Across industries, manufacturing outsourcing isn’t a new concept for Original Equipment Manufacturers (OEMs). In fact, it’s hard to find any company that completely manufactures its own products these days. Electronics manufacturers are considering a wide range of deeper, more collaborative business relationships that could help improve cost effectiveness and reduce time to market while sustaining or improving product quality. As they do so, these companies are finding that such relationships—while carrying huge potential benefits—are significantly more complex and challenging than the simpler contract manufacturing arrangements of the past.
Contract manufacturing and commissionaire structures: Some businesses enter into arrangements where sales of the processed goods are made by commissionaires, i.e., undisclosed agents. It may even be the case that the contract manufacturer will act in this capacity. This raises a number of customs issues, such as the use of duty relief’s; the treatment of agents; and the customs and VAT liability of supplies by the principal, the commissionaires and the contract manufacturer.
Contract manufacturing and commissionaire structures: In most instances, the functions of the contract manufacturer are deliberately kept to a minimum to minimise the risks faced by it. The rewards to the contract manufacturer are therefore kept to a minimum. This is in line with the intended objective of tax savings as the contract manufacturer is normally located in a high tax jurisdiction. The principal and/or its sales units, which are usually located in comparatively low tax jurisdictions, would retain most of the risks associated with the overall process (research and development, distribution, marketing), thereby seeking to reap the lion’s share of the rewards. We can ensure that the customs function is aligned with and supports sales and manufacturing strategies. We can also ensure that maximum use is made of duty reliefs and customs warehousing without compromising the other objectives, particularly any risk of permanent establishment.