RIPE NCC Tax Position
for 1998 and Beyond |
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Paul Ridley
RIPE NCC
Version 1.0
Document ID: ripe-165
See also: ripe-161, ripe-164
Date: 8 September 1997
Obsolete
Contents
- Scope
- Status
- Introduction
- RNA Set Up Phase
- Personnel Fund
- General Operations
- Clearing House
- Clearing House Example
- Personnel Fund
- Summary
1. Scope
At the RIPE NCC contributors meeting in September 1996 the NCC were asked to
seek ways in which to minimise the paying of company tax. This document,
ripe-165, answers that request within the framework of the proposed new
RIPE NCC organisation (hereafter referred to as RNA). This document is
a companion document of ripe-161
(The de facto organisational rules of the RIPE NCC-new organisation).
The aim of this document is to detail the tax position of the RNA during
its set up phase and during its general operations. The intended audience
of this document is the RIPE NCC contributors, the TERENA
General Assembly, and any interested parties. Comments to the authors
are welcome.
2. Status
This document is still in draft form. A definite version of this document can
only be given once the Dutch Tax Authorities (Belastingdienst)
have made a written statement as to their position on the taxes of the
RNA. At present they have verbally agreed to all aspects, and have given
written agreement to all set up phase issues.
3. Introduction
There are two separate tax issues regarding the RNA; firstly the tax implications
of the set up of the RNA and the transfer of funds from TERENA;
and secondly tax agreements regarding general operations following the
set up phase. Each of these issues will be detailed in turn. When explaining
each point it will be stated as to the present level of commitment by
the Dutch Tax Authorities, and where applicable the expected decision
by them.
4. RNA Set Up Phase
During the set up phase of the RNA i.e. the period up to 1 January 1998, funds
will have to be transferred from TERENA
to the RNA. These funds take the form of:
- - fixed assets: computers, furniture, and building infrastructure
- - current assets: cash, debtors
- - goodwill
- - pre-payments / accrued income
These funds can be liable to two various forms of tax: company tax, and succession
tax. Company tax is levied at 35% and succession tax is levied up to a
maximum rate of 65%.
The Dutch tax authorities have agreed that the value of the funds to
be transferred will be that stated in the "RIPE NCC Project" balance sheet,
which is part of the audited TERENA
annual accounts, as at 31 December 1997. With regard to the goodwill asset,
the tax authorities have agreed that this will have nil value. They have
also agreed that the transfer of funds will not be liable to any company
tax or succession tax. Therefore the initial transfer of funds will be
free of any form of tax. All these agreements with the tax authorities
are formal written statements.
5. Personnel Fund
It is proposed that in addition to the RNA another organisation is started.
This organisation would be a foundation called the 'RNA Personnel Fund'.
A personnel fund is of benefit to the RNA since it gives the employees
a sense of security should the RNA run into difficult times. This security
will make it more likely that employees will stay on working in the difficult
times instead of immediately leaving and finding alternative employment.
If a mass exodus of employees would occur during difficult times then
the RNA would not be able to function, thus endangering the stability
of the European Internet. Therefore it is felt that this fund gives the
RNA far more stability and thus gives all contributors a more guaranteed
level of service. It is proposed to start this foundation whilst future
RNA employees are still employed by TERENA.
This fund would build up reserves with the aim of being able to give RNA
employees some compensation should the RNA cease operations for whatever
reason. The reason to put this fund in a separate foundation is so that
in the event of bankruptcy the staff would still receive this benefit
since it is not an asset of the RNA. The RNA would administer the foundation
but the funds in it could only be used for the designated purpose of paying
the staff should RNA operations cease. Any RNA employee who leaves the
organisation in the normal course of her/his career has no right to any
funds in the 'RNA Personnel Fund'. The tax authorities have given written
approval that any transfer of funds TERENA
may do to the 'RNA Personnel Fund' would be free from both company and
succession taxes.
