cross-border logistics Archives

The challenge of taxation in cross-border logistics investments is one of the most important to overcome as a fund manager.

The international logistics industry, which includes warehouses and distribution centers, ports and transport systems, is both appealing in terms of returns and a challenging array of tax regimes, regulations, and reporting policies.

A clear understanding of these issues is not merely an administrative requirement but a strategic one to ensure the best returns possible and that no expensive fines are incurred. Fund managers should not only consider the headline figures of the deal but also look deeper into the tax implications.

The Basic Dilemma: Double Taxation

The main taxation issue in cross-border investments is: there is a possibility of being taxed twice. This arises when the same income or gain is subjected to taxation by more than one country.

To a logistics fund, it may mean the country in which the physical property (such as a warehouse) is situated, and the country in which the fund and its investors are domiciled, both seeking to force their way to the pie.

Fund managers are also required to overcome the difference between direct investment and portfolio investment. A direct investment, where the investor exercises a considerable level of control over the asset, can be taxed differently from a portfolio investment, where the investor is passive.

This is a crucial distinction in a logistics sense, with fund structures usually obliterating these boundaries.

Key Tax Considerations for Fund Managers

Entity and Fund Structuring

The most important and first step is to select the appropriate legal structure of the fund. Pass-through entities, such as limited partnerships or limited liability companies, are usually utilized by fund managers so that the entity is not subject to entity-level taxation. This is because the fund itself is not taxed, but the profits and losses are directly transferred to the investors themselves, who then must pay taxes in the respective jurisdictions.

The pass-through nature is however not always that simple. A foreign entity might not be treated as a pass-through by some countries and might be subjected to an extra level of taxation. The selected structure should also be in accordance with the tax statute of the home country, as well as the host country where the assets are situated.

Withholding Taxes and Tax Treaties

An income that is earned by a logistics property, such as rental income or the sale of a property, may be subject to withholding tax in the host country and not distributed to the fund. It is a tax charged at the point of payment that can differ significantly across countries.

This is where DTTs come in handy. DTTs are treaties between two countries to prevent double taxation by either:

It involves exempting the income from tax in one country.
Allowing the investor to receive a tax credit in the home country, based on the payment of taxes in the host country.

A fund manager should be well conversant with the DTTs between the domicile of the fund, the domicile of the investors, and the location of the logistics assets. A properly organized fund can use these treaties to reduce withholding taxes and assure investors that they may claim the relevant tax credit.

3. Taxes on Operations and Real Estate

The logistics industry is a property-heavy industry, and this introduces a series of property taxes. These can include:

Property taxes: There is an annual tax as an amount of the value of land and buildings.
Transfer taxes: One-time taxes on the transfer or sale of property.
Capital gains tax: A tax on the gain on the disposal of assets.
VAT/GST (Value-Added Tax/Goods and Services Tax): The taxes levied on the value of goods and services that may be imposed on the lease or sale of the commercial property; it may depend on the jurisdiction.

As a fund manager, knowing that these taxes exist is not sufficient. You must simulate the effect of these taxes on the expected returns of the fund. A seemingly lucrative deal can quickly become unprofitable if a fund hasn’t accounted adequately for significant property transfer or capital gains taxes.

4. The OECD’s Two-Pillar Solution and BEPS

One significant evolution is the Two-Pillar Solution proposed by OECD (Organisation for Economic Co-operation and Development), which targets the tax issues of the digitalized economy but has broad implications for multinational companies. Pillar One is concerned with redistributing taxing rights to market jurisdictions, which may affect funds where the logistics are heavily dependent on digital or e-commerce.

Pillar Two proposes a minimum corporate tax rate of 15 percent on large multinational companies around the globe. Most logistics funds are not directly involved in this, although the regulations are complex and may impact the portfolio companies and their local operations through the fund.

Fund managers need to keep up with these, among other efforts, including the Base Erosion and Profit Shifting (BEPS) project that seeks to reduce tax avoidance efforts.

Best Practices for Fund Managers

To navigate through this challenging environment, fund managers should:

Perform adequate tax due diligence: This is something that should be part of the investment, rather than an afterthought. Involve tax specialists early to determine the tax implications of each of the possible deals and structures, particularly those offering tax services for fund managers.
Optimize fund and investment structures: Select a legal structure that is tax-neutral to investors, minimizes tax leakage, and ensures adherence to all local regulations.
Leverage tax treaties: Learn about the system of DTTs and their terms. This can significantly reduce withholding taxes on distributions, while also being tax-efficient for fund investors.
Keep abreast with international tax reform: The tax regime in the world is not standing still. To prevent surprises and adjust strategies to new regulations and reforms, it is crucial to continuously observe new rules and changes.

