# transfer pricing & economics institute of chartered accountants of new zealand - 2003 tax...
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Transfer Pricing & Economics
#
Institute of Chartered Accountants of New Zealand - 2003 Tax ConferenceInstitute of Chartered Accountants of New Zealand - 2003 Tax Conference
Leslie Prescott-HaarAnton NannestadLeslie Prescott-HaarAnton Nannestad
Dealing with Sales Offices Transfer Pricing ToolsDealing with Sales Offices Transfer Pricing Tools
#Transfer Pricing & Economics
Overview of PresentationOverview of Presentation
• The Relevance and Benefits of Transfer Pricing to the Supply Chain
• The Relevance and Benefits of Transfer Pricing to the Supply Chain
OverviewOverview
CASE STUDY PART CASE STUDY PART
• Introducing Optimal Solutions Inc
• Introducing Optimal Solutions Inc
• Integration Transfer Pricing, Tax Planning and Business Strategy
• Integration Transfer Pricing, Tax Planning and Business Strategy
• Understanding Optimal Solutions NZ
• Understanding Optimal Solutions NZ
• 4 Planning Tactics
• Dealing with the PE Issue
• Revenue Environment
• 4 Planning Tactics
• Dealing with the PE Issue
• Revenue Environment
• Finding Optimal Solutions (for Optimal Solutions NZ)
• Finding Optimal Solutions (for Optimal Solutions NZ)
PRESENTATION PARTPRESENTATION PART
#Transfer Pricing & Economics
Transfer Pricing and the Supply Chain
Transfer Pricing and the Supply Chain
• The Overall Supply Chain
• The Sales Office Supply Chain
• Benefits of Tax Effective Supply Chain Management
• Optimal Solutions Case Study – Part I
• The Overall Supply Chain
• The Sales Office Supply Chain
• Benefits of Tax Effective Supply Chain Management
• Optimal Solutions Case Study – Part I
#Transfer Pricing & Economics
The Overall Supply ChainThe Overall Supply Chain
Transfer Pricing and the Supply Chain Transfer Pricing and the Supply Chain
Information
Materials/Products/Services
Operations/Strategy
Cash
Process/Organisation
R&D Plan Make/Service Move Sell After-
SalesBuy
CUSTOMERS
CUSTOMERS
SUPPLIERS
SUPPLIERS
#Transfer Pricing & Economics
Sales Office Business ProcessesSales Office Business Processes
Transfer Pricing and the Supply ChainTransfer Pricing and the Supply Chain
Sales &MarketingSales &
Marketing
SupplyChain
Management
SupplyChain
Management
InventoryManagement
InventoryManagement
OrderManagement
OrderManagement
After-salesSupport
After-salesSupport
Service DeliveryService
Delivery
Customers
NZ Channels
Local Infrastructure
Group Infrastructure
#Transfer Pricing & Economics
Weighing BenefitsWeighing Benefits• Improved business model, management &
processes– Improved decision making, management and
monitoring of business performance– Incentives for revenue growth/cost reduction– Risk reduction
• Improved business model, management & processes– Improved decision making, management and
monitoring of business performance– Incentives for revenue growth/cost reduction– Risk reduction
Transfer Pricing and the Supply ChainTransfer Pricing and the Supply Chain
#Transfer Pricing & Economics
Weighing BenefitsWeighing Benefits• Improved business model, management &
processes
• Improved management of working capital, cashflow and capital funding– Repositioning funds– Capex budgeting– FX and interest exposure management
• Improved business model, management & processes
• Improved management of working capital, cashflow and capital funding– Repositioning funds– Capex budgeting– FX and interest exposure management
Transfer Pricing and the Supply ChainTransfer Pricing and the Supply Chain
#Transfer Pricing & Economics
Weighing BenefitsWeighing Benefits• Improved business model, management &
processes
• Improved management of working capital, cashflow and capital funding
• Global effective tax rate management– Management of losses, concessions, foreign tax
credits, tax rates and imputation credits– Withholding taxes, indirect taxes and tariff
management
• Business Purpose Defensibility
• Improved business model, management & processes
• Improved management of working capital, cashflow and capital funding
• Global effective tax rate management– Management of losses, concessions, foreign tax
