the tax implications of automotive industry joint ventures in the electric and autonomous vehicle sector.
Table of Content
PART I - AI in Tax Administration
Exploring the transformative potential of artificial intelligence in modern tax administration, examining global adoption trends, benefits, risks, and critical implementation considerations for tax authorities worldwide.
Global AI Adoption in Tax Administration
29/38
OECD Members
OECD member countries currently using AI in tax administration according to the Inventory of Tax Technology Initiatives 2024
69%
Global Usage
Of 58 participating administrations in ISORA/OECD survey report using AI tools actively
24%
Implementation Phase
Additional administrations currently implementing AI tools and systems
The adoption of AI in tax administration has experienced remarkable growth, rising from approximately 9% in 2016 to 69% by 2023, with an additional 24% of tax authorities in the implementation phase. This dramatic increase reflects the technology's proven value in enhancing compliance, reducing costs, and improving taxpayer services.
The Evolution of AI in Tax: A Decade of Digital Revolution
1
2016
Early adoption phase with approximately 9% of tax administrations using AI tools, primarily for basic automation tasks
2
2019
Accelerated growth as more administrations recognized AI's potential for risk assessment and fraud detection
3
2023
Mainstream adoption with 69% using AI and 24% implementing, marking a fundamental shift in tax administration
4
2025
OECD publishes comprehensive guidance on governing AI in tax administration, establishing best practices
Key Advantages of AI in Tax Administration
Better Compliance Risk Management
- Higher hit-rate audit selection through predictive analytics
- Earlier detection of fraud and evasion patterns
- Smarter case prioritization based on risk scoring
- Pattern recognition across large datasets
Lower Administrative Costs
- Automated triage and document classification
- Anomaly detection reducing manual review
- Faster cycle times for routine processes
- Efficient arrears segmentation and management
Improved Taxpayer Service
- 24/7 digital assistants for taxpayer queries
- Tailored guidance based on taxpayer profiles
- Better "right-first-time" filing prompts
- Reduced wait times and improved accessibility
Stronger Design-in Compliance
- Analytics to reduce errors upstream
- Behavioral nudges for better compliance
- Pre-fill capabilities reducing burden
- Real-time validations preventing mistakes
Enhanced Compliance Through AI
AI transforms compliance risk management by enabling tax authorities to move from random or sample-based audits to intelligent, data-driven selection. Machine learning algorithms analyze vast amounts of taxpayer data, identifying patterns and anomalies that human auditors might miss. This results in significantly higher audit hit rates, earlier detection of sophisticated fraud schemes, and more efficient allocation of enforcement resources.
The technology excels at identifying complex evasion patterns across multiple taxpayers, detecting unusual transaction flows, and flagging inconsistencies in real-time. This proactive approach shifts the paradigm from reactive enforcement to preventive compliance management, ultimately improving voluntary compliance rates while reducing the burden on honest taxpayers.
Cost Efficiency and Operational Excellence
Process Automation
AI automates routine tasks such as document classification, data entry, and initial case assessment, freeing skilled staff for complex analytical work and taxpayer engagement
Faster Processing
Cycle times for refunds, assessments, and correspondence are dramatically reduced through automated workflows and intelligent routing systems
Resource Optimization
Better allocation of human resources to high-value activities while AI handles volume processing, resulting in improved productivity and staff satisfaction
Transforming Taxpayer Experience
24/7 Digital Assistance
AI-powered chatbots and virtual assistants provide round-the-clock support to taxpayers, answering common questions, guiding through filing processes, and providing personalized advice based on individual circumstances. This dramatically improves accessibility and reduces frustration.
Personalized Guidance
Machine learning algorithms analyze taxpayer profiles, transaction histories, and filing patterns to provide tailored recommendations, helping taxpayers understand their obligations and maximize legitimate deductions while maintaining compliance.
Proactive Support
AI systems can identify potential errors before submission, prompting taxpayers to correct mistakes and providing real-time validation, significantly improving first-time filing accuracy and reducing the need for amendments.
Disadvantages and Risks of AI Implementation
1
Legality & Due Process
Automated or AI-assisted decisions must preserve taxpayers' fundamental rights, including explainability, transparency, and robust appeal pathways. Legal frameworks may not adequately address algorithmic decision-making.
2
Bias & Unfair Outcomes
Historical data can embed systemic biases, leading models to disproportionately target certain sectors, demographics, or taxpayer segments, potentially perpetuating or amplifying existing inequities.
3
Opacity & Black Box Problem
Complex AI models may operate as "black boxes" where even developers cannot fully explain specific decisions, undermining credibility, defensibility, and taxpayer trust in the system.
Additional Critical Risks
1
Data Governance & Cybersecurity
Tax data is highly sensitive personal and financial information. AI implementation expands attack surfaces through model training environments, vendor access points, and data-sharing arrangements, requiring robust security protocols.
2
Over-reliance & Capability Gaps
"Automation bias" can develop where staff over-trust AI recommendations without critical evaluation. Shortage of professionals who understand both tax domain expertise and data science creates implementation challenges.
3
Vendor Lock-in & IP Issues
Proprietary models and tools can limit transparency, restrict portability to alternative systems, and compromise sovereign control over critical tax administration functions and sensitive taxpayer data.
The Legitimacy Challenge
The risks associated with AI in tax administration fundamentally challenge public sector legitimacy. Tax authorities derive their power from public trust and legal mandate. When AI systems make decisions that cannot be explained, appear biased, or violate due process principles, they undermine the social contract between citizens and government.
Unlike private sector AI applications where errors may result in commercial losses, mistakes in tax administration can deprive individuals of property, damage reputations, and erode confidence in democratic institutions. Therefore, tax authorities must approach AI implementation with heightened caution, ensuring that efficiency gains never come at the expense of fairness, transparency, and taxpayer rights.
Strategic Considerations: Strategy & Scope
Define Clear Outcomes
Before implementing AI, tax authorities must articulate precisely what outcomes matter most: revenue uplift, service improvement, compliance burden reduction, or integrity enhancement. Different objectives require different AI approaches and success metrics.
Avoid the trap of "AI for AI's sake." Technology should serve clearly defined policy goals aligned with the administration's strategic priorities and stakeholder needs.
Start with High-ROI, Low-Risk Use Cases
Begin with applications that offer high return on investment while presenting minimal risk to taxpayer rights. Examples include:
- Document classification and data extraction
- Anomaly detection on VAT invoices
- Chatbots for routine inquiries
- Automated correspondence triage
Only after proving success in these areas should authorities expand into high-stakes decision-making such as audit selection or fraud prosecution.
Legal Basis & Governance Framework
01
Establish Human-in-the-Loop Requirements
Define which decisions require human review and approval, particularly for high-impact determinations affecting taxpayer rights or significant financial consequences
02
Create Comprehensive Audit Trails
Document what data was used, which model version made the decision, what features influenced outcomes, and who reviewed or approved the result
03
Set Explainability Standards
Establish clear requirements for explaining AI decisions both internally to staff and externally to taxpayers in disputes or appeals
04
Form AI Governance Board
Assemble cross-functional oversight including tax policy, legal, IT security, privacy, internal audit, and ethics representatives
Data Readiness: The Foundation of Success
AI is only as good as the data it learns from. Tax authorities must ensure robust data quality controls, clear data lineage documentation, appropriate retention policies, and seamless cross-system integration before deploying AI solutions. Poor data quality leads to unreliable models, biased outcomes, and failed implementations.
Critical data governance requirements include:
- Data minimization principles: Collect and use only data necessary for specific purposes
- Access rights management: Strict controls on who can access sensitive taxpayer information
- Cross-border sharing rules: Clear policies on international data transfers and sovereignty
- Quality assurance processes: Regular audits of data accuracy, completeness, and consistency
Model Risk Management Framework
Pre-Deployment Testing
Rigorous testing for accuracy, false positive rates, bias across demographic groups, and drift detection before any model goes live
Continuous Monitoring
Ongoing surveillance for model drift, performance degradation, retraining triggers, and rollback procedures when issues arise
Independent Review
Internal audit or external assurance to validate model governance, testing procedures, and operational controls
Model risk management (MRM) is essential to prevent AI failures that could harm taxpayers or damage the authority's reputation. This includes establishing clear model development standards, validation procedures, and governance processes that ensure models remain accurate, fair, and fit for purpose throughout their lifecycle.
