Whats in Store Transfer Pricing

8/8/2019 Whats in Store Transfer Pricing

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Possibilities in procurement

A number o major organisations have been looking again atthis whole area over the last ew months. In some cases its

the result o expansion into new markets, in some its been

prompted by the continuing recession and the need to keep

costs down, and in others theres been a one-o window o

opportunity ater a big merger or acquisition. There are also

a number o trends aecting retail and consumer businesses

in particular, ranging rom the increased risk o supplierailure during a recession, to changes in consumer behaviour

(some o which are also being driven by the downturn), to

sustainability, and the increasing emergence o global supply

chains. These developments are leading many international

companies to restructure their procurement and supply

relationships, whether by pursuing low-cost country sourcing

opportunities (with all their attendant political and currencyrisks), or building green considerations into their procurement

at an earlier stage.

As Steve Hasson, [Transer pricing partner] said, procurementcan make a signifcant contribution to the bottom line cutting

purchase costs by as little as 5% can result in a 50% increase

in proft margin. To achieve that same impact by other meanswould either require sales to rise by 50%, or drastic cuts in

sta numbers. A ull review o procurement arrangements

should help identiy these savings, then capture those savings

through new or revised supplier contracts, and fnally makethe savings sustainable through rigorous purchase-topay

procedures. A ull review can also be the frst step towards a

more comprehensive change to the overall procurement model.

Theres a whole range o dierent options here, ranging rom

a ully local approach, to a centre-led model that takes on

the management and negotiation o some key contracts, to

a standalone procurement company. The right approach or

a particular business will depend on a number o specic

actors, including the markets the company operates in,the scope o its activities, and the location o both risks

and assets. These can all be fexed to achieve nancial,

commercial, or tax eciencies, and can be based on a wide

range o transer pricing principles, rom cost plus service ee,

to commission.Where tax is concerned, the key as always is that the tax

structure should refect the actual substance o the business,

and the level o transer pricing is a key consideration here.

And again as always the more radical the model, the more

substantial the operational and tax benets can be, though thismay be counterbalanced by the practical upheavals required

to achieve them, and what can be a higher degree o risk,

not least in reputational terms, i things go wrong. As Steve

said, i youre thinking o changing your procurement model

you need to take into account a number o signicant costs,

including IT, potential relocation o sta, and potential taxleakage. As with so many other similar business issues, you

need sure-ooted planning and execution to turn theoreticalbenets into actual gains.

The value o good documentation

This session was led by Daniel Alter (Transer pricing seniormanager), whos one o the key members o the PwC team

working on global co-ordinated documentation. Getting

decent documentation in place or transer pricing is clearly

A high-prole masterclass run by

PricewaterhouseCoopers (PwC) has

provided an invaluable update on

Transer pricing

trends in theretail and

consumer sector

Whats in Store?Business insight or the retail and consumer sector

pwc

Despite Icelandic volcanic eruption disruptions, a PwC masterclass, led by Sue Rissbrook (Global head o the retail

and consumer transer pricing network), on transer pricing issues or the retail and consumer sector attracted

people rom a wide and varied group o international businesses, including Diageo, Burberry, Cadburys andUnilever. There were presentations on procurement, documentation, and resolving disputes, as well as a detailed

working session on the challenge o establishing robust comparables. Here are some o the highlights.


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a major and time-consuming undertaking, but one wheregetting it right repays the time and money invested in it. As

Daniel said, A lot more countries are bringing in transer

pricing regulations, or new rules or documenting them, andthe penalties or non-compliance can be signicant. Likewise,

many tax authorities are now working together and comparing

notes, so its absolutely vital to get your approach and your

message consistent across the piece.

Consistency is only one obvious advantage o managing

transer pricing documentation on a centralised basis; anothersignicant actor is the clarity it gives on the companys global

tax risks and opportunities.

Turning to practicalities, the documentation process shouldusually start by dening the scope o the project. You

need to look at the relevant local transer pricing rules and

documentation requirements, and what you have in placealready. You should also look at issues like the type and value

o your related party transactions, your tolerance o risk,

and how responsibility or dierent aspects o the process

will be allocated. Communication is key here, as is rigorousmanagement o the timetable, as this is an area where

signicant slippage is a common problem. And remember that

you dont have to have an all-singing all-dancing approach

to every single market: some countries may indeed require

a traditional transer pricing study, but others could be dealt

with just as eectively with a slide deck analysis, or a brie

executive summary.

Daniel Alter summed it up like this: The key to a successul

global documentation approach is a combination o committedresource, detailed project design and planning, and a

methodology based on good communication and fexibility.

Transer pricing trends in the retail and consumer sector (contd)


Sector updates

Food

Key trends Key transer pricing questions

Globalisation: the ood retail sector is highly concentrated

in comparison to other retail sectors - the top ten retailers

in Germany, Sweden, France, Belgium, and Switzerland

have a cumulative market share o more than 90%.

Competition: getting more intense all the time, as retailers

struggle to dierentiate themselves rom their rivals

Private labels: now competing signicantly in the premium,

mid, and budget price levels

Customer loyalty: more important than ever, and giving riseto a plethora o new initiatives, including the move towards

entertainmentisation, which ranges rom event shopping,

to in-store samplings, to the marketing o meal solutions

rather than mere ingredients.