credits, tax rates and imputation credits– Withholding taxes, indirect taxes and tariff
management
• Business Purpose Defensibility
Transfer Pricing and the Supply ChainTransfer Pricing and the Supply Chain
Transfer Pricing & Economics
#
Optimal Solutions IncOptimal Solutions Inc
Sales Offices Case Study
I Introducing Optimal SolutionsII Understanding Optimal SolutionsIII Finding Optimal Solutions
Sales Offices Case Study
I Introducing Optimal SolutionsII Understanding Optimal SolutionsIII Finding Optimal Solutions
Optimal Solutions – Case Study Optimal Solutions – Case Study Transfer Pricing & Economics
#Transfer Pricing & Economics
Introducing Optimal SolutionsIntroducing Optimal Solutions
Optimal Solutions – Case Study IOptimal Solutions – Case Study I
Market Share:
•43% Global
•30% Australia & New Zealand
Market Share:
•43% Global
•30% Australia & New Zealand
Retail Enterprise Software
• POS, Loyalty Card, Purchaser Analysis, Supply Chain Management
Retail Enterprise Software
• POS, Loyalty Card, Purchaser Analysis, Supply Chain Management
OptimalSolutions (NZ)
Ltd
OptimalSolutions Pty Ltd
New Zealand
OptimalSolutions Inc
Australia
United States
Other OptimalSolutions
Subsidiaries
100%
Palo AltoPalo Alto
Other US Optimalgroup enitities
Other US Optimalgroup enitities
#Transfer Pricing & Economics
Introducing Optimal SolutionsIntroducing Optimal Solutions
• Product Characteristics
– Large
– Complex
– Expensive
– Limited to top-tier of supermarket chains and “category killer” retailers
– Requires close initial and ongoing customer relationship
• Product Characteristics
– Large
– Complex
– Expensive
– Limited to top-tier of supermarket chains and “category killer” retailers
– Requires close initial and ongoing customer relationship
• Business Model
– Country basis
– Distributor/Marketer
– Locally independent and stand alone
– Globally mobile staff
– Software royalty for continued product development
• Business Model
– Country basis
– Distributor/Marketer
– Locally independent and stand alone
– Globally mobile staff
– Software royalty for continued product development
Optimal Solutions – Case Study IOptimal Solutions – Case Study I
#Transfer Pricing & Economics
Integrating Transfer Pricing and Business Strategy
Integrating Transfer Pricing and Business Strategy
• Market Strategy for the Sales Office
• Portability of Functions, Assets and Risks
• Link to Profitability
• Optimal Solutions Case Study – Part II
• Market Strategy for the Sales Office
• Portability of Functions, Assets and Risks
• Link to Profitability
• Optimal Solutions Case Study – Part II
#Transfer Pricing & Economics
Market Tactics - Sales OfficeMarket Tactics - Sales Office
Integrating StrategyIntegrating Strategy
Test Marketing/Market ResearchTest Marketing/
Market Research
(Re)Focusing onTarget Market or
Product
(Re)Setting Objectives/Goalsfor Target Market
or Product
ChoosingMarket Entry/Development
Strategy
(Re)SettingTarget Market or
ProductMarketing Budget
and Plan
Transfer Pricing
And Tax Strategy
Monitoring and Adjusting:1. Target Market
Strategy2. Fit with Global
Strategy
#Transfer Pricing & Economics
Portability of Functions, Assets and Risks
Portability of Functions, Assets and Risks
Integrating StrategyIntegrating Strategy
Ability to move profit
Low
High
Return = Risk
Low
High
SalesManufacturing
Bad debtsForeign exchangeMarket
Trade marksTrade names
Functions
Intangibles
Functions
Commercial Risks
Intangibles
#Transfer Pricing & Economics
Link To Profitability Link To Profitability
Fu
nct
ion
s, a
s se t
s &
ris
k s
Full distribution/ marketing company
Exchange risk
Packaging
Warehousing
Distribution
Invoicing
Back office
Stock ownership
After sales support
Warranty risk
Promotions & advertising
Intangibles
Marketing
Sales force
Technical literature
Simple distribution
company only
Function/riskstripped distribution
company
Instantaneous buy/sell
company
Sales agent or commissionaire
Profit = f (Functions, assets & risks)
Credit risk
Integrating StrategyIntegrating Strategy
#Transfer Pricing & Economics
Understanding Optimal SolutionsUnderstanding Optimal Solutions
Optimal Solutions – Case Study IIOptimal Solutions – Case Study II
OptimalSolutions (NZ)
Ltd
OptimalSolutions Pty Ltd
New Zealand