6. General Operations
During operations of RNA, the objective is to minimise company tax payments
by avoiding any surplus which is liable for company tax. Another essential
objective is for the RNA to ensure that at all times a prudent amount
of working capital is available.
The RNA aims to be a not-for-profit organisation and therefore does not
aim to build up surpluses or be liable for company tax. However in order
to be financially prudent the RNA should, when budgeting, not overestimate
income or underestimate costs. This prudent financial management coupled
with the need to keep working capital and personnel fund reserves at desired
levels will normally lead to an excess of income over expenditure at the
year end. This surplus will be used for the purposes of building up the
personnel fund reserves (detailed later) and keeping working capital at
desired levels.
7. Clearing House
To avoid having to pay company tax on any surplus destined for working capital,
the RNA will operate a clearing house system. The clearing house system
works by setting up current accounts for every RNA contributor and reducing
any profit or loss to nil by means of either crediting or debiting these
accounts.
The RNA itself administers these current accounts. This system has been
verbally agreed to by the tax authorities but as yet no written confirmation
of that agreement has been received.
8. Clearing House Example
The system is best illustrated by an example. In this example there are initially
10 contributors, five "A" contributors who pay ECU 10,000 per year, and
five "B" contributors who pay ECU 5,000 per year. It is assumed that contributions
for years 1, 2 and 3 stay fixed at these rates. It will also be assumed
that any surplus referred to in the example will be surplus left after
any funds have been transferred to the personnel fund.
- Year 1
- The total income for the year 1 is ECU 75,000. Assume the expenditure for
the same year is ECU 60,000, giving a surplus of ECU 15,000. In order to bring
the surplus level to nil the ECU 15,000 surplus is distributed to the contributor
current accounts. The distribution is based on the individual amount of contribution
paid. At the end of year 1 "A" contributors have been credited ECU 2,000 each
and "B" contributors ECU 1,000 each. Therefore the current accounts have the
following balances:
-
-
"Year 1 'A' contributors" ECU 2,000
"Year 1 'B' contributors" ECU 1,000
__________________________________________________________
Cumulative total of current account balances ECU 15,000
- Year 2
- In year 2 the contributions stay fixed but Year 1 contributors get a refund
on their contribution. The level of the refund given is determined by the
amount of working capital needed. Suppose the working capital, i.e. the cumulative
total of current account balances needed at the end of Year 1 is ECU 7,500,
thus a total refund of ECU 7,500 could be given. This refund difference is
made up from money in the current accounts. "Year 1 'A' contributors get a
refund of ECU 1,000 and "Year 2 'A' contributors" get a refund of ECU 500.
This results in the following current account balances.
-
-
"Year 1 'A' contributors" ECU 1,000
"Year 1 'B' contributors" ECU 500
__________________________________________________________
Cumulative total of current account balances ECU 7,500
At the beginning of year 2, one new "A" contributor and one new "B" contributor
join. All "A" contributors pay contributions of ECU 10,000 and "B" contributors
ECU 5,000. Therefore the total income for year 2 is thus ECU 90,000. (Note:
In practice any refund given will be deducted from the contribution bill paid)
Assume that expenditure for the same year is ECU 72,500, giving a surplus
of ECU 18,000. In order to bring the surplus level to nil the ECU 18,000 surplus
is distributed to the contributor current accounts. The distribution is based
on the individual amount of contribution levied in year 2. At the end of year
2 "A" contributors have been credited ECU 2,000 each and "B" contributors
ECU 1,000 each. Taking into account the balances at the beginning of year
2, the current accounts have the following balances at the end of year 2:
-
-
"Year 1 'A' contributors" ECU 3,000
"Year 1 'B' contributors" ECU 1,500
"Year 2 'A' contributors" ECU 2,000
"Year 2 'B' contributors" ECU 1,000
_________________________________________________
Cumulative current account total ECU 25,500
- Year 3
- In year 3 the contributions stay fixed, but Year 1 and 2 contributors get