How do you develop and roll out the own brand conceptinternationally?

How do you allocate a cost to central concepts likemerchandising, store layout, and logistics?

What about the use o common IT inrastructures likemerchandise management systems, data warehousing, or

sta planning?

I procurement is pooled, how are the benets allocated

back?

Luxury goods

Key trends Key transer pricing questions

Emerging markets: rapid growth in recent years, especially

in Asia, and especially among the young and well-educated.

The recession: 2009 was a perect storm, which hit the

luxury sector hard and saw up to 20% alls in sales. Bothdeveloped and developing markets are still tough, though

there are signs o a turnaround, especially in emerging

economies.

Brand: sustaining the promise o the brand, and actoring

in sustainability too.

How do you manage transer pricing issues in regions like

Asia or South America, which are the most challenging intax terms, but also the most promising in terms o sales

growth?

How do you manage the interaction between transerpricing, customs duties, royalties, and withholding taxes,

especially in a sector where duty rates are oten high, both

in developed and developing markets?

How can you make local deductions or central costs?

How do you manage and maintain local protability, giventhe signicant and ongoing need to invest in the retail

network?


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For urther inormation please contact:

Sue Rissbrook

Global Head o Retail and Consumer Transer Pricing

Tel: +44 (0)121 265 5294

Email: [email protected]

Transer pricing trends in the retail and consumer sector (contd)


FMCG

Key trends Key transer pricing questionsThe recession: generally milder or this sector, given

that most FMCG goods are low-margin, high-volume

essentials. That said, commodities markets have beenvolatile and are likely to continue that way

Health and sustainability: these were becoming key issuesbeore the recession and will probably re-emerge.

Speed to market: getting more important all the time,

because the rst to market secures higher marginsand prices. Many US businesses are rationalising their

European operations or precisely this reason.

How do you manage transer pricing models and intra-

group transer pricing arrangements ater a major

acquisition?

Do you manage transer pricing documentation locally,

regionally or globally?

How do you deal with multiple audits across a number o

dierent tax jurisdictions, especially in more challenging

markets like India and China?

Whats the best way to make sure customs and transer

pricing documents work equally well or both authorities,including issues like retrospective pricing?

Dealing with disputes

The masterclass ended with a round-up o the current state o

play on transer pricing disputes in some key markets, with a

discussion led by Diane Hay, now Special Advisor to PwC on

international tax. As she said, the typical international company

is now acing a growing range and volume o tax risks across

the world, as more countries see transer pricing as a way

o raising revenue, and more start to collaborate together

to conduct multiple tax audits, especially within the EU. A

higher number o disputes are going into Mutual Agreement

Procedures (or MAPs) according to the OECD these cases

increased by 50% in 2006/7 - but as the government resources

available to deal with them is not growing at a similar rate,

theyre taking longer to resolve. Theres also evidence o a

growing interest in Advance Pricing Arrangements (or APAs),

by both tax authorities and businesses. As Diane says, in the

ace o such a complex international picture, companies need

to be pragmatic: your transer pricing deences need to be

cost-eective deences you cant gold-plate everything.

Key points rom the round-up included the UK authorities

growing emphasis on Alternative Dispute Resolution (ADR)

procedures like arbitration and mediation, with HMRC now

running some pilot cases. In the US, the IRS has suered a

number o signicant recent setbacks in some key litigation

cases, and its likely theyll be enhancing both their litigation

capability and their approach to transer pricing audits.

Theres evidence o more transer pricing audits in Spain, and

more aggressive positions being taken during them. Resolving

MAP claims is still taking a very long time. However, the

Spanish APA programme is getting more eective and working

well. Tougher new documentation rules now in place in France,

which is also conducting an increasing number o transerpricing audits. MAP cases are growing, and the UKs largest

number o outstanding international disputes is with France.

Turning to the BRIC economies. Brazil is not yet an OECD

member, and has a very limited number o ull tax treaties

that give businesses operating their access to MAP. Neither

the US, UK or Germany are covered, or example. In general,

the position is complex, and local knowledge essential.

The authorities in Russia have proposed a new law that will

introduce APAs or the largest companies. These will probably

be or three years, and then renewable or two years.

In India the courts are now showing an increased willingnessto apply OECD Guidelines, and 2009 saw the introduction o

sae harbours and the establishment o Dispute Resolution

panels to tackle a growing mountain o transer pricing cases.The local tax authorities in China are increasingly asking or

documentation o related party transactions and updating

their national databases. There are currently around 50 bilateral

APAs and 10 unilateral APAs under discussion; 12 have beenconcluded, including Japan, the US, Korea, Singapore, and

Denmark.

Diane summed up the international situation by stressing the

importance o getting the right level o management involved

locally: You need to make sure theyre ully involved in

the process, not only where there are language issues, but

also because they can help you navigate the niceties o the

relevant operating and tax regime. As in so much else, never

underestimate the value o local knowledge.

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Whats in Store Transfer Pricing