Security & Privacy Imperatives
Secure Environments
- Isolated training and inference environments
- End-to-end encryption for data in transit and at rest
- Segregation of duties preventing unauthorized access
- Regular penetration testing and vulnerability assessments
Vendor Requirements
- Mandatory security audits and certifications
- Clear incident response SLAs and procedures
- Local hosting constraints where required by law
- Contractual liability for data breaches
Tax data represents some of the most sensitive information governments hold. A breach could expose financial details, business secrets, and personal information for millions of taxpayers. AI implementation must not compromise security through expanded access points, cloud processing, or vendor relationships.
Building the Right Operating Model
Capability Building
Develop teams that combine data science expertise with deep tax technical knowledge. Invest in training programs that create "translators" who can bridge the gap between AI specialists and tax professionals.
Change Management
Implement comprehensive training to prevent automation bias, where staff blindly trust AI recommendations. Develop standard operating procedures for when and how to override AI decisions.
Process Documentation
Create clear workflows showing how AI integrates with human decision-making, escalation procedures, and quality assurance checkpoints throughout the process.
Transparency & Trust: The Social License
Tax authorities operate on a "social license" granted by taxpayers who trust the system to be fair, transparent, and accountable. AI implementation must strengthen, not weaken, this trust through proactive transparency measures.
Public AI Use Statement
Publish clear information about what AI is used for, what it is NOT used for, and what oversight safeguards exist. Explain in plain language how AI supports but does not replace human judgment in critical decisions.
Robust Appeal Mechanisms
Ensure taxpayers can challenge AI-influenced decisions through well-defined appeal processes. Provide clear explanations of how AI contributed to decisions and allow human review of contested cases.
Stakeholder Engagement
Regularly consult with taxpayer representatives, professional bodies, and civil society organizations about AI use, addressing concerns and incorporating feedback into governance frameworks.
Recommended Paper Structure
1
Executive Summary
One-page overview of key recommendations, benefits, risks, and implementation approach
2
Current State & Global Adoption
OECD statistics, adoption trends, and leading practices from peer jurisdictions
3
Priority Use Cases
Specific applications in service delivery, compliance, enforcement, and debt management
4
Benefits vs Risks
Detailed analysis with risk heatmap showing likelihood and impact
5
Governance Model
Legal safeguards, human oversight requirements, explainability standards, audit trails
6
Data Governance
Data quality, security, privacy, and cybersecurity requirements
7
Implementation Roadmap
Phased approach from pilot to scale to institutionalization
8
KPI Framework
Metrics for revenue yield, hit-rate, service satisfaction, false positives, dispute outcomes
Essential Appendices
Model Controls
- Development standards
- Testing protocols
- Validation procedures
- Monitoring requirements
- Retraining triggers
Sample Policy Wording
- AI use statement
- Explainability policy
- Human oversight rules
- Appeal procedures
- Data governance policy
Vendor Due Diligence
- Security requirements
- Audit rights
- Performance SLAs
- Exit provisions
- IP and data ownership
Key Performance Indicators
85%
Audit Hit Rate Target
Percentage of AI-selected audits that result in adjustments, compared to baseline
30%
Cost Reduction Goal
Reduction in processing costs per transaction through automation
90%
Service Satisfaction
Taxpayer satisfaction with AI-enhanced services and digital channels
<5%
False Positive Rate
Maximum acceptable rate of incorrect fraud or risk flags
Establishing clear KPIs is essential for measuring AI success and identifying areas for improvement. Metrics should balance efficiency gains with fairness, accuracy, and taxpayer satisfaction.
Essential Reading: OECD Guidance
Tax Administration 2025
Published November 17, 2025, this comprehensive OECD report provides the most current guidance on AI implementation in tax administration. It includes case studies from member countries, best practices for governance, and frameworks for addressing ethical and legal challenges.
Governing with Artificial Intelligence
The OECD's broader work on AI governance in the public sector provides essential context for tax-specific applications, addressing issues of transparency, accountability, and human rights in algorithmic decision-making.
These resources should form the foundation of any tax authority's AI strategy, providing evidence-based guidance drawn from international experience and expert analysis.
PART II - EV Joint Ventures: Tax Implications
Understanding the complex tax landscape of automotive industry joint ventures for electric and autonomous vehicles, including incentive structures, IP ownership considerations, transfer pricing, and strategic business rationale.
The EV Revolution: Why OEMs Choose Joint Ventures
Capital Intensity & Risk Sharing
EV battery supply chains and gigafactories require multi-billion dollar investments. Joint ventures allow OEMs to share both capital requirements and demand risk with specialized partners.
Speed to Market
Battery chemistry and autonomous technology stacks evolve rapidly. Partnering accelerates time-to-market compared to building capabilities from scratch.
Access to Critical Know-How
Battery partners bring cell chemistry and manufacturing expertise; tech partners provide software, AI, and autonomy algorithms that would take years to develop internally.
Strategic Drivers for JV Formation
Industrial Policy Alignment
Many government incentive regimes link benefits to local investment, manufacturing footprint, and qualifying activities. Joint ventures provide a practical structure to meet these conditions while sharing the investment burden.
Jurisdictions increasingly require substantial local presence, technology transfer, and job creation as prerequisites for tax incentives, making JVs an attractive vehicle for compliance.
Supply Chain Resilience
Recent supply chain disruptions have highlighted the risks of single-country dependency for critical components. JVs help OEMs secure access to battery cells, rare earth materials, and semiconductor supplies.
By partnering with suppliers in different regions, OEMs build redundancy and flexibility into their supply networks, reducing vulnerability to geopolitical tensions or natural disasters.
The Platform Economics of EVs
The fundamental shift from traditional automotive to electric and autonomous vehicles transforms the product from a mechanical asset into a hardware-software-data platform. This changes the economics entirely.
Traditional Auto vs. EV Platform
Traditional Vehicle
- Mechanical engineering dominance
- Value in powertrain and chassis
- One-time purchase model
- Limited post-sale revenue
- Incremental innovation cycles
EV/Autonomous Platform
- Software and data centricity
- Value in battery, compute, and AI
- Subscription and service revenue
- Continuous OTA updates
- Rapid technology evolution
Real-World JV Examples
Ultium Cells (GM + LG Energy Solution)
Large-scale battery manufacturing JV demonstrating the capital intensity and strategic importance of securing cell supply for EV production
BlueOval SK (Ford + SK On)
Battery JV illustrating both the formation logic and the potential for restructuring as demand and subsidy conditions evolve
Coretura (Volvo + Daimler Truck)
Software-focused JV showing that OEMs also partner for digital platforms and software-defined vehicle capabilities, not just components
Technology Partnerships Beyond Manufacturing
Toyota + NTT Mobility AI Initiative
This partnership exemplifies the convergence of automotive and telecommunications sectors in the autonomous vehicle era. Toyota and NTT are jointly developing AI platforms that combine vehicle intelligence with network infrastructure.
The collaboration reflects a broader trend where OEMs recognize that autonomous driving requires not just vehicle-level AI but also edge computing, 5G connectivity, and cloud-based data processing capabilities that telecom partners can provide.
Such partnerships raise unique tax questions around data ownership, cross-border data flows, and the allocation of value between hardware (vehicle) and software/connectivity services.
JV Operating Model & Value Chain
Typical JV Scope
The joint venture typically handles EV vehicle manufacturing and integration, incorporating autonomy-enabled architecture in a software-defined vehicle (SDV) platform. Understanding the value chain is essential for proper tax analysis.
Battery Partner
Supplies cells, modules, and packs plus manufacturing process know-how and quality control expertise
Tech Partner
Provides autonomy software, data platforms, compute infrastructure, and AI services
OEM Partner
Contributes vehicle platform, brand, dealer network, homologation expertise, and manufacturing systems
The Critical IP Distinction
Before analyzing tax implications, we must understand the fundamental distinction between two categories of intellectual property in any JV structure:
Background IP
Pre-existing technology that each partner contributes or licenses to the JV:
- Battery partner's cell chemistry and BMS technology
- Tech partner's autonomy stack and AI algorithms
- OEM's vehicle platform and manufacturing processes
This IP typically remains owned by the contributing partner, with the JV receiving a license for specific uses.
Foreground IP
New intellectual property created through JV development activities:
- Integration IP combining battery and vehicle systems
- Manufacturing process improvements
- Vehicle-level software and control systems
- Data models and training datasets
Ownership of foreground IP must be clearly defined in JV agreements and has significant tax implications.
Why the IP Distinction Matters for Tax
1
Royalty & Service Flows
Background IP licensing creates cross-border royalty payments subject to withholding taxes. The characterization of payments (royalty vs. service fee) affects tax treatment and treaty benefits.
2
Transfer Pricing Testing Points
The distinction determines which party is the "tested party" in TP analysis and what comparables are appropriate. Background IP owners may be entitled to premium returns.
