Business archetypes and Tax

I have recently returned from a short safari to Tsavo National Park. Its undoubtedly one of the most scenic places to see if you are in Kenya. From the tales of the Shetani Lava and how it intrigued the Akamba long distance traders to the myths behind the amazing Mzima springs, the experience of being there can hardly be described in words.Looking over the observatory at Kilaguni Lodge, I noticed how the animals respected the pecking order as they shared the watering hole. I realized that without saying a word to each other, the Elephant new that the Buffalo was one of its kind in the broad classification of herbivores. I also noticed how they were both wary of Lions and Leopards, broadly classified as carnivores.

Nature has classified everything into broad categories. Humans, for instance, are classified into Male and Female. Seasons are broadly classified into winter, autumn, spring and summer and so on and so forth. I hope you get the point. Broad classifications are useful for strategic thinking since they enable us set realistic expectations and determine the most effective way to allocate resources. They help the Elephant share water with the Buffalo. These classifications also help the gazelle and the Zebra perceive the Lion as a common threat and as such look out for each other at the watering hole. In the world of business, we identify competitors and customers though these broad classifications. I hold the view that this broad classifications can also be utilized to forecast and plan for taxes. This is the rational behind the classification of businesses into archetypes for taxation.

An archetype is defined as a model or pattern by which things of the same kind are classified.

In business, there are three known primary archetypes that have existed for many years and have been perfected over many years by different cultures and nations. These primary archetypes are;

1.Product based businesses,

2.Service based businesses

3.Trade based businesses.

Over the years, theses archetypes have been combined to develop more complex secondary business models which again have been classified on the basis of revenue and primary activities. To arrive at these classifications, the following combinations are important to note;

Product + Trade= Marketplace

Service + Product= Subscription

Service + Trade= Brokerage

Service +Product+ Trade= Ecosystem

If you take the chance to explore your own business or that of the organization you work for, you will easily identify with one of the primary models or one of the secondary combinations. For instance, companies that operate manufacturing plants but have not forwardly integrated distribution into their supply chain, would be primarily product based businesses. Should these manufactures incorporate distribution to the end user, then they adopt the business archetypes of a marketplace.

Interestingly, business archetypes determine the type of income to be realized by a business which brings me to the question of how taxes tie back to the business archetype. Taking the marketplace model for instance, the organization creates the product and takes the product to the customers through an online platform such as an e-commerce shop or operates a physical outlet such as a retail store. With this model, the business not only gets paid for selling its product but also now attracts revenue from advertisement activities as well as commissions for sales it may make for third party products.

From a tax point of view, the product based business would only attract Value added tax and Income tax.

On the other hand, the marketplace model attracts more taxes such as withholding taxes for its commission and advertisement revenue as well as digital service tax for the use of its platform.

Studies on business modeling have in the past been limited to the understanding of how businesses compete and convert their competitive advantages into revenue. Recent studies, however, demonstrate that taxation authorities are using the same knowledge of business archetypes to enhance taxation and seal tax loopholes that such businesses generate. With this knowledge, businesses must define their models with precision and determine the possible tax structure that befits their identified archetype.

In conclusion, the cost of tax compliance depends on the combination of taxes that a business adopts. In the case of the marketplace as discussed above, the combinations of Income tax, VAT, digital service tax and withholding tax is known to have the highest compliance cost. VAT and Digital service tax(DST) require monthly reconciliation as well as verification with the suppliers through the VAT Auto Assessment (VAA) for VAT and user transaction reconciliation for DST. Tax planning is all about choosing the ideal business model and managing transactions. The knowledge of business models (archetypes) is such a valuable point of departure.