RIPE NCC Tax Position for 1998 and Beyond
Paul Ridley
RIPE NCC
Version 1.0
Document ID: ripe-165
See also: ripe-161, ripe-164
Date: 8 September 1997

Contents
1.Scope
2.Status
3.Introduction
4.RNA Set Up Phase
5.Personnel Fund
6.General Operations
7.Clearing House
8.Clearing House Example
9.Personnel Fund
10.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.