3
Incentive Eligibility
Many incentive regimes distinguish between using licensed IP versus owning and developing IP. The background/foreground split affects which activities qualify for benefits.
Tax Implications Overview
The tax analysis of an EV/autonomous vehicle JV must address multiple interconnected issues. This section provides a comprehensive framework for evaluating tax implications across all relevant dimensions.
1
JV Structuring & Jurisdiction
Entity form, governance, permanent establishment risks, and withholding tax exposure
2
Incentives Analysis
Types of available incentives, qualifying conditions, and the IP ownership question
3
IP & DEMPE Mapping
Where value creation occurs and how returns should be allocated
4
Transfer Pricing
Controlled transactions, tested party selection, and benchmarking approach
5
Indirect Taxes & Customs
Import duties, VAT recovery, and classification issues
6
Pillar Two Considerations
Minimum tax implications and incentive effectiveness
JV Structuring Considerations
Entity Form & Governance
The choice between corporate and partnership structures affects tax treatment, profit allocation, and governance flexibility. Key considerations include:
- Tax transparency vs. separate entity treatment
- Dividend withholding tax implications
- Governance rights and deadlock resolution
- Exit mechanisms and buyout provisions
Permanent Establishment Risks
PE exposure can arise even before the JV is fully operational:
- Joint development teams working in partner locations
- Seconded employees performing core functions
- Testing and commissioning activities
- Shared facilities and equipment
Proper documentation of employment relationships, cost allocations, and supervision lines is essential to manage PE risk.
Withholding Tax Exposure
Cross-border flows between JV partners and the JV entity create multiple withholding tax touchpoints that must be carefully managed:
- Royalties: Payments for background IP licenses typically subject to withholding tax, though rates may be reduced under tax treaties
- Service Fees: Technical services, management fees, and support charges may trigger withholding depending on characterization and treaty provisions
- Interest: Financing arrangements between partners and the JV create interest withholding exposure
- Dividends: Profit distributions from the JV to partners subject to dividend withholding tax
Treaty planning and proper characterization of payments are essential to minimize withholding tax costs while maintaining defensible positions.
Types of EV-Related Incentives
Corporate Income Tax Holidays
Reduced CIT rates or full exemptions for qualifying periods, typically linked to priority sectors, high-tech classification, or strategic industries
R&D Super-Deductions
Enhanced deductions or tax credits for qualifying research and development expenditure, often with specific requirements for local R&D activities
Training & Employment Credits
Incentives for workforce development, particularly for high-skilled technical positions in advanced manufacturing
Accelerated Depreciation
Faster write-offs for manufacturing equipment, particularly for environmentally friendly or high-tech production facilities
Customs & VAT Exemptions
Duty-free importation of eligible machinery and equipment; VAT exemptions or deferrals for qualifying imports
Land & Infrastructure Support
Subsidized land costs, rent holidays, or infrastructure development in designated industrial zones
The IP Ownership Misconception
Common Planning Error
Many tax planners assume: "If the JV owns the IP, it automatically qualifies for incentives." This is often wrong and can lead to failed planning and controversy.
The Reality: Two Separate Tests
Manufacturing/Investment Incentives
Typically driven by approved project features:
- Capital expenditure thresholds
- Industry classification
- Geographic location
- Employment levels and skills
- Local content requirements
- Technology level or environmental benefits
Legal IP ownership may be supportive but is often not a legal requirement for these incentives.
IP Income Regimes (Patent Box)
Benefits follow the OECD nexus approach:
- Requires qualifying R&D expenditure
- Links benefits to taxpayer's own R&D spend
- Legal title alone is insufficient
- Must demonstrate substance and activity
The taxpayer must have undertaken the R&D that generated the IP income to benefit from preferential rates.
OECD Modified Nexus Approach
The OECD's modified nexus approach, adopted by most jurisdictions with IP regimes, fundamentally changed how IP incentives work. Understanding this is critical for JV planning.
Core Principle
Tax benefits for IP income are proportional to the taxpayer's qualifying expenditure on developing that IP. The formula compares qualifying R&D expenditure to total R&D expenditure (including outsourced and acquired IP costs).
Implications for JVs
- Simply transferring IP ownership to the JV does not automatically qualify for patent box benefits
- The JV must incur its own qualifying R&D expenditure to benefit
- Outsourced R&D to related parties reduces the benefit ratio
- Acquired IP from partners may not qualify at all
This means JV structures must carefully consider where R&D activities are performed and how they are funded to maximize incentive benefits.
Practical Incentive Analysis Framework
1
Identify Available Incentives
Catalog all potentially applicable incentives in the JV jurisdiction, including national, regional, and local programs
2
Separate Project vs. IP Incentives
Distinguish between manufacturing/investment incentives (activity-based) and IP income regimes (nexus-based)
3
Map Qualifying Activities
Determine which JV activities qualify: manufacturing, R&D, training, local content, etc.
4
Assess Substance Requirements
Evaluate whether the JV has sufficient substance to claim benefits: employees, facilities, decision-making
5
Model Benefit Scenarios
Quantify expected benefits under different structures and activity allocations
6
Consider Pillar Two Impact
Assess whether incentives will be effective or clawed back under minimum tax rules
IP & DEMPE: Where Value is Created
For international tax and transfer pricing, the most critical analysis is DEMPE: Development, Enhancement, Maintenance, Protection, and Exploitation of intellectual property. This determines where profits should be allocated.
1
Development
Who performs the initial R&D work? Where are the engineers, scientists, and designers located? Who controls the development process and makes key technical decisions?
2
Enhancement
Who improves and evolves the IP over time? This is particularly important for software and autonomous systems that require continuous updates.
3
Maintenance
Who maintains the IP, fixes bugs, addresses security issues, and ensures ongoing functionality? For EV software, this is a continuous activity.
4
Protection
Who manages patent filings, trade secret protection, and enforcement against infringement? Who bears the cost and risk of IP protection?
5
Exploitation
Who makes decisions about how the IP is used, licensed, or commercialized? Who bears market risk and controls pricing?
High-Risk DEMPE Areas in EV JVs
Seconded Engineers & Shared Labs
Tax authorities will scrutinize arrangements where partner employees work on JV projects. Key questions:
- Who supervises and directs the work?
- Who owns the results?
- How are costs allocated?
- Are there proper assignment letters?
Without clear documentation showing the JV controls the work, authorities may argue that the partner, not the JV, performs DEMPE functions and should receive corresponding returns.
Data Ownership for Autonomous Driving
For autonomous vehicles, "IP" extends beyond patents to include:
- Training data and datasets
- Machine learning model weights
- Software code and algorithms
- Ongoing OTA update content
The JV must have clear positions on who owns or can exploit data outputs, whether the tech partner is licensing a "black box," and how ongoing updates are priced.
Buyout & Exit Clauses: Latent IP Migration
JV agreements typically include provisions for partner exit, buyout rights, and IP treatment upon termination. These clauses create significant tax risks that are often overlooked during formation.
Common Exit Scenarios
- Partner buyout: One partner acquires the other's interest, potentially including IP rights
- JV dissolution: IP must be allocated between partners or sold to third parties
- IP migration: Foreground IP developed by the JV is transferred to a partner
- License termination: Background IP licenses end, requiring renegotiation or replacement
Tax Implications
These events can trigger significant tax consequences including capital gains, deemed royalties, transfer pricing adjustments, and loss of incentive benefits. The tax treatment should be analyzed and planned for at JV formation, not when exit is imminent.
The Practical DEMPE Rule
Allocate returns where people + control sit, not only where IP is registered
This principle, emphasized by tax authorities globally, means that legal IP ownership alone does not determine profit allocation. The entity that performs and controls DEMPE functions should receive corresponding returns.
What This Means for JV Planning
- Document who actually performs development work
- Show clear lines of supervision and control
- Demonstrate decision-making authority through governance minutes
- Align cost allocations with functional reality
- Ensure the JV has appropriate technical capability
- Avoid "empty" IP ownership without substance
- Price intercompany transactions consistently with DEMPE analysis
- Prepare for authority challenges with robust documentation
Transfer Pricing: The Critical First Decision
Before analyzing specific transactions, the JV must decide its fundamental role in the value chain. This decision drives the expected profit level and determines the transfer pricing approach.
1
Contract Manufacturer / Tolling
JV provides manufacturing services for a fee, with partners retaining IP, market risk, and strategic control. Returns are routine, typically cost-plus 5-10%.
2
Principal / Entrepreneur
JV owns IP, bears market and product risk, and controls strategic decisions. Returns can be higher but require demonstrating genuine risk-bearing and control.
3
Limited-Risk Distributor
JV purchases finished goods and distributes them, bearing limited inventory and credit risk. Returns are moderate, typically cost-plus or resale-minus.
