Value Chain Planning post BEPS - cdn.ymaws.com · Significant People Function ... the company operates (e.g., Value Chain Analysis) ... a member firm of Baker & McKenzie

Value Chain Planning post BEPSTax Executives Institute – Houston ChapterTS1815Transfer Pricing Planning after BEPS

Thursday, May 10, 2018

Agenda

1 Defining a Supply Chain 3

2Impact 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

1 Defining a Supply Chain

© 2018 Baker & McKenzie Consulting LLC

What is a Supply Chain?

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▪ 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


Example - Supply Chain for Drilling

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▪ 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


Example Drilling Supply Chain Structure

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Foreign

Rig Owner

Local OpCo

(MX)

US Svc ProviderMgmt. Svcs

Third Party Raw

Goods/Svcs

Suppliers

Third Party

Customer

Mgmt. Fees

Rig BBC

Foreign Svc

Provider

(UK)

Foreign Principal

(Swiss)

US Parent


Treasury & OECD’s View of these Structures?

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▪ How does Treasury view supply chain structures?

▪ Perception

▪ How does the OECD’s BEPS program view supply chain structures?

▪ Examples and Perceptions

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


Supply Chains and Transfer Pricing

9

▪ 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


Global Guidance Favors Value Chains

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▪ 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


U.S. Guidance Moving Toward Value Chains

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▪ 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.


Value Chain Focus

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▪ 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

3 A word on Risk

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New OECD guidance places emphasis on risk

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Why is Risk important?

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“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 2017.


Risks in the Context of Operating Models

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Strategic or marketplace

risks

Infrastructure or

operational risks

Financial risks

Transactional risks

Hazard risks

Paragraph 1.72, OECD Guidelines July 2017.


Risks in the Context of Industries & Sectors

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(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.

(i)

+ (

ii) =

Contr

ol over

risk

(iii)

= R

isk m

itig

ation

New OECD Framework for Performing a Risk Analysis

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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?

Is the risk mitigation

activity outsourced?

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?

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 decision-

making?

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 ?

Control over Risk

Go to Step 4 Risk Management

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)?

Full Risk Return

Entitlement

Yes

No

Yes

Yes

No

No

No

No

Yes

No

Yes

Yes

Six Step Analysis Decision Tree

4 Risk Analysis in a Value Chain

Context

[Title of document here]

VCA approachValue Chain Analysis – Baker McKenzie Transfer Pricing Framework

01Detailed understanding of company’s

operations through research and analysis

02Industry analysis (starting

from risks) and positioning of

company within the industry

03Categorisation of economically significant

risks

04Identification of key value

drivers of the company

05Operating model (functional,

transactional, contractual)

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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

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Analysing the Risk Categories

Regulatory risk

Volatility in agricultural input and output prices

Food safety and food recall risk

Brand / reputation risk

Market risk

Operational and financial risks

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Primary Raw

Materials

Cultivation

Primary

Processing

R&D

Packaging

Sales &

Marketing

Primary

Packaging –

End of Life

Zooming into the Risks within the supply chain

Ingredient

Cultivation

Key risks:

• Food safety

• Commodity price volatility

Key risks:

• Food safety

Key risks:

• Food labelling regulations

• Food safety

Production DistributionCooking &

Consumption

Key risks:

• Food safety

• Operational risk – plant/equipment safety,

production disruption

• Workplace safety

Key risks:

• Food safety

• Perishable food

• Product tampering

Key risks:

• Food safety

• Customer claims

• Product recall

• Reputation risk

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(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.


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

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Final Comments

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Value Chain Planning post BEPS - cdn.ymaws.com · Significant People Function ... the company operates (e.g., Value Chain Analysis) ... a member firm of Baker & McKenzie