OptimalSolutions Inc
Other US Optimalgroup Companies
Australia
United States
Other OptimalSolutions
Subsidiaries
100%
Fully fledged Marketer/Distributor
Fully fledged Marketer/Distributor
#Transfer Pricing & Economics
Understanding Optimal SolutionsUnderstanding Optimal Solutions
• Australia/NZ Market
– Optimal’s market share about 30% in both countries
– Australia’s turnover is about 4.8 times NZ’s turnover
– Projected FY 2000 sales growth not realised
– Seen as one mature market
• Australia/NZ Market
– Optimal’s market share about 30% in both countries
– Australia’s turnover is about 4.8 times NZ’s turnover
– Projected FY 2000 sales growth not realised
– Seen as one mature market
• Optimal’s Issues
– Increasing Overheads
– Decreasing Sales Growth
– Shrinking Margins – Decreasing ROTE
– Internal Profitability Pressures
– IRD Questionnaire
• Optimal’s Issues
– Increasing Overheads
– Decreasing Sales Growth
– Shrinking Margins – Decreasing ROTE
– Internal Profitability Pressures
– IRD Questionnaire
Optimal Solutions – Case Study IIOptimal Solutions – Case Study II
#Transfer Pricing & Economics
10
4
123
3
3
14
22
8
25
5
4
5
26
Sales
Training
CustomerService/Delivery
Marketing
Warehouse
IT Management
Management & BackOffice
Optimal Solutions – Case Study IIOptimal Solutions – Case Study II
Optimal Solutions - Personnel Optimal Solutions - Personnel Aust.Aust.
NZNZ
#Transfer Pricing & Economics
Focus On Four StrategiesFocus On Four Strategies
• Four Transfer Pricing Strategies– Distributor/Marketer– Limited Risk Distributor– Sales Facilitator– Commissionaire
• Permanent Establishment Issue
• Optimal Solutions Case Study – Part III
• Four Transfer Pricing Strategies– Distributor/Marketer– Limited Risk Distributor– Sales Facilitator– Commissionaire
• Permanent Establishment Issue
• Optimal Solutions Case Study – Part III
#Transfer Pricing & Economics
Distributor/MarketerDistributor/Marketer
Four Strategies - IFour Strategies - I
Customers
Parent Group
Distributor/Marketer
Country A
Country B
Sell
Sale of goods / services
Portable Risks• Warranty• Local market (long term)• Local volume (long term)• Inventory• Foreign exchange• Credit• Business
Risks•Local strategy/planning
•Local market (short term)
•Local volume (short term)
•All or some “portable” risks
Risks•Global strategic marketing/advertising•Global strategy/planning•Intangible property
Shared Functions/ Assets
Shared Functions/ Assets
#Transfer Pricing & Economics
Limited Risk DistributorLimited Risk Distributor
Four Strategies - IIFour Strategies - II
Customers
Parent Group
Limited RiskDistributor
Country A
Country B
Sell
Sale of goods/services
Risks• Strategic marketing/advertising• Strategy/planning• Market (long term)• Volume (long term)• Warranty• Inventory• Foreign exchange• Credit• Business• Intangible property
Risks
•Market (short term)
•Volume (short term)
#Transfer Pricing & Economics
Sales FacilitatorSales Facilitator
Four Strategies - IIIFour Strategies - III
CustomersCustomers
PrincipalPrincipal
Sales Facilitator
Sales Facilitator
Country A
Country B
Risks• Strategic
marketing/advertising• Strategy/planning• Market (long term)• Volume (long term)• Warranty• Inventory• Foreign exchange• Credit• Business• Intangible property
Risks• Volume• Market
Provision of sales services(order solicitation, sales force, market research, etc.)
Sell
#Transfer Pricing & Economics
CommissionaireCommissionaire
Four Strategies - IVFour Strategies - IV
CustomersCustomers
PrincipalPrincipal
CommissionaireCommissionaire
Country A
Country B
Risks• Strategic marketing/advertising• Strategy/planning• Market (long term)• Volume (long term)• Warranty• Inventory• Foreign exchange• Credit• Business• Intangible property
Risks• Volume• Market
Provision of sales services(order solicitation, sales force, market research, etc.)
Sell
#Transfer Pricing & Economics
Sales Offices - The PE IssueSales Offices - The PE Issue
• Subsidiary companies
• Holding Company/Branch structures– Emerging international consensus?
• Dependent & Independent Agents– No accepted practice– Confusion over issues– Common/civil law jurisdictions
• Subsidiary companies
• Holding Company/Branch structures– Emerging international consensus?