The choice must reflect operational reality, not just tax optimization. Authorities will challenge structures where the claimed role doesn't match the JV's actual functions, assets, and risks.
Key Controlled Transactions to Price
Battery Supply
Cells, modules, and packs from battery partner. Must consider embedded intangibles (chemistry, BMS technology) and whether pricing is at arm's length compared to third-party supply.
Manufacturing Know-How
Process technology, quality control systems, and production expertise. May be structured as upfront payment, running royalty, or service fee.
Software & Autonomy Licensing
Autonomy stack, AI algorithms, and software platforms. Characterization as license vs. SaaS affects withholding tax and TP analysis.
Engineering Services
Design, testing, integration, and technical support services. Must document scope, deliverables, and value-add to support pricing.
Prototype & Testing Costs
Treatment of pre-production costs: capitalize vs. expense, allocation between partners, and cost-sharing arrangements.
Shared Services
HR, IT, finance, and administrative support. Typically cost-plus with modest markup, but must document actual services provided.
Transfer Pricing Documentation: Build Before Revenue Starts
The safest approach is to define the transfer pricing model before revenue begins. Most JV disputes arise because tax structuring lags behind operational reality.
Minimum Documentation Package
Agreements & Contracts
- JV formation agreement
- IP license agreements
- Supply agreements
- Service agreements
- Cost-sharing arrangements
Functional Analysis
- Value chain mapping
- DEMPE analysis
- Risk allocation matrix
- Asset ownership schedule
- Decision-making authority
Ongoing Requirements
- Benchmarking studies for key transactions
- Local file and master file (where required)
- Governance minutes showing decision-making
- Annual TP review and updates
Benchmarking Challenges in EV JVs
Finding appropriate comparables for EV and autonomous vehicle transactions is particularly challenging due to the nascent nature of the industry and the unique combination of technologies involved.
Limited Comparables
Few pure-play EV or autonomous vehicle companies with public financials. Traditional auto comparables may not reflect the software and data intensity of EV platforms.
Bundled Transactions
Battery supply often includes embedded intangibles (chemistry, BMS). Software licenses may bundle code, data, and ongoing updates. Unbundling for TP purposes is complex.
Rapid Evolution
Technology and business models evolve quickly. Historical comparables may not reflect current market conditions or technological capabilities.
These challenges require creative approaches to benchmarking, including use of broader technology sector comparables, adjustments for unique factors, and robust economic analysis to support pricing positions.
Indirect Taxes & Customs Considerations
Import Duties & Classification
Battery packs and critical components face complex tariff classification issues:
- Classification as complete batteries vs. parts
- Duty rates varying by chemistry and application
- Rules of origin for preferential treatment
- Temporary import regimes for prototypes
Proper classification can result in significant duty savings and must be addressed early in supply chain planning.
VAT/GST Recovery
During the ramp-up phase, the JV typically incurs substantial input VAT on equipment, construction, and services while generating little or no output VAT:
- Recovery timing and procedures
- Refund mechanisms and processing times
- Cash flow impact during pre-revenue period
- Documentation requirements for recovery
VAT recovery can become a significant cash trap if not properly managed.
Special Customs Issues for EVs
Prototypes & Testing Vehicles
Pre-production vehicles and test units create unique customs challenges. Many jurisdictions offer temporary import relief for prototypes, but conditions vary and documentation requirements are strict. Failure to comply can result in full duty assessment plus penalties.
Warranty Returns & Repairs
Defective batteries or components returned for warranty repair or replacement may trigger duty on re-import if not properly documented. Repair and return programs require careful customs planning.
Technology Transfer
Transfer of technical data, software, and know-how may have customs implications in some jurisdictions, particularly where technology transfer is subject to licensing or approval requirements.
Pillar Two / Global Minimum Tax Implications
For multinational groups within scope of the OECD Pillar Two rules, the 15% global minimum tax can significantly impact the effectiveness of traditional tax incentives.
ETR Calculation
Incentives that reduce the JV's effective tax rate below 15% may trigger top-up tax in the parent jurisdiction
Jurisdictional Blending
ETR is calculated on a jurisdictional basis, so the JV's low rate may be blended with other entities in the same country
Qualified Refundable Credits
Certain refundable tax credits may be excluded from ETR calculation, preserving their benefit even under Pillar Two
This means incentive analysis must be conducted at both the local level (does the JV qualify?) and the group level (will the benefit be clawed back by top-up tax?).
Substance-Based Income Exclusion
Carve-Out for Real Activity
Pillar Two includes a substance-based income exclusion (SBIE) that allows a return on tangible assets and payroll to be excluded from the minimum tax calculation. For capital-intensive EV manufacturing, this can be significant.
Planning Implications
JVs with substantial tangible assets (factories, equipment) and high payroll (engineers, production workers) may be able to earn returns below 15% without triggering top-up tax, up to the SBIE amount.
This makes the location of real economic activity even more important than in traditional tax planning focused solely on legal entity location.
Day-1 Controls: Preventing Future Controversy
Operational discipline from day one prevents later tax controversy and protects the value of the JV structure. These controls should be implemented at formation, not added later.
1
Governance & Documentation
Board minutes documenting key decisions, risk assumption, and strategic control. Regular meetings with proper documentation of discussions and resolutions.
2
Audit Trail
Clear records linking decisions to decision-makers, showing the JV's control over operations, IP development, and commercial strategy.
3
Intercompany Contract Discipline
Signed agreements before transactions begin, consistent with actual conduct, and regularly reviewed for continued appropriateness.
4
Transfer Pricing Compliance
Annual benchmarking, contemporaneous documentation, and proactive adjustments to maintain arm's length pricing.
5
Tax Provision & Reporting
Accurate tax accounting, proper disclosure of uncertain tax positions, and coordination with group tax reporting.
Other Tax Implications Checklist
1
Withholding Tax Exposure
Royalties, cross-border services, and interest payments. Confirm characterization and treaty positions, especially for mixed software-service arrangements.
2
PE Risk Pre- and Post-JV
Plant commissioning, prototype testing, and long-term secondments. Clear assignment letters, supervision lines, and cost recharge logic required.
3
Indirect Tax & Customs
Import classification of battery packs and components. VAT recovery during ramp-up can become a cash trap requiring careful management.
4
Pillar Two Considerations
If groups are in scope, incentives may reduce ETR and create top-up exposure. Evaluate incentives at both domestic and group level.
PART III - Presentation Slides
The following slides contain the core presentation content for the JV case study, with detailed speaker scripts provided in the notes section of each slide.
Why OEMs Increasingly Use JVs for EV + Autonomous
Capital Intensity + Risk Sharing
Batteries, software, data/compute, and manufacturing scale-up require multi-billion dollar investments that are shared between partners
Speed + Capability Access
Partner brings critical know-how in battery chemistry and autonomy/AI stack that would take years to develop internally
Supply-Chain Resilience
Secure upstream materials and cell capacity; reduce single-country dependency and geopolitical risk
Industrial Policy Alignment
Local manufacturing and qualifying activities often prerequisite to incentives; JVs facilitate compliance
Ecosystem Model
EV + autonomy is a platform (hardware + software + data), not only a "car"—requiring diverse capabilities
JV Operating Model & Value Chain
JV Scope
EV vehicle manufacturing + integration; autonomy-enabled architecture (SDV)
Key Flows
Battery Co
Cells/modules/pack + process know-how
Tech Co
Autonomy software, data platform, compute/AI services
OEM
Vehicle platform, brand, dealer network, homologation, manufacturing systems
Two IP Buckets
Background IP
Contributed/licensed pre-existing technology
Foreground IP
Newly developed through JV activities
Incentives: What to Test, and the "IP Ownership" Misconception
Separate 2 Incentive Questions
1. Project-Based Investment Incentives
Driven by capex, location, sector, employment, local value-add
2. IP-Income Regimes (e.g., Patent Box)
Commonly require R&D substance under OECD nexus approach
IP Ownership is Not Always Decisive
- For many project incentives: focus is qualifying activity, not legal IP title
- For IP-income regimes: benefit often follows the OECD nexus approach (link to qualifying R&D spend)
- Legal ownership alone is insufficient—must demonstrate substance and activity
IP & DEMPE: Where Value is Created
DEMPE Mapping
Development, Enhancement, Maintenance, Protection, Exploitation
Typical High-Risk Areas
Seconded Engineers / Shared Labs
"Who is really developing?" Must show clear supervision, control, and cost allocation
Data Ownership/Rights
For autonomous driving models—who owns training data, model weights, and update content?