a refund on their contribution. Suppose the level of working capital needed
at the end of Year 2 is set at ECU 16,500, thus a total refund of ECU 9,000
can be given. The level of working capital needed is higher than the year
before since Year 3 looks as though it might be an unstable year. This refund
difference is made up from money in the current accounts. "Year 1 and 2 "A"
contributors" get a refund of ECU 1,000 and "Year 1 and 2 "B" contributors"
get a refund of ECU 500. This results in the following current account balances:
-
-
"Year 1 'A' contributors" ECU 2,000
"Year 1 'B' contributors" ECU 1,000
"Year 2 'A' contributors" ECU 1,000
"Year 2 'B' contributors" ECU 500
_________________________________________________
Cumulative current account total ECU 16,500
At the beginning of year 3, two new "A" contributors and two new "B" contributors
join. All "A" contributors pay contributions of ECU 10,000 and "B" contributors
ECU 5,000. Therefore the total income for the year 2 is ECU 120,000. Assume
the expenditure for the same year is ECU 132,000, resulting in a loss of ECU
12,500. In order to bring the loss level to nil the ECU 12,500 loss is recovered
from the contributor current accounts. The recovery is based on the individual
amount of contribution paid in year 3. At the end of year 3 "A" contributors
have been debited ECU 1,000 each and "B" contributors ECU 500 each. Taking
into account the balances at the beginning of year 3, the current accounts
have the following balances at the end of year 3:
-
-
"Year 1 'A' contributors" ECU 1,000
"Year 1 'B' contributors" ECU 500
"Year 2 'A' contributors" ECU 0
"Year 2 'B' contributors" ECU 0
"Year 3 'A' contributors" ECU -1,000
"Year 3 'B' contributors" ECU -500
__________________________________________________
Cumulative current account total ECU 4,500
It is stressed that this is only an example and that giving a refund to present
contributors is dependent upon the level of current account balances at
that time and the wished for level of working capital. The obvious aim
to keep the current account balances and thus working capital in a healthy
positive state so as to maximise stability. The clearing house system
allows the RNA to make use of the current account reserves by being able
to make a loss if needs be. This has the large advantage that no company
tax has to be paid. If a contributor leaves the RNA then they are entitled,
at that time, to payment of their current account balance at the end of
the current financial year. If at any time the RNA would cease to carry
out its activities then contributors would be entitled to receive payment
of their current account balance. The tax authorities have stated that
the maximum limit the current account is allowed to reach is three times
the yearly contribution, after which any surplus is to be directly distributed
back to the contributor. The RNA will aim to keep the current account
balance far below this set limit.
9. Personnel Fund
The level of reserves in the personnel fund should increase as the number of
employees increases and thus the RNA wants to be able to transfer a portion
of the surplus made to the 'RNA Personnel Fund' foundation at each year
end. This transfer should be not liable to company tax since it is destined
for a defined liability, and will not directly benefit either the RNA
or the contributors. Therefore the tax authorities have been asked to
agree to a tax free transfer of funds to the "RNA Personnel Fund" from
RNA once a year, providing the previously stated reserves limit is not
exceeded. The tax authority has verbally agreed to this proposal.
10. Summary
As previously stated the tax authority have verbally agreed in principle to
all of the proposed RNA tax structures, and have given written confirmation
on all but a few minor points. The aim of the proposed tax structures
of the RNA is to conform to organisational principles of ripe-161
(the de facto organisational rules of the RIPE NCC-new), to minimise the
tax paid, and to maintain a healthy level of working capital and personnel
fund reserves. The payment of minimal tax is a condition laid down by
the RIPE NCC contributors at the 1996 general meeting (see ripe-145, Minutes
of RIPE NCC Contributors Committee 1996 Annual Meeting). The tax structure
as presented in this document fulfills all of these wishes and is in our
opinion the best possible solution achievable.
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