• Dependent & Independent Agents– No accepted practice– Confusion over issues– Common/civil law jurisdictions
Permanent EstablishmentPermanent Establishment
#Transfer Pricing & Economics
PE Issue – Common vs Civil LawPE Issue – Common vs Civil Law
Permanent EstablishmentPermanent Establishment
Agency Contract Civil Law Common Law
Indirect representative i.e. Commissionaire
Generally does not bind the
principal
Generally binds the principal
Direct representative
i.e Commercial Agent
Generally binds the principal
#Transfer Pricing & Economics
PE Issue – Common vs Civil LawPE Issue – Common vs Civil Law
Permanent EstablishmentPermanent Establishment
Agency Contract
appointing indirect
represent-ative (without power to
bind principal
Agent’s Contract
With Third Party
Civil Law Contract i.e France, Germany In
Common Law Contract
i.e. NZ, US In
Civil Law Contract i.e France, Germany
Out
Rebuttable Presumption
NO PE
Rebuttable Presumption
NO PE
Common Law Contract
i.e. NZ,US Out
Rebuttable Presumption
NO PE
Rebuttable Presumption
PE
#Transfer Pricing & Economics
Finding Optimal SolutionsFinding Optimal Solutions
Optimal Solutions – Case Study IIIOptimal Solutions – Case Study III
OptimalSolutions (NZ)
Ltd
OptimalSolutions Pty Ltd
New Zealand Australia
United States
Other OptimalSolutions
Subsidiaries
100%
Fully fledged Marketer/Distributor
Fully fledged Marketer/Distributor
OptimalSolutions Inc
Other US Optimalgroup Companies
#Transfer Pricing & Economics
Finding Optimal SolutionsFinding Optimal Solutions
Optimal Solutions – Case Study IIIOptimal Solutions – Case Study III
OptimalSolutions (NZ)
Ltd
OptimalSolutions Pty Ltd
New Zealand Australia
United States
Other OptimalSolutions
Subsidiaries
100%
Consolidating Functions, Assets & RisksConsolidating Functions, Assets & RisksOptimal
Solutions Inc
Other US Optimalgroup Companies
#Transfer Pricing & Economics
Finding Optimal SolutionsFinding Optimal Solutions
Optimal Solutions – Case Study IIIOptimal Solutions – Case Study III
OptimalSolutions (NZ)
Ltd
OptimalSolutions Pty Ltd
New Zealand Australia
United States
Other OptimalSolutions
Subsidiaries
100%
Consolidating Functions, Assets & RisksConsolidating Functions, Assets & Risks
OptimalSolutions Inc
Other US Optimalgroup Companies
#Transfer Pricing & Economics
Transfer Pricing RisksTransfer Pricing Risks
• Economic Double Taxation– Competent Authority Process
• Income Adjustments
• Penalties and Interest
• Internal Defence Costs– Management Time– Staff Attrition
• Advisor Defence Costs
• Revenue Authority Information Sharing
• Economic Double Taxation– Competent Authority Process
• Income Adjustments
• Penalties and Interest
• Internal Defence Costs– Management Time– Staff Attrition
• Advisor Defence Costs
• Revenue Authority Information Sharing
Revenue EnvironmentRevenue Environment
#Transfer Pricing & Economics
The Revenue EnvironmentThe Revenue Environment
• IRD– Measured risk-based approach– Key issues – royalties, management fees, commercial
realism– Further RAR questionnaire round Oct/Nov– Increased audit activity
• ATO – Increased review and audit activity
• IRS – Priority in large and medium sized businesses, and foreign-based organisations
• UK IRD – Increased review and audit activity
• Others – France, Germany, Canada
• IRD– Measured risk-based approach– Key issues – royalties, management fees, commercial
realism– Further RAR questionnaire round Oct/Nov– Increased audit activity
• ATO – Increased review and audit activity
• IRS – Priority in large and medium sized businesses, and foreign-based organisations
• UK IRD – Increased review and audit activity
• Others – France, Germany, Canada
Revenue EnvironmentRevenue Environment
#Transfer Pricing & Economics
Sales Offices - SummarySales Offices - Summary
• Increased Revenue activity– Means increased tax risk
• Properly integrating business, tax, and transfer pricing strategy– increases shareholder value – decreases tax/transfer pricing risk
• Transfer pricing risk management– Appropriate documentation– Consider Advance Pricing Arrangements
• Increased Revenue activity– Means increased tax risk
• Properly integrating business, tax, and transfer pricing strategy– increases shareholder value – decreases tax/transfer pricing risk
• Transfer pricing risk management– Appropriate documentation– Consider Advance Pricing Arrangements
SummarySummary