Value Chain Management

Transcription

1 Value Chain Management Aligning transfer pricing outcomes with value creation Annual Transfer Pricing Seminar November 23, 2016

2 Presenters Àgata Uceda Director +31 (0) Jeroen Kuppens Director +31 (0)

3 Agenda Topics Introduction - Disruptive Business Models - Shifting Tax and Transfer Pricing landscape after BEPS - Value Chain Analysis Case Studies Conclusions 3

4 Disruptive business models 4

5 The value added of software in a car will grow from about 5% today to around 60% over the next decade. - Morgan Stanley, January

6 Imagine the future 6

7 Disruptive business models Cars & software: e.g., Tesla upgrades its cars like Apple updates iphones over the air. No use of dealers and direct access to car s performance (for R&D) and driver s risk profile(for insurance). Pharma & big data: Big Pharma joins Big Tech. E.g., Google partnerships with GSK, Novartis and Sanofi for treatments of chronic diseases. The digital economy and sharing economy: consumer to consumer transactions (Uber, Airbnb, WeWork ) Unique business models and shifting value drivers: how to benchmark? From competition to cooperation and unconventional partnerships: how to apply the arm s length principle? New economic models: how to tax? 7

8 Traditional approaches to transfer pricing face scrutiny - Increased transparency: documentation requirements and information exchange - Big picture of the whole value chain, not just specific transactions: CbCR and Master File - Oversimplification and unrealistic assumptions in practice: accurately delineating transactions, choice of tested party, FRA standard vs. real - Place of key decision-making: DEMPE, control-over-risk - Challenging structures with (largely) financial contributions only: capital versus people - Limitations of TNMM, royalty rate comparables, external CUPs and database searches in general - New approaches to pricing complex value chains and high value-adding services - Simplification (our models) vs. Complexity (the real world) 8

9 Challenge to conventional models & BEPS A. Traditional (local) model B. Regional support model C. Central business model (Principal) Manufacturer Distributor Manufacturer Distributor Manufacturer Distributor Service fee Service fee Service fee Tolling fee Sales commission R&D HQ SSC R&D HQ SSC Principal core processes management Neither TNMM nor C+ apply because both parties are making non-routine contributions Value adding services as cost plus e.g. HQ services where mixed with strategic services? R&D? Implies rigid distinction of activities and roles But if not all key decision making is by Principal? Blanket TNMM challenged by tax authorities Tax authorities request global value chain analyses Back to traditional TP methods? 9

10 Value Chain Management 10

11 BEPS requirements for a VCA approach Three key changes are: 01 Tax authorities want to look at the big picture of the whole value chain of a business, not just the specific transactions of a legal entity 02 There is a greater focus on people substance/activities (including asset and risk management activities) when assessing value contributed per location 03 Emphasis on profit outcomes being closely aligned to value creation capturing the updated IP and Risk descriptions of how to think about value 11

12 VCA Methodology: Map and Evaluate 1. Map 2. Evaluate Kick off Review and analyse third party data Develop value hypothesis Value focused interviews 1 Prepare process map Capturing activities across value chain 4 Evaluate risks and assets Evaluate and assess in relation to key activities 2 Identify and map assets and risks Identifying assets and risks, map to processes 5 Evaluate activities, prepare Value Heat Map Validate with business 3 Prepare functional analysis Document activities performed 6 Overlay entity perspective Match process to entity/location 12

13 Sample VCA deliverables Heat Map Regional versus local market relative functional profile weighting Summary of key risks and assets System profit analysis Industry Analysis supporting value hypothesis 13

14 Case studies 14

15 Case 1: R&D and IP Fact pattern - Pharmaceutical company establishing UK headquarters - R&D scattered over several locations - UK office is more commercial than R&D focused Key considerations - Some contract R&D in Ireland questionable under BEPS Nexus approach makes Patent Box regimes more difficult to access - Industry trends and regulatory pressure forces additional activities in local opcos - New types of partnerships with third parties (competitors, software, supply chain) Northern Ireland R&D entity Contract R&D in low cost locations Possible solution Reconsider TP policy with value chain analysis Align tax strategy with RD strategy Consider RD incentives & costs holistically: labour costs, access to patent boxes, other RD incentives, tax rate, contingency plans UK principal with senior management and marketing French R&D entity 15