Buyout/Exit Clauses
Latent IP migration value—tax treatment of IP transfers upon JV termination or partner exit
Practical Rule
Allocate returns where people + control sit, not only where the IP is registered
Transfer Pricing Blueprint: What to Document Early
Decide the JV's Role (Drives Profit Level)
1
Contract Manufacturer / Tolling
Routine returns (cost-plus)
2
Principal
Higher returns but must show risk-bearing and control
3
Limited-Risk Distributor
Moderate returns (resale-minus or cost-plus)
Key Controlled Transactions to Price
- Battery supply (cells/modules), manufacturing know-how
- Software/autonomy licensing or SaaS-type fees
- Engineering services, testing, prototype costs
- Shared services + intercompany financing (if any)
Documentation Pack (Minimum)
Agreements, value chain, DEMPE, benchmarking, TP local file/master file (as relevant)
Other Tax Implications & "Day-1 Controls"
1
Withholding Tax Exposure
Royalties, cross-border services, interest—confirm characterization and treaty positions
2
PE Risk Pre- and Post-JV
Secondments, testing activities, commissioning teams—clear assignment letters and cost logic
3
Indirect Tax & Customs
Import classification of battery packs/components; VAT recovery in ramp-up phase
4
Pillar Two / Minimum Tax
Incentives may reduce ETR; consider top-up risk at group level
5
Day-1 Controls
Governance + audit trail + intercompany contract discipline from formation
Evidence & Real-World JV Examples
Ultium Cells (GM + LG Energy Solution)
Battery JV demonstrating scale and strategic nature of cell manufacturing partnerships
BlueOval SK (Ford + SK)
Battery JV formation and later restructuring showing evolution with demand and policy changes
Coretura (Volvo Group + Daimler Truck)
Software JV illustrating OEM partnerships for digital platforms and software-defined vehicles
Toyota + NTT
Mobility/AI initiative combining automotive and telecommunications capabilities
IP-Income Incentives Principle
OECD modified nexus approach: benefits aligned to qualifying R&D substance, not mere legal ownership
SECTION 2 - INDIVIDUAL CASE
Modern Operating Models: Remote Work & Supply Chain Restructuring
Navigating the tax implications of structural business transformation in a post-pandemic world
Overview: Two Critical Topics, One Unifying Theme
Topic 1: Remote Working
Policy guidance on Article 5(1) Permanent Establishment risk in the era of distributed teams and home offices
Topic 2: Supply Chain Volatility
Case for invoicing hub restructuring in multi-plant manufacturing with weather-driven price fluctuations
Common theme: Aligning commercial reality, governance structures, and tax outcomes in modern operating models
Chapter I - Remote Work Revolution
Understanding the structural drivers and permanent establishment implications
Why Remote Working Is Growing Beyond the Pandemic
Remote work has evolved from a temporary pandemic response to a permanent feature of modern business operations. Understanding the structural drivers is essential for tax authorities developing policy frameworks.
Labour Market & Talent Strategy
Access to scarce skills across borders, improved retention, and employee bargaining power. Rise of distributed teams in IT, finance, marketing, design, and analytics functions.
Cost Base Optimisation
Reduced office footprint requirements, shift to co-working arrangements, and strategic relocation of back-office functions to lower-cost jurisdictions.
Technology & Security Maturity
Cloud-native systems, sophisticated endpoint management, and identity-based security frameworks enable controlled remote work at scale.
Additional Structural Drivers
Business Continuity & Resilience
Operating models that survive weather events, geopolitical disruptions, and local infrastructure issues. Remote work provides geographic diversification of critical business functions.
Client Delivery Expectations
Faster response windows, multi-time-zone operations, and "follow-the-sun" support models increasingly demanded by global clients.
ESG & Wellbeing
Lower commuting footprint supporting environmental goals, enhanced wellbeing policies, and improved inclusion for carers and people with mobility constraints.
Critical Implication for Tax Authorities
Key Insight: Remote work is no longer "exceptional" (unlike COVID-era temporary dislocation), so the treaty PE analysis must be applied in a normalised environment.
The OECD's COVID guidance addressed temporary forced home working, stating that exceptional and temporary changes of location during public health measures should not create new PEs. However, the post-COVID update recognizes that remote work has become a permanent feature of business operations.
Tax authorities must now develop frameworks that distinguish between:
- Temporary pandemic-driven arrangements (historical context)
- Permanent structural remote work arrangements (current reality)
- Employee convenience versus commercial necessity
- Genuine business presence versus incidental home working
Article 5(1) PE Analysis: A Disciplined Framework
When analyzing whether remote working creates a fixed place of business permanent establishment under Article 5(1), tax authorities should apply a structured five-step test. This framework ensures consistency and rigor in PE determinations.
01
Is there a "place of business"?
A home can be a physical place where business is carried on. The question becomes: is it the enterprise's place of business, or merely an employee's private location?
02
Is it "fixed" (location + permanence)?
Requires a degree of stability and persistence. Post-pandemic reality means longer-term patterns are common; authorities will look at actual working patterns over time.
03
Is the home office "at the disposal" of the enterprise?
Often the decisive issue. Does the enterprise require work from that location or effectively replace an office with home working?
04
Is the enterprise's business carried on through that place?
What activities are performed from the home? Sales, negotiation, client management, or merely internal support?
05
Are there limiting principles / exceptions?
If activities are truly preparatory or auxiliary, PE may not arise even if there is some presence.
Step 3: "At the Disposal" — The Decisive Issue
Step 3 of the PE analysis framework is often where cases are won or lost. Understanding the indicators that point toward or away from the home being "at the disposal" of the enterprise is critical.
Indicators: MORE LIKELY at disposal
- Enterprise requires work from that location
- Effectively replaces an office with home working
- Role requires regular local presence for enterprise's business
- Customer or supplier engagement necessitates local presence
- Enterprise sets up the place like an office (exclusive area, signage, leased space)
- Reimbursed dedicated facilities or equipment
Indicators: LESS LIKELY at disposal
- Home working is for employee convenience only
- No commercial need for local presence
- Employee could work from enterprise's office if desired
- No local customer or supplier interaction
- No enterprise control over the home workspace
- Activities could be performed from any location
Step 4: Nature of Activities Performed
Authorities focus on what activities are actually performed from the home office. The nature and substance of these activities determines PE risk.
Higher Risk Activities
- Sales activity and contract negotiation
- Key client relationship management
- Real-time service delivery to local customers
- Procurement and supplier management
- Strategic decision-making for local markets
- Revenue-generating activities
Lower Risk Activities
- Internal support functions
- Preparatory or auxiliary tasks
- Administrative coordination
- Back-office processing
- Research without local application
- Activities that could be performed anywhere
OECD 2025 Update: The New Framework
The OECD 2025 Update to the Model Tax Convention introduced a clearer framework for cross-border remote work and home offices, moving beyond the temporary COVID-era guidance to address permanent structural changes.
50% Benchmark
If an individual works from a home in the other State for ≥50% of total working time over any 12-month period, whether the enterprise has a place of business there is determined by facts and circumstances.
"Commercial Reason" Test
A key question is whether there is a commercial reason for activities to be undertaken by that individual in that State. It exists when physical presence facilitates carrying on the enterprise's business.
Cost-Saving Limitation
OECD commentary indicates that permitting home working solely to reduce office costs is not, by itself, a commercial reason for presence in that State.
Commercial Reason: The Critical Distinction
The concept of "commercial reason" is central to the OECD 2025 framework. It separates genuine business presence from mere employee convenience or cost optimization.
1
Commercial Reason EXISTS
Individual's physical presence in that State facilitates carrying on the enterprise's business through:
- Access to local people or resources
- Customer engagement and relationship management
- Supplier interaction and procurement
- Market-specific expertise or knowledge
- Regulatory or compliance requirements
2
Commercial Reason ABSENT
Presence is driven by:
- Employee personal preference
- Cost reduction alone
- Convenience without business necessity
- Activities that could be performed anywhere
- No local market interaction
COVID-Era Contrast: Temporary vs. Permanent
OECD COVID Guidance: The exceptional and temporary change of location (including working from home) during COVID public health measures should not create new PEs.
The contrast between COVID-era temporary arrangements and post-pandemic permanent remote work is fundamental to understanding the current framework.
COVID-Era (Temporary)
- Forced by public health measures
- Exceptional circumstances
- Expected to be temporary
- No change to business model
- Should not create new PEs
Post-COVID (Permanent)
- Voluntary business decision
- Normal operating conditions
- Permanent or long-term arrangement
- Structural change to operating model
- Standard PE analysis applies
Recommendations for Tax Authorities: Provide Clear Guidance
A tax authority succeeds by being predictable and providing certainty to taxpayers. Clear administrative guidance aligned to OECD principles is essential for effective enforcement and voluntary compliance.
