Transfer Pricing &
Economics
Institute of Chartered Accountants
of New Zealand - 2003 Tax Conference
Dealing with Sales Offices
Transfer Pricing Tools
Leslie Prescott-Haar
Anton Nannestad
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Overview of Presentation
PRESENTATION PART
CASE STUDY PART
• The Relevance and Benefits of
Transfer Pricing to the Supply
Chain
• Introducing Optimal Solutions
Inc
• Integration Transfer Pricing,
Tax Planning and Business
Strategy
• Understanding Optimal
Solutions NZ
• 4 Planning Tactics
• Dealing with the PE Issue
• Revenue Environment
Transfer Pricing & Economics
Overview
• Finding Optimal Solutions
(for Optimal Solutions NZ)
#
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
Transfer Pricing & Economics
#
The Overall Supply Chain
Information
Materials/Products/Services
S
U
P
P
L
I
E
R
S
Operations/Strategy
R&D
Plan
Buy
Make/
Service
Move
Sell
AfterSales
Cash
Process/Organisation
Transfer Pricing & Economics
Transfer Pricing and the Supply Chain
#
C
U
S
T
O
M
E
R
S
Sales Office Business Processes
Customers
NZ Channels
Sales &
Marketing
Supply
Chain
Management
Inventory
Management
Order
Management
After-sales
Support
Service
Delivery
Local Infrastructure
Group Infrastructure
Transfer Pricing & Economics
Transfer Pricing and the Supply Chain
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Weighing Benefits
• Improved business model, management &
processes
– Improved decision making, management and
monitoring of business performance
– Incentives for revenue growth/cost reduction
– Risk reduction
Transfer Pricing & Economics
Transfer Pricing and the Supply Chain
#
Weighing Benefits
• 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 & Economics
Transfer Pricing and the Supply Chain
#
Weighing 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
Transfer Pricing & Economics
Transfer Pricing and the Supply Chain
#
Transfer Pricing &
Economics
Optimal Solutions Inc
Sales Offices Case Study
I
II
III
Introducing Optimal Solutions
Understanding Optimal Solutions
Finding Optimal Solutions
Transfer Pricing & Economics
Optimal Solutions – Case Study
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Introducing Optimal Solutions
Other US Optimal
group enitities
Optimal
Solutions Inc
United States
Palo Alto
MarketEnterprise
Retail
Share: Software
••43%
POS,
Global
Loyalty Card, Purchaser
Analysis, Supply Chain Management
•30% Australia & New Zealand
100%
New Zealand
Optimal
Solutions (NZ)
Ltd
Transfer Pricing & Economics
Optimal Solutions – Case Study I
Australia
Other Optimal
Solutions
Subsidiaries
Optimal
Solutions Pty Ltd
#
Introducing Optimal Solutions
• Product Characteristics
• Business Model
– Large
– Country basis
– Complex
– Distributor/Marketer
– Expensive
– Limited to top-tier of
supermarket chains and
“category killer” retailers
– Requires close initial and
ongoing customer
relationship
Transfer Pricing & Economics
Optimal Solutions – Case Study I
– Locally independent and
stand alone
– Globally mobile staff
– Software royalty for
continued product
development
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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
Transfer Pricing & Economics
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Market Tactics - Sales Office
Test Marketing/
Market Research
(Re)Focusing on
Target Market or
Product
(Re)Setting
Objectives/Goals
for Target Market
or Product
Choosing
Market Entry/
Development
Strategy
(Re)Setting
Target Market or
Product
Marketing Budget
and Plan
Transfer Pricing
And Tax Strategy
Monitoring
and Adjusting:
1. Target Market
Strategy
2. Fit with Global
Strategy
Transfer Pricing & Economics
Integrating Strategy
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Portability of Functions,
Assets and Risks
Ability to
move profit
Return = Risk
High
Intangibles
Commercial Risks
Low
Transfer Pricing & Economics
Integrating Strategy
Functions
Functions
Trade marks
Trade names
High
Bad debts
Foreign exchange
Market
Sales
Manufacturing
Low
#
Link To Profitability
Intangibles
Marketing
Packaging
Warehousing
Profit = f (Functions, assets & risks)
Distribution
Invoicing
Back office
Stock ownership
After sales support
Credit risk
Warranty risk
Exchange risk
Technical literature
Promotions &
advertising
Full distribution/
marketing company
Transfer Pricing & Economics
Integrating Strategy
Simple
distribution
company only
Function/risk
stripped distribution
company
Instantaneous
buy/sell
company
Sales force
Sales agent or
commissionaire
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Understanding Optimal Solutions
Other US Optimal
group Companies
United States
Optimal
Solutions Inc
100%
New Zealand
Optimal
Solutions (NZ)
Ltd
Australia
Other Optimal
Solutions
Subsidiaries
Optimal
Solutions Pty Ltd
Fully fledged
Marketer/Distributor
Transfer Pricing & Economics
Optimal Solutions – Case Study II
#
Understanding 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
• Optimal’s Issues
– Increasing Overheads
– Decreasing Sales Growth
– Shrinking Margins
– Projected FY 2000 sales
growth not realised
– Decreasing ROTE
– Seen as one mature market
– Internal Profitability
Pressures
– IRD Questionnaire
Transfer Pricing & Economics
Optimal Solutions – Case Study II
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Optimal Solutions - Personnel
Aust.