16 Case 2: TP and M&A Fact pattern - US company with centralised IP buys European company with decentralised IP - Question: how to integrate the European business? Principal TP model Multi entrepreneurial TP model US: $$$$ HQ + IP Canada: $$ CM & LRD Germany: R&D, Prod., Sales Key considerations - Relocating functions, risks and/or IP in order to centralise/simplify TP - Some employees may not want to move and thus some profit potential cannot be relocated (DEMPE and aligning TP with value creation) France: HQ, R&D, Prod., Sales Possible solution Is the one principal model still appropriate? Phase out approach or move to several principals Align TP with allocation of profit potential and align over time with the degree of centralisation 16

17 Case 3: Two-country principal company Fact pattern - Oil and gas company with various sites around the world - Currently decentralised TP - Project to investigate moving to a principal/tolling model Key considerations - Business model is extremely centralised but key control of risk and DEMPE functions are located in more than one location (tricky) - R&D all in Germany, commercial largely in UK - Many senior staff spend half the week in one place, half in the other UK HQ German branch Manufacturing Distribution Shared services Possible solution A single principal company with branches or Two regional principals (closer to final consumer) Attribution of residual profit (profit split) based on value chain analysis 17

18 Case 4: Medical Devices Group Quantifying VCA US Co (Parent Company) Ireland Co (IP Company) Singapore Co (Regional HQ and supply chain principal) 50% 10% 8% 13% UK Co (Regional HQ) 10% 45% Germany Co (EU supply chain principal) 7% 12% India Co (Op Co) China Co (Op Co) Thailand Co (Op Co) 6% 6% 3% 3% 3% 3% UK Co1 (Commissionaire Co) 3% 5% EU Distributor (Distribution Co) 2% 3% Key: Change in pricing policy % Percentage of overall RoW profits under existing pricing policy % Percentage of overall RoW profits under revised pricing policy (decrease) % Percentage of overall RoW profits under revised pricing policy (increase) 18

19 Case 4: Medical Devices Group Revised operating model US Co (Parent Company) Ireland Co (IP Company) Fixed return linked to legal ownership and funding Using VCA to bridge the gaps in the existing transfer pricing policy and setting up a revised arm s length pricing policy within the Group Residual profits from US business and ROW IP royalty Variable royalty payments after value based reward retention Fixed royalty payments linked to sales in Asia Pac UK Co (Regional HQ) Germany Co (EU supply chain principal) TNMM NCPM Singapore Co (Regional HQ and supply chain principal) Value-based fee linked to European residual profits UK Co1 (Commissionaire Co) TNMM OM TNMM OM EU Distributor (Distribution Co) India Co (Op Co) TNMM NCPM China Co (Op Co) TNMM OM Thailand Co (Op Co) TNMM OM Key Licence of IP Provision of services Sale of goods 19 19

20 Case 5: A change in model post-vca exercise VCA findings Toy company HQ Residual profit UK Singapore LRDs Manufacturer DEMPE / control of risk DEMPE / control of risk Customer Suppliers - Originally, HQ principal company with UK activities rewarded as a service function - VCA outlined DEMPE activities in the UK - TP was not aligned with value creation - Not enough substance in Singapore Regional Hub: Suggested how to improve substance to make TP model aligned - Solution Suggestion Value based fee from UK to HQ 20

21 Case 5: A change in model post-vca exercise VCA findings toy company: Analysis of outcome from VCA exercise Reward for HQ Singapore Regional HQ Profit outcomes from existing TP Model Sales and distribution entity CLIENT China CLIENT US (Inc. licensing London Hub Key: High risk Medium risk Low risk Pricing for manufacturing operations Value creation as per VCA 21

22 Points To Leave With PAST TP focused on choosing the tested party and benchmarking Overall CPM/TNMM approach White board tax planning FUTURE Roll up your sleeves and get to know the business before making a choice Keep the broad picture (strategy, supply chain) and prepare for changes Double check your assumptions Think out of the box while keeping your feet on the ground 22

23 This proposal is subject to fully and satisfactory completion of the applicable client and engagement acceptance procedures of Meijburg & Co. All activities performed and all services rendered by Meijburg & Co are subject to its general terms and conditions, filed with the Dutch Chamber of Commerce. Meijburg & Co, Tax Lawyers, is an association of limited liability companies under Dutch law, registered under Chamber of Commerce registration number and is a member of KPMG International Cooperative ("KPMG International"), a Swiss entity. The general terms and conditions are available on the Meijburg & Co website ( and will be supplied upon request.