Publish Comprehensive Guidance
Issue guidance notes aligned to OECD principles covering "at the disposal," "fixed," "permanence," and "commercial reason" with clear evidence standards.
Include Worked Examples
Provide practical examples for common patterns: employee convenience vs. market-facing presence, hybrid commuters, cross-border call-centre support, local procurement roles.
Define Evidence Standards
Specify what documents and evidence matter for audit purposes, creating predictability for taxpayers and consistency for auditors.
Risk-Based Compliance Approach
Tax authorities should adopt a risk-based approach to avoid overreach while focusing resources on genuine PE risks. A structured risk filter enables efficient audit triage and reduces unnecessary disputes.
1
Time-Pattern Screening
Use OECD 50% benchmark as initial screening (not automatic conclusion). Percentage of working time in-state triggers deeper analysis.
2
Activity Assessment
Whether the role involves customer or supplier engagement in that State. Revenue-generating vs. support activities.
3
Substitution Test
Whether the enterprise would otherwise maintain premises in that State if home working were unavailable.
4
Commercial Reason Analysis
Whether there is a genuine commercial reason for physical presence in that State beyond cost savings or employee convenience.
Evidence Package for Audit
Tax authorities should request a comprehensive evidence package that enables fact-based PE determination. Clear evidence requirements reduce disputes and improve compliance.
HR Policy Documentation
Whether remote work is optional versus required by the enterprise. Formal policies on home working arrangements and approvals.
Job Description & KPIs
Sales targets, supplier management responsibilities, customer relationship metrics, and performance indicators tied to local market activities.
Activity Records
Travel calendars, CRM logs, meeting minutes, contracting workflow documentation showing where and how business is conducted.
Expense Reimbursement
Home office cost reimbursements and whether a dedicated office space exists. Enterprise investment in home workspace setup.
Substitution Analysis
Would the enterprise rent premises if home were unavailable? Evidence of commercial necessity for local presence.
Coordination and Dispute Prevention
Cross-Regime Alignment
Align PE determinations with payroll/PIT withholding and social security guidance, even though these are separate regimes. Inconsistent positions across tax types create confusion and disputes.
Coordinate between corporate tax, employment tax, and indirect tax teams to ensure consistent treatment of remote working arrangements.
Dispute-Prevention Practices
Set up early engagement mechanisms allowing taxpayers to discuss complex remote work arrangements before positions harden.
Ensure MAP (Mutual Agreement Procedure) readiness for cross-border remote work cases where double taxation may arise.
Chapter 2 - Supply Chain Restructuring
Managing volatility through invoicing hub models
Case Study: The Business Problem
A UK-headquartered group operates multiple manufacturing units across different countries. Weather-driven fluctuations cause significant cost and price volatility. Sales offices source from whichever plant offers the lowest price at any given time, but no single plant can satisfy total demand.
Current Model Symptoms
Sales offices source opportunistically from the "cheapest" plant, but no single plant can satisfy full demand. Weather-driven volatility creates frequent price reversals, and allocation decisions become inconsistent across markets.
What Is Actually Broken
The operational issue is supply and price volatility combined with ad-hoc allocation. The tax problem is inconsistent contracting reality that creates unpredictable margin outcomes and audit exposure.
Tax and Control Risks Created
1
Transfer Pricing Volatility
Unpredictable margin outcomes across plants and sales entities. Inconsistent pricing creates benchmarking challenges and makes it difficult to demonstrate arm's length outcomes.
2
Customs Valuation Conflicts
Import values may be challenged if year-end TP adjustments change pricing after importation. Creates duty underpayment risk and potential penalties.
3
Operational Audit Risk
Contracts versus conduct misalignment. Authorities will ask: "Who really decides and confirms orders and allocates supply?" Inconsistent answers create controversy.
4
Double Taxation Risk
Multiple authorities dispute where the "entrepreneurial" profit should sit when control and risk-bearing are unclear or fragmented.
Restructuring Solutions: Three Options
A strong presentation shows that "invoicing hub" is not the only lever. The group can choose the ambition level based on substance capability and risk tolerance.
Central Procurement / Sourcing Hub (Limited-Risk)
Hub coordinates demand and allocates supply across plants. Plants continue to invoice sales entities or hub. Hub earns a coordination fee.
Principal / Invoicing Hub (Full Trading Model)
Hub becomes the contracting principal: buys from multiple plants, owns inventory or assumes title/price risk, sells to regional sales companies and third parties.
Regional Principals (Two-Hub Model)
Split by region (e.g., EMEA principal and APAC principal). Closer to customers and logistics, but adds complexity.
Option 1: Central Procurement / Sourcing Hub
How It Works
Hub coordinates demand forecasting and allocates supply across manufacturing plants based on capacity, cost, and delivery requirements.
Plants continue to invoice sales entities directly or invoice the hub, which then invoices sales entities. Hub earns a coordination or procurement fee for its services.
Pros
- Easier to defend with tax authorities
- Lower entrepreneurial profit concentration
- Simpler to implement operationally
- Lower substance requirements
Cons
- May not solve full pricing volatility
- Principal risks remain fragmented
- Limited margin stabilization
- Allocation decisions may still be inconsistent
Option 2: Principal / Invoicing Hub (Full Trading Model)
The hub becomes the contracting principal, taking ownership and control of the supply chain. This is the most ambitious restructuring option.
How It Works
Hub buys from multiple plants, owns inventory (or at least assumes title and price risk at defined points), and sells to regional sales companies and third parties.
Pros
- Centralised risk control and pricing
- Consistent margin outcomes
- Clear entrepreneurial principal
- Effective volatility management
Cons
- High substance requirement
- Customs and VAT chain complexity
- Controversy risk if "paper principal"
- Significant operational changes required
Option 3: Regional Principals (Two-Hub Model)
Structure
Split principal functions by region, for example establishing an EMEA principal and an APAC principal. Each regional hub manages supply allocation, pricing, and contracting for its region.
Pros
- Closer to customers and logistics networks
- Spreads risk across geographies
- Better time-zone alignment
- Regional market expertise
Cons
- Increased complexity and cost
- Risk of fragmentation returning
- Coordination challenges between hubs
- Duplicate substance requirements
Two Preferred Hub Locations: No Single Right Answer
A robust pair of commonly accepted locations in practice provides a balanced shortlist. The "right" answer depends on where the group will genuinely locate decision-makers and build operational control.
Candidate 1: Singapore
APAC Principal / Trading Hub Archetype
Strong APAC logistics and treasury ecosystem, stable governance, practical for regional control. Time zone advantage for Asia markets. Requires substance: decision-makers, trading/procurement team, risk management, and control over allocation and pricing.
Candidate 2: Netherlands
EU Principal / Logistics + Treasury Archetype
Strong EU logistics ecosystem, proximity to EMEA markets, established capability for principal models. High scrutiny on substance and value creation. EU customs and VAT chain can be complex if flows involve multiple member states.
Singapore: APAC Principal Hub
Strengths (Conceptual)
- APAC logistics and treasury ecosystem
- Stable governance and rule of law
- Practical for regional control functions
- Time zone advantage for Asia markets
- Established trading hub infrastructure
- Favorable tax treaty network
Risks / Requirements
- Must demonstrate real substance
- Decision-makers physically present
- Trading and procurement team on ground
- Risk management and control systems
- Control over allocation and pricing decisions
- Avoid "paper principal" characterization
Singapore works best when the group's growth markets and supply allocation decisions are genuinely APAC-centric and the group is willing to locate a real procurement and trading team in Singapore.
Netherlands: EU Principal Hub
Strengths (Conceptual)
- Strong EU logistics ecosystem
- Proximity to EMEA markets
- Established capability for principal models
- Sophisticated treasury and finance infrastructure
- Access to European talent pool
- Extensive tax treaty network
Risks / Requirements
- High scrutiny on substance and value creation
- EU customs and VAT chain complexity
- Multiple member state flows create challenges
- Detailed documentation requirements
- BEPS scrutiny on profit allocation
- Need for genuine decision-making presence
Netherlands is preferred where EMEA demand, logistics, and contracting are concentrated in or near Europe and the group can establish real substance and operational control, with careful handling of EU VAT and customs chain complexity.
Alternative: Switzerland as Non-EU Principal
You can substitute Switzerland for Netherlands if your audience prefers a non-EU principal location. The decision matrix remains the same, but Switzerland offers non-EU advantages with its own considerations.
