Value Chain Planning post BEPS

Transcription

1 Value Chain Planning post BEPS Tax Executives Institute Houston Chapter TS1815 Transfer Pricing Planning after BEPS Thursday, May 10, 2018

2 Agenda 1 Defining a Supply Chain 3 2 Impact of Transfer Pricing on Supply Chain: Moving to a Value Chain 8 3 A word on Risk and 13 4 Risk Analysis in a Value Chain Context 20

3 1 Defining a Supply Chain

4 What is a Supply Chain? A system of entities, people, activities, information, and resources involved in moving a product or service from a supplier to an end customer Generally encompasses the following three functions: Supply of goods or materials to a manufacturer; The manufacturing process; and The distribution of finished goods through a network of distributors and retailers to a final customer. Most supply chain structuring is business driven Tax planning needed to ensure optimal efficiency of supply chain 4

5 Example - Supply Chain for Drilling The drilling supply chain encompasses the following three functions: The management of the rig and other assets, labor, and contracts needed to execute the drilling service; The processing of the above assets to perform the drilling service; and The supply of the drilling service to the customer. Similar to the manufacturing supply chain, the drilling supply chain is business driven Tax planning is an important part of the efficiency of drilling projects 5

6 Example Drilling Supply Chain Structure US Parent Third Party Raw Goods/Svcs Suppliers US Svc Provider Mgmt. Fees Mgmt. Svcs Foreign Principal (Swiss) Rig BBC Foreign Svc Provider (UK) Foreign Rig Owner Local OpCo (MX) Third Party Customer 6

7 Treasury & OECD s View of these Structures? How does Treasury view supply chain structures? Perception How does the OECD s BEPS program view supply chain structures? Examples and Perceptions 7

8 2 Impact of Transfer Pricing on Supply Chain: Moving to a Value Chain

9 Supply Chains and Transfer Pricing Transfer pricing is fundamental to supply chain planning Analysis of the system s entities, activities, resources, and assets used in the supply chain to determine where system profit belongs Converts the supply chain into a value chain Tax authorities continue looking at system profit approaches to valuing a supply chain Each country places value on their supply chain A myopic view (without my activity no value is created) De-emphasizing role of mobile assets (IP, tangible assets) People functions drive value Sharing of profits (profit-split, formulary pricing) are favored 9

10 Global Guidance Favors Value Chains Action 8 10: Aligning TP Outcomes with Value Creation BEPS is putting value creation on center stage Tax authorities are adopting rules that focus on reporting value Does not answer the what, where, and when s of value creation Action 13: TP Documentation and CBC Reporting BEPS Master and Local Files reinforce the justification of the supply chain - taxpayer are required to describe their supply chain Country-by-country reporting is a post-ante analysis converting your supply chain into dollar flows (crude value chain) Local countries requesting more on value chains 10

11 U.S. Guidance Moving Toward Value Chains U.S. law (IRC 482) did not focus on the value chain Historically took a single-entity approach looking at entity arm s length profitability Appears IRS is slowly moving toward BEPS-like requirements Transfer pricing rules have not changed: only their interpretation IRS notices to consider Clear focus on TTPO and development of consistent positions from Treasury Taxpayer initiated positions at the forefront More important that ever for taxpayers in any given industry to develop the what, where, and when s of their value creation. 11

12 Value Chain Focus Multiple supply chains exist: each should be considered Short- or long-term supply chain Operational versus asset supply chain Substance (both own-country and counter-party/ies) Significant People Function Important to define and demonstrate Do not underestimate the tax authority s tunnel vision Importance of IP and other mobile assets diminishing Each country places value on their supply chain Proving where and how value is created is essential to your supply chains 12

13 3 A word on Risk 13

14 New OECD guidance places emphasis on risk 14

15 Why is Risk important? Determining the economic significance of risk and how risk may affect the pricing of a transaction between associated enterprises is part of the broader functional analysis of how value is created by the MNE group, the activities that allow the MNE group to sustain profits, and the economically relevant characteristics of the transaction. The analysis of risk also helps to determine comparability under the guidance in Chapter III. Paragraph 1.73, OECD Guidelines July