Sales
22
Training
26
10
14
Customer
Service/Delivery
4
Marketing
8
3
5
Warehouse
3
4
3
NZ
12
5
25
Transfer Pricing & Economics
Optimal Solutions – Case Study II
IT Management
Management & Back
Office
#
Focus On Four Strategies
• 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/Marketer
Risks
•Global strategic
marketing/advertising
•Global strategy/planning
•Intangible property
Portable Risks
•
•
•
•
•
•
•
Warranty
Local market (long term)
Local volume (long term)
Parent Group
Inventory
Foreign exchange
Credit
Sale of goods / services
Business
Country A
Shared
Functions/
Assets
Country B
Risks
Distributor/
Marketer
Customers
Sell
•Local strategy/planning
•Local market (short term)
•Local volume (short term)
•All or some “portable” risks
Transfer Pricing & Economics
Four Strategies - I
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Limited Risk Distributor
Risks
• Strategic marketing/advertising
• Strategy/planning
• Market (long term)
Parent Group
• Volume (long term)
• Warranty
• Inventory
• Foreign exchange
• Credit
• Business
Sale of goods/services
• Intangible property
Country A
Country B
Risks
Customers
Sell
Transfer Pricing & Economics
Four Strategies - II
Limited Risk
Distributor
•Market (short term)
•Volume (short term)
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Sales Facilitator
Risks
• Strategic
marketing/advertising
• Strategy/planning
• Market (long term)
• Volume (long term)
• Warranty
• Inventory
• Foreign exchange
• Credit
• Business
• Intangible property
Principal
Provision of sales services
(order solicitation, sales
force, market research,
etc.)
Country A
Country B
Sell
Sales
Facilitator
Customers
Transfer Pricing & Economics
Four Strategies - III
Risks
• Volume
• Market
#
Commissionaire
Risks
• Strategic marketing/advertising
• Strategy/planning
• Market (long term)
• Volume (long term)
Principal
• Warranty
• Inventory
• Foreign exchange
• Credit
• Business
Country A
• Intangible property
Provision of sales services
(order solicitation, sales
force, market research,
etc.)
Country B
Sell
Customers
Transfer Pricing & Economics
Four Strategies - IV
Commissionaire
Risks
• Volume
• Market
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Sales 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
Transfer Pricing & Economics
Permanent Establishment
#
PE Issue – Common vs Civil Law
Agency Contract
Civil Law
Indirect representative
Generally does
not bind the
principal
i.e. Commissionaire
Common Law
Generally binds
the principal
Direct representative
i.e Commercial Agent
Transfer Pricing & Economics
Permanent Establishment
Generally binds
the principal
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PE Issue – Common vs Civil Law
Agency
Contract
appointing
indirect
represent-ative
(without power to
bind principal
Agent’s
Contract
With Third
Party
Civil Law Contract i.e
France, Germany
Out
Civil Law Contract i.e
France, Germany In
Common Law
Contract
i.e. NZ, US In
Rebuttable Presumption
Rebuttable Presumption
NO PE
NO PE
Common Law
Contract
Rebuttable Presumption
Rebuttable Presumption
i.e. NZ,US Out
NO PE
PE
Transfer Pricing & Economics
Permanent Establishment
#
Finding Optimal Solutions
Other US Optimal
group Companies
United States
Optimal
Solutions Inc
100%
New Zealand
Optimal
Solutions (NZ)
Ltd
Australia
Other Optimal
Solutions
Subsidiaries
Optimal
Solutions Pty Ltd
Fully fledged
Marketer/Distributor
Transfer Pricing & Economics
Optimal Solutions – Case Study III
#
Finding Optimal Solutions
Other US Optimal
group Companies
Optimal
Solutions Inc
United States
Consolidating Functions,
Assets & Risks
100%
New Zealand
Optimal
Solutions (NZ)
Ltd
Transfer Pricing & Economics
Optimal Solutions – Case Study III
Australia
Other Optimal
Solutions
Subsidiaries
Optimal
Solutions Pty Ltd
#
Finding Optimal Solutions
Other US Optimal
group Companies
Optimal
Solutions Inc
United States
Consolidating Functions,
Assets & Risks
100%
New Zealand
Optimal
Solutions (NZ)
Ltd
Transfer Pricing & Economics
Optimal Solutions – Case Study III
Australia
Other Optimal
Solutions
Subsidiaries
Optimal
Solutions Pty Ltd
#
Transfer 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
Transfer Pricing & Economics
Revenue Environment
#
The 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
Transfer Pricing & Economics
Revenue Environment
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Sales 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
Transfer Pricing & Economics
Summary
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Transfer Pricing &
Economics
Discussion?
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