UT parameters – Sales

“Sales” is the amounts received from selling anything outside the Business, grouped by the residence of the customer rather than the supplier.

Picciotto refers to the Business needing to have an establishment in the country of the customer, so it can be said that it is doing business there, but this is a much broader term than your normal Article 5 PE under current rules.  His paper is silent about sales to a customer in a country in which you have no establishment.

I was regarding the PE issue as just one aspect of the Sales factor, but it seems to be significant enough to deserve a post of  its own, so I’ve hived it off.

Inter-Business sales

Sales within a Business are ignored, but those to another group company outside the Business seem to count.  Where sales are cross-border, this would seem to raise the spectre of transfer (mis)pricing again.  One of my aims here is to eliminate transfer pricing as a consideration, but this is giving me some problems.  My approach with the definition of a Business was to say that there should be a threshold above which the level of transactions is sufficient to bring the two activities into the same Business, and below which the amounts are going to be insignificant and so are taken as booked.

I’m not entirely happy with this approach, but I can’t see a sensible alternative.  You either eliminate all the transactions by making the entire group into a single Business, or you allow multiple businesses but have to find some way of pricing related party transactions.  If we can do the latter properly then we might as well not bother with UT at all; if we take it as a UT axiom that this is not possible, sacrificing the idea of separate Businesses is the only way to go.  On the other hand like to preserve them where possible – if only to allow different formulary apportionments for different industries – so I’m going to compromise by using the Business split method above.

Recording sales

Where we have a commission-based model, what counts as sales?  Take a UK software reseller, dealing in products from a US company.  If we have a 10% commission, then you can look at this two ways: either the UK sales are 100 and cost of sales (which is disregarded to UT) is 90, or UK sales are 10.  The accounting treatment of this could dramatically affect the Sales factor in the UT formula.  For the moment I think I need to just stick with the accounting treatment and trust the accountants to come up with the right answer.

We also have a mismatch between groups and separate entities.  If the reseller were part of the same US Business that produced the software, then the whole 100 would be recorded as UK sales; if the reseller is a separate Business from the developer then even if we agree that only 10 is to be recorded as reseller’s sales, so with the 90 recorded by the developer all 100 is in the UK, the 90 is pulling in very different profits.  It’s hard to see the impact of this before I model it, but it’s a potential asymmetry that could cause a problem.

B2B transactions – goods

I’m not at all sure how one can track the destination of a sale by one global entity to another.  Say a US manufacturer sells goods to the UK-based purchasing company of an entirely unconnected retailer (via that company’s US branch office), which then sells them in the UK, France and Germany.  Where does the manufacturer record the sales?

1)       all in the UK

2)      all in the US, or

3)       in the UK, France and Germany?

I think (3) is unacceptable: it would rely on the retailer passing on its sales information, which is not only a commercial issue but would mean that the manufacturer is reliant on a third party to determine its tax position.  (2) seems odd, if none of the goods are being sold in the US, but then (1) seems odd as the manufacturer doesn’t really care where the goods end up if all the talking has been done in the US.

I ws hoping the CCCTB principles would help, but they are more about assigning sales to the right entity, rather than working out which country the sale should be allocated to.

The answer presumably lies in movement of goods, and VAT rules are probably helpful here: broadly, the supply of goods is where legal title to them changes.  So if the retailer takes control of the goods in the US and arranges shipping to the UK itself, then the sales are in the US.  If the manufacturer ships to the UK and the retailer takes over from there, then sales are in the UK.  And if the manufacturer ships to France, then the sales are in France.  This seems like a fairly simple rule to apply, although I can see it might be easy to game.

Of course we’re also in the slightly odd situation that when a US company signs a contract in the US with a UK company, this is a sale made in France.  If we regard this as the US manufacturer profiting from the French market for its goods then that seems reasonable, but that does rely on equating the shipping chain with the source of profit.  What if all the goods are shipped to Rotterdam, the retailer takes control there, and they are then sold in France and Germany?  If we call that Dutch sales then the Netherlands make something of a windfall gain.

This also seems to tie in very much to PE issues, as of course one UT axiom is that you can only have sales in a country in which you have a PE.  If our US manufacturer has no presence in Europe then things are going to be much simpler in one respect, but see my thoughts on PE.

A thought occurs: what if the shipping contract is such that the manufacturer has title to the goods when they’re loaded, then hands them over mid-Atlantic and the retailer is responsible for unloading?  It doesn’t happen now, so far as I’m aware – but if it had a major tax impact…?

B2B transactions – services

This seems trickier even than goods.  If a US consultancy sells advice to the European retailing group above, where does it do so?  We can’t follow anything tangible.  Possibilities:

– Where the staff providing the services are.  This kind of ignores the whole point of UT.
– Where the providing company is resident.  Even worse.
– Where the purchaser makes use of the services.  This is a bit vague and hard to define, and it may be hard for the taxpayer to get any reliable information.
– Where the purchaser under the contract is based.  This is clear, but means that the sales get concentrated into one place even if they’re global.  It would also seem to let a business purchaser dictate where the provider pays tax, which may permit abuse.

I think the only coherent answer is to look at the contracting entity, and then maybe see if any safeguards are needed.

Initial conclusions

Follow the accounting recognition of sales.

Intra-Business sales are ignored.  Sales between related businesses are recorded at the accounting values, which should be reasonable.

Sales of goods are allocated to the country in which legal title to the product changes hands.

Sales of services are allocated to the country in which the purchaser under the contract is resident.

See the PE post for what to do if sales are made to a country in which there is no PE.


This is an area that is fundamental to UT, but seems very hard to pin down once you start looking at it in any detail – especially on the B2B side, and of course one of the points of UT is to address the taxation of large businesses.

I note that Clausing and Avi-Yonah in 2007 suggested that using VAT principles would make life easy, but then didn’t follow that through.   I haven’t found anything else that goes much further than saying “allocate sales by destination”.  If anyone knows of any further work in this area, it’d be good to have a look at it.


4 thoughts on “UT parameters – Sales

  1. Re your worries about where title would pass – I think that may be a bigger issue than you feared. It’s been a while since my Masters in International Commercial Law, but terms like FoB and CIF ring bells, as does the existence of things called ‘honour policies’, which are needed where tankers full of oil/grain etc change hands half a dozen times during the course of a voyage. As with my concerns about wider impacts if you muck up the economics of crewing goods vessels, putting a brake on commodities trades could be somewhat counter productive – or, it might be the place where the most ‘gaming’ goes on.

    • I think it’s a very significant issue. If you take a simple set of rules it is perfectly possible to profit-shift even simple transactions: all you need to do is get your customers to set up a purchasing company in a tax haven, rather than setting up your own sales company there. Promise them a small discount for doing so, and Bob’s your uncle.

      More complex situations like the ones you describe make life even harder.

  2. Thanks for your responses Andrew – I’m conscious my last few posts might look as though I’m trying to kick holes in the methodology; it’s more a case of trying to understand how we could actually make it work without breaking international trade. Trade and accounting are mutually intertwined and inseparable; currently , tax (which impacts trade) follows the existing accounting. Cutting that tie potentially drops both baby and bathwater straight into the middle of an enormous can of worms; a deliberately unpleasant mental image which I feel it would be best to try to avoid.

    • Oh, kick away, as much as you like. I don’t have a coherent methodology as yet (though I’m working on it!), so the more you kick now the better I can make sure that anything I do propose would avoid your boots (if you see what I mean…).

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