16 Risks in the Context of Operating Models Strategic or marketplace risks Infrastructure or operational risks Financial risks Transactional risks Hazard risks Paragraph 1.72, OECD Guidelines July

17 Risks in the Context of Industries & Sectors 17

18 (iii) = Risk mitigation (i) + (ii) = Control over risk New OECD Framework for Performing a Risk Analysis (i) capability to make decisions to take on or decline a risk-bearing opportunity, together with the actual performance of that decision-making function; (ii) capability to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision-making function; and (iii) capability to mitigate risk, that is the capability to take measures that affect risk outcomes, together with the actual performance of such risk mitigation. 18

19 Six Step Analysis Decision Tree Yes Employees have the capabilitiy to make decisions to take on, lay off, decide a risk bearing opportunity. Together with the actual performance of that decision-making function? No Yes No Employees have the capabilitiy to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision making function? No Employees have the capability to mitigate risk, that is the capability to make measures that affect risk outcomes, together with the actual performance of such risk mitigation? Yes Go to Step 4 No Is the risk mitigation activity outsourced? Risk Management No Yes Does the outsourcing party have capability to determine the objetives of the outsourced activities, to decide to hire the provider of the risk mitigation functions, to assess whether the objectives are being adequately met, and, where necessary, to decide to adapt or terminate the contract with that provider, together with the performance of such assessment and decisionmaking? Yes No Control over Risk Does the company have the financial capacity (access to funding to take on the risk or lay off the risk to pay for the risk mitigation functions and to bear the consequences of the risk if the risk materialises)? Yes Full Risk Return Entitlement 19

20 4 Risk Analysis in a Value Chain Context

21 VCA approach Value Chain Analysis Baker McKenzie Transfer Pricing Framework 01 Detailed understanding of company s operations through research and analysis 05 Operating model (functional, transactional, contractual) 02 Industry analysis (starting from risks) and positioning of company within the industry 04 Identification of key value drivers of the company [Title of document here] 03 Categorisation of economically significant risks 21

22 Understanding the industry Inputs into Agricultural Production (e.g., fertilizers, seeds) Food Production (e.g., wheat) Primary food storage and processing Secondary food processing Distribution, Transport and Trade Retailing and Catering Consumers Group position in the global food industry 22

23 Analysing the Risk Categories Regulatory risk Operational and financial risks Volatility in agricultural input and output prices Market risk Food safety and food recall risk Brand / reputation risk 23

24 Zooming into the Risks within the supply chain Primary Raw Materials Cultivation Primary Processing Key risks: Food safety Commodity price volatility Key risks: Food safety (i) capability to make decisions to take on or decline a riskbearing opportunity, together with the actual performance of that decision-making function; (ii) capability to make decisions on whether and how to respond to the risks associated with the opportunity, together with the actual performance of that decision-making function; and (iii) capability to mitigate risk, that is the capability to take measures that affect risk outcomes, together with the actual performance of such risk mitigation. Ingredient Cultivation R&D Packaging Key risks: Food labelling regulations Food safety Production Key risks: Food safety Operational risk plant/equipment safety, production disruption Workplace safety Key risks: Food safety Perishable food Product tampering Distribution Sales & Marketing Key risks: Food safety Customer claims Product recall Reputation risk Cooking & Consumption Primary Packaging End of Life 24

25 Key takeaways New OECD guidance places emphasis on Risks Six Step Framework for Performing a Risk Analysis (e.g., Decision Tree) Consider economically significant Risks Important to analyse Risks in the context of industry and sector where the company operates (e.g., Value Chain Analysis) Risk analysis in the context of a comparability analysis analysis for the Local File Practical tip: Revisit inter-company legal agreements 25

26 26 Final Comments

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