The debtor-creditor relationship is usually quite straightforward: the debtor pays a debt to the creditor thereby satisfying his or her contractual obligations to the latter.
In some cases, however, this relationship is complicated by the involvement of a third party. As a compliance officer, you should ensure that the appropriate procedures and control mechanisms are in place to deal with this type of structure. This blog post briefly outlines the legal consequences of third-party involvement in the debtor-creditor relationship.
Cases of third-party involvement
Take for example the centralisation or outsourcing of billing. Many corporate groups try to centralise their billing activities within a specific entity or decide to outsource them altogether. Likewise, when a customer makes an online purchase, the payment almost always passes through a third party first, such as PayPal, before ending up in the seller's hands.
Supply chain management and overhead functions are other examples of activities that are often centralised. In fact, almost all activities can be centralised, such as purchasing (to obtain better conditions), the payment of membership dues (in lobbying organisations, chambers of commerce, etc.), and IT, accounting and HR services. The main purpose of centralisation is to ensure a better overview of expenses within the group. Centralised accounting is a practical solution for larger corporate groups, in order to ensure consistent billing throughout the group. Finally, cash pooling is also widely used within multinational groups. Typically, such groups create one or more "group banks" in order to streamline cash flows and grant intra-group loans. It should be noted that cash pooling has regulatory and tax consequences (e.g. withholding tax on interest and corporate tax).
Legally speaking, there is nothing wrong with this type of structure. However, it is important to be aware of the potential pitfalls.
Civil and criminal consequences
When a third party steps in to pay a bill on behalf of another person or company, it will need to verify certain items of information, such as the identity of the parties and whether the transaction has effectively taken place. Another important issue that needs to be checked is whether the transaction had a legitimate object and cause. In extreme cases, a third party could accidentally implicate itself in unlawful business practices, for example transactions involving bribes or illegal substances, and be held liable as an accessory for corruption or forgery.
Another issue which springs to mind, particularly in multinational companies, is the difficulty of keeping up with regional compliance requirements. Even though many compliance issues are regulated at the European level, there are often slight differences between Member States and, in the case of Belgium, between the regions and the communities (such as linguistic requirements). Companies that wish to use a centralised billing and accounting system must bear in mind the various compliance requirements which may apply to different branches of the group.
In the case of a third-party payment recipient (such as PayPal or a factor), certain points should be kept in mind as well. In this regard, it should be noted that PayPal is merely a platform used to facilitate payments, while factoring entails a transfer of the original claim (i.e., the third party is subrogated to the creditor's rights).
This type of tripartite transaction has become increasingly common with the rise of online shopping. However, since such transactions provide a certain degree of anonymity to the parties involved, they may be used to circumvent the customer due diligence rules for money laundering purposes. New blockchain technologies and cryptocurrencies can also be used in money-laundering schemes. In response to these threats, the European Commission launched in February of this year the EU Blockchain Observatory and Forum to highlight key developments in blockchain technology, promote European actors, and reinforce European engagement with multiple stakeholders involved in blockchain activities and take initiatives to keep them safe. More information can be found here.
In short, the use of a third-party payment service can entail compliance risks. There are of course ways to mitigate the risks. A company using such a service should have its own due diligence procedures and keep records of its customers. It is also advisable for compliance officers to be well versed in the issue of money laundering and the possible sanctions. In addition, all staff who are liable to be involved in these types of transactions should receive the necessary training to be able to spot red flags, such as conflicts of interest. When staff are aware of the risks and able to do a preliminary screening, many compliance shortcomings and potential liability can be avoided.
The Ruling Commission has already rendered several decisions with respect to re-invoicing within a corporate group or to unrelated parties (in the framework of supply chain processes). From a tax law point of view, there is nothing wrong with paying an invoice for a third party (be it a natural person or a legal entity), provided the translation has sound and genuine grounds and is not carried out for the purpose of tax evasion.
However, a number of points should be kept in mind when settling an invoice for goods or services provided to another party:
- It is important to make sure that the recipient does not owe taxes or social security contributions. Under certain circumstances (including in the construction and meat processing sectors), the payer can be held personally liable for such arrears. Check www.checkinhoudingsplicht.be to see if the invoice can be settled.
- Make sure the invoice is genuine and relates to goods or services that were actually provided or delivered. If the invoice is not genuine, it will not be possible to claim back VAT or deduct the cost for corporate tax purposes.
- Make sure the correct VAT rules are applied to re-invoicing schemes. Depending on the situation, it may or may not be possible to claim input VAT (on invoices paid) or to be held liable for additional output VAT (e.g. VAT was applied to the full amount but this amount was not invoiced);
- If the full amount is not re-invoiced, the tax authorities may deem the non-invoiced amount to be a non-arm's-length benefit and add it to the payer's corporate tax base. This rule is only applied, however, in the case of re-invoicing to a company that is not located in Belgium. In practice, therefore, it is important to be careful when waiving (in whole or in part) the debts of group or unrelated companies.