Agent scheme: tax and other risks
Today's situation is such that only the lazy does not write about tax optimization schemes. However, in business everything is interconnected and schemes need to be analyzed not only from the perspective of the Tax Code.
Circuit description
In the case under consideration, there was an attempt to “legitimize” the agency agreement for the separation of large and medium wholesale. LLC “Warehouse and Purchase” ships to several large customers with high turnover and low margin. Through the Agent go all other sales with a normal margin. The loan agreement in this case solves the main operational problem of the agent scheme, which is silent in tax reviews. All profits are accumulated in LLC Torgovy Dom, and the need for working capital in LLC Warehouse and Purchase.
The only participant and director of Warehouse and Purchase LLC is the head of the procurement department. Control of decisions is carried out through a corporate agreement in which the second party is Trading House LLC as a creditor of the company. A 100% interest is pledged under a long-term loan agreement provided by Warehouse and Purchase LLC. The participant of Trading House LLC is the owner of the entire business. The director of Trading House LLC is the head of the sales department.
Tax optimization
There is no VAT optimization in this scheme. Actually, this minus will soon become a rudiment, because there is still no legitimate VAT optimization, and the risks of all other options for optimizing the value added tax will soon be incompatible with business. It will be easier to win money in a casino.
Through the payment of agent fees, 20% of income tax is replaced by 6% of simplified tax.
Insurance premiums from the salary fund of the sales department are also reduced, but not more than 50% of the amount of the simplified tax (clause 3.1 of article 346.21 of the Tax Code of the Russian Federation).
Tax risks are possible in terms of additional charge of income tax. The apparent interdependence of legal entities is not in itself a problem. And even a loan agreement here is not critical (although it may seem so at first glance). If all employees are sitting in the same office, working under the same leadership, reporting is done by one chief accountant, both companies have one contract for corporate cellular communications, the Internet, clean water, office, and an agency contract is gathering dust somewhere on the shelf, being signed only for that in order to show it to the reviewer - in such a situation, even without a loan agreement, the tax benefit from crushing will be considered unreasonable.
In this case, companies sit in different offices, have independent rental agreements with service providers. The director of Warehouse and Purchase LLC is not nominal, has sufficient freedom in choosing suppliers of goods and independently conducts all negotiations (like any head of the supply department). The owner of the company LLC “Warehouse and Purchase” is managed only within the framework of the corporate agreement and the general meeting of participants. Only Trading House LLC employees work with clients of Trading House LLC. In this situation, when we have two independent business entities, additional tax on profits only on the basis of the existing long-term loan agreement is unlikely.
An additional issue is the recognition of interest under a loan agreement as part of the expenses of Warehouse and Purchase LLC. To reduce risks, you need to pay them regularly under the contract, and not just charge them.
Asset protection
Trading companies, due to the specifics of their assets, are not the tidbit for raiders. Rather, it is necessary to defend oneself from “internal enemies”. What has been done in this case?
Director of Warehouse and Purchase LLC does not have the authority to conclude contracts for the sale of goods. He has the authority to sign implementation documents only with respect to certain customers. Since the company has only a few regular customers, this limitation does not affect the company's operations. For any interaction with one-day firms, including with a view to transferring assets, the director of Warehouse and Purchase LLC, by virtue of its status, bears full responsibility, up to the criminal one.
The pricing for Trading House LLC is governed by an agency agreement. It is impossible to sell goods below price. The expenditure part of Torgovy Dom LLC has a conditionally permanent composition (payroll of the sales department and service providers) and is determined by the budget approved by the owner on a monthly basis. Based on Art. 1005 of the Civil Code of the Russian Federation in a transaction made by an agent with a third party on its behalf acquires the rights of an Agent. Thus, incoming cash flow and receivables are controlled by the business owner. The requirements of Warehouse and Purchase LLC for the shipped goods are leveled by counterclaims under a long-term loan agreement with the corresponding covenants.
Operational efficiency
The economic disadvantage of the agency agreement is the document flow. For each implementation, the package of documents is tripled: in addition to shipping, the client must issue the same shipment from the Principal and issue the Agent's report.
The main advantage of an agency contract is its scalability. Regardless of the turnover, the Agent automatically “takes” the necessary part of the margin. That is, unlike other ways to increase the expenditure side (royalties, interest on a loan), an accountant at the end of the reporting period does not need to adjust expenses to the revenue. Royalty payments can also be made dependent on sales, but royalties are a passive way of promotion, that is, in any case, the remuneration under an agent agreement can be made large with less risk.