Switzerland Advantages
- Non-EU status provides flexibility
- Strong logistics infrastructure
- Established trading hub reputation
- Favorable tax environment
- Political and economic stability
Switzerland Considerations
- EU customs border creates complexity
- VAT treatment of EU flows
- Substance requirements remain high
- BEPS scrutiny on profit allocation
- Need for genuine commercial rationale
Critical Considerations: Location Decision Matrix - What Must Be Considered
The decision matrix ensures all critical factors are evaluated systematically. Success requires alignment across transfer pricing, customs, indirect tax, audit readiness, and operational feasibility.
Consideration 1: Transfer Pricing and Control of Risk
Transfer pricing is the foundation of any hub structure. The hub must genuinely control the risks it is compensated for bearing.
Can the hub genuinely control:
- Allocation of constrained supply across markets
- Pricing policy and volatility management
- Contracting terms with plants and sales entities
- Inventory risk and obsolescence
- Credit risk and payment terms
Profit allocation must follow:
- Functions performed by the hub
- Risks controlled and borne by the hub
- Assets employed by the hub
- DEMPE (Development, Enhancement, Maintenance, Protection, Exploitation) alignment
- Avoid "paper principal" characterization
Tax authorities will challenge hubs that claim entrepreneurial returns without demonstrating genuine control over risk and decision-making.
Consideration 2: Customs Valuation vs. TP Adjustments
Critical Failure Point: This is where many hub structures break down in practice. Transfer pricing adjustments can affect customs value of imported goods and create duty underpayment risk, penalties, audit exposure, and refund difficulties.
When goods are imported, customs values are based on invoice prices at the time of importation. Year-end transfer pricing adjustments that change pricing after importation create significant issues.
The Problem
TP adjustments increase or decrease the transaction value after customs clearance, potentially creating duty underpayment or overpayment.
The Risks
Penalties for underpayment, difficulty obtaining refunds for overpayment, customs audits, and operational disruption.
The Solution
Design stable pricing mechanisms and a documented approach to TP adjustments consistent with customs rules. Use WCO guidance on the interaction between customs valuation and transfer pricing.
WCO Guidance: Customs and Transfer Pricing
The World Customs Organization (WCO) has published guidance on the relationship between customs valuation and transfer pricing. This guidance is essential reading for any hub restructuring.
Key WCO Principles
- Customs value is based on transaction value at time of importation
- TP adjustments may affect customs value
- Need to understand the impact of TP adjustments on customs valuation
- Importance of controls and documentation
- Coordination between tax and customs teams
Practical Implications
- Design pricing mechanisms that minimize year-end adjustments
- Document the customs valuation approach
- Establish controls for TP adjustment impact
- Consider advance pricing agreements (APAs) that address customs
- Train customs and tax teams on the interaction
Consideration 3: Indirect Tax (VAT/GST) Chain
Hub contracting must not break VAT or GST recovery. The indirect tax chain is often overlooked in restructuring design but can create significant unrecoverable costs.
01
Confirm Registrations
Ensure the hub is registered in all necessary jurisdictions and that registration thresholds are monitored.
02
Place-of-Supply Rules
Understand where supplies are deemed to take place for VAT/GST purposes and whether the hub or customer must account for tax.
03
Import VAT Recovery
Confirm that import VAT can be recovered and that the recovery mechanism is efficient and timely.
04
Non-Recoverable VAT Risks
Identify any scenarios where VAT becomes a cost (e.g., exempt supplies, non-business use, registration gaps).
VAT/GST Chain Complexity: EU Example
If the hub is in the EU (e.g., Netherlands), the VAT chain can be particularly complex when flows involve multiple member states.
Intra-EU Supplies
Movements between EU member states may qualify for zero-rating if conditions are met, but require VAT registration and reporting in multiple states.
Triangulation
Three-party transactions involving different EU member states have special simplification rules but require careful structuring.
Call-Off Stock
Inventory held in another member state before sale has specific VAT treatment and registration requirements.
Consideration 4: Audit and Controversy Profile
Tax authorities will challenge "paper principal" hubs. Understanding typical audit challenges and preparing documentation is essential for successful implementation.
Why does the hub earn margin?
Authorities will ask: Who negotiated contracts? Who decided on supply allocation? Where are the traders physically located? What decisions are made at the hub versus elsewhere?
Are plants truly routine manufacturers?
Or do they bear market risk, capacity risk, or pricing risk? Inconsistent characterization creates controversy.
Documentation must match reality
Governance minutes, delegation of authority, pricing policy, risk management framework, and operational evidence must all align with the legal structure.
Documentation Needs to Match Reality
The gap between contracts and conduct is where most hub structures fail under audit. Documentation must reflect actual decision-making and control.
Governance
- Board minutes showing decisions
- Delegation of authority
- Risk management framework
- Pricing committee records
Operational
- Allocation decisions and rationale
- Pricing policy application
- Contract negotiation records
- Customer and supplier interaction
Transfer Pricing
- Functional analysis
- Benchmarking studies
- Intercompany agreements
- Annual TP documentation
Consideration 5: Operational Feasibility and Controls
Restructuring is not just a tax exercise. Operational changes must be feasible and sustainable. Many hub structures fail because operational complexity was underestimated.
ERP and Order-to-Cash Redesign
Systems must support the new contracting flow, invoicing chain, and inventory ownership model. This often requires significant IT investment and change management.
Incoterms and Inventory Title
When does title transfer? Who bears shipping risk? Incoterms must align with the intended risk allocation and customs treatment.
Trade Compliance
Sanctions screening, export controls, product classification, and origin determination become more complex with a hub structure.
ERP and System Changes
The hub structure requires significant changes to enterprise resource planning (ERP) systems and order-to-cash processes. Underestimating this complexity is a common failure point.
1
Current State
Sales entities order directly from plants. Plants invoice sales entities. Simple two-party transactions.
2
Hub State
Sales entities order from hub. Hub orders from plants. Plants invoice hub. Hub invoices sales entities. Three-party transactions with inventory ownership transfer.
3
System Requirements
New legal entities, new pricing logic, new inventory ownership tracking, new invoicing flows, new reporting requirements.
Trade Compliance Complexity
Sanctions and Export Controls
Hub becomes responsible for sanctions screening of all customers and suppliers. Export control classification of products. License requirements for controlled items. Denied party screening.
Product Classification
Harmonized System (HS) codes must be determined for customs purposes. Classification affects duty rates and may require expert determination. Errors create audit risk.
Origin Determination
Rules of origin for preferential duty treatment. Certificates of origin. Free trade agreement qualification. Non-preferential origin for trade remedies.
Recommended Approach: Staged Implementation
The safe route is staged implementation: lock down governance and legal terms first, pilot a region to prove customs/VAT/ERP feasibility, then scale globally. This reduces risk and allows for course correction.
1
Phase 1: Design
Define target operating model, contracts, governance framework, and documentation requirements. Align TP, customs, and VAT approaches.
2
Phase 2: Pilot
Implement in one region to test operational feasibility. Validate customs, VAT, and ERP design. Identify and resolve issues before scaling.
3
Phase 3: Scale
Roll out globally with monitoring and controversy readiness. Continuous improvement based on pilot learnings.
Phase 1: Design (Target Operating Model)
The design phase establishes the foundation for successful implementation. Rushing this phase is a common mistake.
1
Define Target Operating Model
What functions will the hub perform? What risks will it bear? What decisions will it make? How will it interact with plants and sales entities?
2
Draft Contracts and Governance
Intercompany agreements, delegation of authority, risk management framework, pricing policy, allocation methodology.
3
Align TP, Customs, and VAT
Ensure transfer pricing approach is consistent with customs valuation. Design VAT chain to minimize non-recoverable costs. Document the alignment.
4
Build Documentation Framework
What evidence will be needed for audit? What governance processes will create that evidence? How will documentation be maintained?
Phase 2: Pilot (Prove Feasibility)
Piloting in one region allows the group to test assumptions, identify issues, and refine the model before global rollout. This is where theory meets reality.
Pilot Objectives
- Validate operational feasibility
- Test ERP and system changes
- Confirm customs and VAT treatment
- Identify documentation gaps
- Measure implementation costs
- Assess stakeholder readiness
Pilot Success Criteria
- Contracts match conduct
- Systems support the flow
- Customs and VAT work as designed
- Documentation is complete and accurate
- Stakeholders are trained and ready
- Issues are identified and resolved
Phase 3: Scale (Global Rollout)
Scaling globally requires careful planning, monitoring, and controversy readiness. The goal is consistency between contracts, conduct, and documentation across all regions.
Rollout Planning
Sequence of regions, resource requirements, timeline, stakeholder communication, training programs, and change management.
Monitoring and Controls
KPIs to track compliance with the model, regular governance reviews, documentation audits, and continuous improvement processes.