Conclusion

The global expansion of e-commerce and supply chains has made cross-border logistics investments an interesting frontier for fund managers. There is, however, an elaborate tax hurdle on the way to successful investment.

Identifying the risks of double taxation early, ensuring that the fund is appropriately structured, and keeping fund managers informed about developments in the international tax field will enable them to turn what could be a burden into a strategic benefit and achieve a more efficient and profitable result.

EDRIAN BLASQUINO

Edrian is a college instructor turned wordsmith, with a passion for both teaching and writing. With years of experience in higher education, he brings a unique perspective to his writing, crafting engaging and informative content on a variety of topics. Now, he’s excited to explore his creative side and pursue content writing as a hobby.

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As we look back on the year, the supply chain and logistics industry received more attention than ever before as it faced a myriad of challenges and circumstances. As we look towards 2022, here are some of the top trends and priorities to keep an eye on in the year ahead from Nuvocargo, the first digital freight forwarder and customs broker for US/Mexico trade.

Platformization and integration of data across the whole supply chain. The pandemic pushed the adoption of digital platforms lowering the friction to try new solutions that will drive migration from informal and manual communication platforms to specialized products that make their workdays more “automagical” by providing one source of truth and higher visibility. According to a report by Alloy Technologies Inc., 92 percent of executives agree supply chain visibility is important to success, only 27 percent have figured out a way to achieve it. This means, we may see a shift from discrete software to manage specific use cases (TMS and warehouse software) to platformization and integration of data across the whole supply chain, which will increasingly make operations smoother and companies more competitive. To achieve this, blockchain technology can be used to integrate all supply chain components in one platform and offer more transparency in the process.

Vetting suppliers and vendors based on resilience and adaptability. With digitalization revolutionizing the logistics industry and bringing about more efficient processes, information exchange and visibility, we will see the industry shifting into a careful selection of partners based on their technological aptitude and insights. This will strongly be the case for Mexico since new tax regulations are forcing companies to adapt and optimize their processes in order to comply. Smaller carrier companies will struggle to comply with requirements when dealing directly with clients without the technical infrastructure of brokers. The accounting team of every logistics company will be put to the test and the ones that manage to leverage efficient and automated processes will avoid the crisis of on-time compliance for every shipment. From that angle, staying competitive will require a stricter filtering system of logistics partners and suppliers.

Regionalization of supply chain and nearshoring. Organizations have been impacted by COVID-19 supply chain disruptions which have led companies to find suppliers closer to home to reduce costs and be less affected by more complex logistics or uncertainties. McKinsey’s report on the coronavirus effect on global economic sentiment says that uncertainty over COVID-19 is no longer executives’ foremost economic worry. Instead, they perceive the mounting fallout on the supply chain and inflation as the biggest threats to growth in their companies and economies.’ “Companies have learned the importance of being agile, adapting and solidifying to be able to thrive in volatile and unpredictable environments. That includes a restructure of the business core, technological implementation, regionalization, partners, etc.,” says Anaid Chacón, Head of Product of Nuvocargo. “Businesses have already started implementing new strategies over their supply chains and we can expect these shifts to continue in the coming years.”

Creative and technological solutions to address driver shortage. Delayed delivery is the accumulation of many factors. According to the American Trucking Associations (ATA), in order to keep up with the current economic demand, more than a million truck drivers will have to join the industry. In 2022, we will see how the industry fills this need by tapping into talent from other areas or demographics with previous low representation among drivers. A 2019 US Department of Transportation report states that 28 percent of the current heavy truck driving workforce will be 65+ years in the next decade. This means that the industry will have to promote and offer more benefits to younger people and women since the current average US truck driver is 48 years old. We may also see solutions based on process automation or self-service systems for customers to deal with these labor shortages. Autonomous trucks are also on the rise since large transport lines are starting to buy and test efficiency and costs.

Innovative financing solutions for the supply chain. Continuously offering partners alternatives that will help finance their operations and improve their cash flow will benefit all parties in terms of incrementing capacity and in keeping the supply chain moving. “Our data collection and experience has taught us the pain points of our partners who have high expenses, get paid 30 to 60 days after delivering shipments, and often need loans with high fees to continue operating,” says Chacón. “This is an industry-wide condition that requires attention if we wish to continue strengthening and growing the industry. Financing is one of the solutions to cash flow unpredictability that is required to respond to demand spikes.”

Greener supply chains. Logistics and transportation companies are pushing environmental efforts to make their supply chain less invasive or harmful. This may include eco-friendly warehouses with advanced energy management systems, climate-smart supply chain planning, etc. We can expect these initiatives to continue rising and becoming more sophisticated over time.

How Cross-Border Logistics Investments Are Taxed: What Fund Managers Need to Know