RIPE NCC Tax Position
Ridley
DRAFT 1.0
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RIPE NCC Tax Position
for 1998 and Beyond
Paul Ridley
RIPE NCC
Version 1.0
Document: ripe-165
See also: ripe-161
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.
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.
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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 sec-
ondly 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.
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 trans-
ferred from TERENA to the RNA. These funds take the
form of:
- fixed assets: computers, furniture, and build-
ing 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 writ-
ten statements.
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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 immedi-
ately 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 to staff should RNA operations
cease. Any RNA employee who leaves the organisation
in the normal course of their 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 Per-
sonnel Fund' would be free both company and succes-
sion tax.
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General Operations
During operations of RNA, the objective is to min-
imise 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 over-estimate income or under-estimate 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 build-
ing up the personnel fund reserves (detailed later)
and keeping working capital at desired levels.
Clearinghouse
To avoid having to pay company tax on any surplus
destined for working capital, the RNA will operate a
clearinghouse system. The clearinghouse 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.
Clearinghouse Example
The system is best illustrated by an example. In
this example there are initially 10 contributors, 5
"A" contributors who pay ECU 10,000 per year, and 5
"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 sur-
plus left after any funds have been transferred to
the personnel fund.
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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 contribu-
tor 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" con-
tributors ECU 1,000 each. Therefore the cur-
rent 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
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Year 2
In year 2 the contributions stay fixed but Year
1 contributors get a refund on their contribu-
tion. The level of the refund given is deter-
mined by the amount of working capital needed.
Suppose the working capital, i.e. the cumula-
tive 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' contribu-
tors" 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, 1 new "A" contribu-
tor and 1 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 contribu-
tor 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 in
account the balances at the begining of year 2,
the current accounts have the following bal-
ances 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
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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 cap-
ital 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" contribu-
tors" 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, 2 new "A" contribu-
tors and 2 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" contribu-
tors ECU 500 each. Taking in account the bal-
ances at the begining 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
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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 advan-
tage that no company tax has to be paid. If a con-
tributor leaves the RNA then they are entitled, at
that time, to payment of their current account bal-
ance 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.
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 bene-
fit 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.
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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 organisa-
tional principles of ripe-161 (the de-facto organi-
sational 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 paying of
minimal tax is a condition laid down by the RIPE NCC
contributors at the 1996 general meeting (see
ripe-145 'minutes of 1996 contributors meeting').
The tax structure as presented in this document ful-
fills all of these wishes and is in our opinion the
best possible solution achievable.
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