Controversy Readiness
Anticipate audit challenges, prepare defense files, establish MAP readiness, and maintain consistent positions across jurisdictions.
Key Insights: Critical Success Factors
Based on experience with hub restructurings, these are the factors that separate successful implementations from failed attempts.
Success Factor 1: Substance Over Form
"The hub must genuinely control the risks it is compensated for bearing. Paper principals fail under audit."
Real People
Decision-makers, traders, and risk managers physically present at the hub location.
Real Decisions
Allocation, pricing, contracting, and risk management decisions actually made at the hub.
Real Documentation
Governance minutes, delegation of authority, and operational records that prove substance.
Success Factor 2: Operational Feasibility
Tax-driven restructuring that ignores operational reality will fail. The structure must work in practice, not just on paper.
Systems Must Support the Flow
ERP, order-to-cash, inventory management, and reporting systems must be configured to support the hub structure. This requires significant IT investment.
Stakeholders Must Be Ready
Sales teams, plant managers, finance teams, and customers must understand and accept the new model. Change management is critical.
Costs Must Be Justified
Implementation costs, ongoing operational costs, and complexity must be justified by the benefits. Not every group should implement a hub.
Success Factor 3: Customs and VAT Alignment
Common Failure Point: Groups design hub structures focused solely on transfer pricing and corporate tax, then discover customs and VAT issues that make the structure unworkable or prohibitively expensive.
Customs and VAT must be considered from day one, not as an afterthought. The interaction between transfer pricing adjustments and customs valuation is particularly critical.
Design for Customs
Stable pricing mechanisms, documented approach to TP adjustments, advance rulings where possible, and controls for duty impact.
Design for VAT/GST
Efficient recovery mechanisms, registration strategy, place-of-supply analysis, and minimization of non-recoverable costs.
Success Factor 4: Documentation and Governance
Documentation must be created contemporaneously and must reflect actual decision-making. Retroactive documentation created for audit is easily challenged.
What to Document
- Board and committee minutes
- Delegation of authority
- Pricing policy and application
- Allocation decisions and rationale
- Risk management framework
- Contract negotiation records
- Customer and supplier interaction
How to Document
- Contemporaneous creation
- Consistent with conduct
- Specific, not generic
- Signed and dated
- Retained and accessible
- Regular governance reviews
- Annual updates and validation
Success Factor 5: Controversy Readiness
Even well-designed hub structures will face audit challenges. Being prepared for controversy is essential.
01
Anticipate Challenges
What will tax authorities question? Where are the weak points? What evidence will be most important?
02
Prepare Defense Files
Organize documentation, prepare functional analysis, conduct benchmarking, and document commercial rationale.
03
Maintain Consistency
Ensure positions are consistent across jurisdictions. Inconsistent positions create double taxation risk.
04
MAP Readiness
Understand Mutual Agreement Procedure options and be prepared to invoke MAP if double taxation arises.
Brief Answer: Case Study Recommendation
For the UK-headquartered group with multiple manufacturing units facing weather-driven volatility, here is the recommended approach.
Preferred Invoicing Hub Locations
Two options are recommended, with no single right answer. The choice depends on where the group can genuinely locate decision-makers and build operational control.
Option 1: Singapore (APAC Principal Hub)
Preferred where the group's growth markets and supply allocation decisions are APAC-centric and where the group is willing to locate a real procurement and trading team in Singapore to control pricing, allocation, and contracting.
Option 2: Netherlands (EU Principal Hub)
Preferred where EMEA demand, logistics, and contracting are concentrated in or near Europe and the group can establish real substance and operational control in the Netherlands, with careful handling of EU VAT and customs chain complexity.
Key Consideration 1: Transfer Pricing Substance
Hub must genuinely control supply allocation and pricing policy, and bear and mitigate market and inventory risks consistent with its profit outcome. Plants' characterisation must be consistent (routine manufacturer vs risk-bearing producer).
Control of Risk
Hub must have capability and authority to control the risks it bears. Decision-makers must be present at the hub.
Functions Performed
Hub must perform the functions that justify its profit allocation. Procurement, trading, risk management, and allocation decisions.
Assets Employed
Hub must employ the assets necessary to perform its functions and control its risks. Systems, people, and infrastructure.
Key Consideration 2: Customs Valuation Interaction
If goods are imported, customs values are based on invoice prices. Year-end TP adjustments can create duty underpayment exposure, penalties, or difficult refunds.
Design stable pricing mechanisms and a documented approach to TP adjustments consistent with customs rules. Use WCO guidance on the interaction between customs valuation and transfer pricing.
The Risk
TP adjustments that increase transaction value after importation create duty underpayment. Penalties and interest may apply. Refunds for overpayment are difficult to obtain.
The Solution
Design pricing to minimize year-end adjustments. Document the customs approach. Consider advance pricing agreements that address customs. Coordinate tax and customs teams.
Key Consideration 3: Indirect Tax Chain
Hub contracting must not break VAT or GST recovery. Confirm registrations, place-of-supply rules, import VAT recovery, and any non-recoverable VAT risks.
Registration Strategy
Where must the hub register? What are the thresholds? How are registrations maintained and monitored?
Place of Supply
Where are supplies deemed to take place? Who must account for VAT? Are there reverse charge mechanisms?
Recovery Mechanisms
Can import VAT be recovered? How quickly? Are there any non-recoverable VAT costs in the chain?
Key Consideration 4: Audit and Controversy
Authorities will challenge "paper principal" hubs. Maintain governance minutes showing decision-making, contracts consistent with conduct, benchmarking and clear functional analysis.
Typical Audit Challenges
- Why does the hub earn margin?
- Who negotiated contracts?
- Who decided on supply allocation?
- Where are traders located?
- Are plants truly routine manufacturers?
- Do plants bear market or capacity risk?
Defense Preparation
- Governance minutes and delegation
- Functional analysis and benchmarking
- Operational evidence of control
- Consistent positions across jurisdictions
- MAP readiness if needed
- Regular documentation reviews
Key Consideration 5: Operational Feasibility
ERP and order-to-cash changes, inventory title points, incoterms, trade compliance, sanctions screening, and product classification must all be addressed.
ERP Changes
New legal entities, pricing logic, inventory tracking, invoicing flows, and reporting requirements. Significant IT investment required.
Incoterms and Title
When does title transfer? Who bears shipping risk? Must align with intended risk allocation and customs treatment.
Trade Compliance
Sanctions screening, export controls, product classification, origin determination. Hub becomes responsible for compliance.
Recommended Implementation Approach
Shortlist Singapore versus Netherlands and run a structured decision matrix based on where the group can put real decision-makers and build control over allocation and pricing, customs and VAT feasibility in key importing markets, and audit risk tolerance and documentation readiness.
1
Phase 1: Design
Define target operating model, contracts, governance, and documentation. Align TP, customs, and VAT approaches.
2
Phase 2: Pilot
Implement in one region to validate customs, VAT, and ERP design before global rollout.
3
Phase 3: Scale
Roll out globally with monitoring and controversy readiness. Continuous improvement based on learnings.
Decision Matrix: Singapore vs. Netherlands
Use this framework to evaluate which location best fits the group's specific circumstances and capabilities.
Final Recommendation Summary
The goal is consistency between contracts, conduct, and documentation. Success requires genuine substance, operational feasibility, and careful management of customs and VAT complexity.
Location Choice
Singapore for APAC-centric operations, Netherlands for EMEA-centric operations. Both require real substance and operational control.
Implementation
Staged approach: design, pilot, scale. Validate customs and VAT feasibility before global rollout.
Success Factors
Substance over form, operational feasibility, customs and VAT alignment, documentation and governance, controversy readiness.
Key Takeaways
01
Remote Work Creates PE Risk
Post-pandemic remote work is permanent and requires normalised PE analysis. OECD 2025 framework provides clarity through 50% benchmark and commercial reason test.
02
Tax Authorities Need Clear Guidance
Publish guidance, provide examples, define evidence standards, adopt risk-based approach, and coordinate across tax types.
03
Hub Restructuring Requires Substance
Paper principals fail. Real decision-makers, genuine control, and operational feasibility are essential.
04
Customs and VAT Are Critical
TP adjustments affect customs value. VAT chain must be efficient. Design for all three from day one.
05
Implementation Must Be Staged
Design, pilot, scale. Validate feasibility before global rollout. Documentation must match reality.
Questions?
Thank you for your attention. This presentation covered the tax implications of modern operating models, including remote work PE analysis and supply chain hub restructuring.
For further discussion on implementing these frameworks in your jurisdiction or organization, please reach out to continue the conversation.