In the case under consideration, the separation was not carried out “artificially”, but the logistic function was separated from the sales one. The main factors of profit formation of a trading company - the profitability of the transaction and the conversion of the sales funnel - were divided by different legal entities and became indicators of the performance of directors. Responsibility for these indicators is transferred from the sphere of labor legislation to the civil law plane. This has enhanced overall business manageability.
In addition, in terms of the relationship between the owner and director of Warehouse and Purchase LLC, the corporate agreement implemented the motivational model “a la option” (more on this later). For this, the contract provides for two points:
1. if the company’s profit exceeds a certain value, additionally earned funds by the decision of the director can be sent to repay the loan;
2. After reducing the amount of a long-term loan below a certain limit, the director can make most decisions on his own, without agreement with the creditor.
The decision to conclude a contract with another Agent remains in the sphere of influence of the creditor until the loan is fully repaid. As well as a guarantee of a share.
Management Accounting and Financial Planning
I already wrote that legally well-formed relationships can easily be violated by “double” accounting, whose task is to show “everything that is hidden”. In this case, the classical methodology offers a unified accounting base, consider the margin between the Principal’s input price and the selling price from the Agent, and carry out the agency fee as intra-group transactions that do not affect the financial result. Needless to say, such management accounting clearly shows the artificiality of fragmentation.
In this case, the correct structuring of the business allows you to effectively solve the issue of managerial accounting - to collect a picture for the entire group of companies for the owner on the basis of routine accounting without “double” bookkeeping.
1. A financial model of the business was composed of two companies. Parameters are defined so that a complete picture of the business develops on the Agent. The assets of the Agent will include cash and financial investments, which are a loan to the Principal and correspond to the value of the working capital of the business (inventories and total receivables). These assets are formed at the expense of the owner’s investments (according to PBU it will be the authorized and additional capital) and retained earnings, which, as we recall, almost all are accumulated on the Agent. That is, we received from the regulated reporting of the Agent clear to the owners, banks, investors and any other users a transparent consolidated report on the state of the business. Note: in addition to the indicated articles, it contains the amount of the receivables of the Buyers of the Agent, which, according to the agency agreement, should be transferred to the Principal, and therefore coincides with the amount of accounts payable and the reporting does not distort.
2. Withdrawing all profits to the Agent is quite risky. In the case under consideration there was such a feature: the owner annually “reserved” (in a managerial rather than an accounting sense, that is, mentally set aside for possible losses) up to 15% of the estimated net profit on current assets (warehouse illiquid assets, rising prices for goods, irrevocable receivables debt). The compiled financial model of the business made it possible to select the parameters for structuring the business in such a way that the profit left on the Principal was within 15% of the total net profit. That is, to implement the "reservation" not mentally, but in different balances.
The Agent’s accounting profit became the net managerial profit, and the Principal’s accounting profit became the working capital reserve (write-offs of illiquid assets or non-repayable receivables according to RAS are made at the expense of the Principal’s profit, in the managerial sense, from the created reserves, which was to be achieved).
3. The balance sheet of the Principal also turned out to be transparent from a managerial point of view. Working capital for granting a deferment to customers we partially take from suppliers (line 1520). The rest of the receivables, together with inventories and the current account is formed from borrowed funds - the essence of the owner’s investment and accumulated reserves.
4. The developed model of managerial accounting allowed not only to formulate KPI for the top manager (director of Warehouse and Purchase LLC) based on the indicators of routine reporting, but also to model an optional motivation scheme. Director of Warehouse and Purchase LLC must ensure the functioning of the company due to initial investments and limited annual replenishment (reserves).
Profit earned in excess of a certain indicator (reserve ratio), the director can redeem the business from the owner by sending funds to repay the loan. Since in the created design the main margin settles in the Agent, then the director will not be able to earn on increasing sales. The only way to increase profits is to increase the efficiency of logistics operations and the turnover of own funds. Which is the main goal of the motivation program.
In the event that your litigation or other dispute, contractual work or any other form of activity concerns the issues discussed in this or our other material, we recommend checking and making sure that your legal position complies with the latest changes in practice and legislation.
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August 18, 2017
Kirill Soppa, partner. I am engaged in taxes, I like to build business processes. I am writing articles, looking for interesting information and suggest ways of its practical use. I believe that thanks to high-quality legal analytics, clients come to a law firm, and not vice versa. Do you agree? Then let's be friends on Facebook.
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