Many businesses face significant challenges to ensure their transfer pricing policies are still aligned with their business models, and that these fit for purpose going forwards. KPMG’s Value Chain Analysis can enable companies to assess these gaps & ensure an optimized and tax sustainable outcome.
Business models continually evolve as companies react to changes and reposition themselves to avoid emerging risks and to seize opportunities. Many companies have made use of new technologies, digitalizing their business operations, shifting towards more direct-to-customer models, where platform–based business models are eliminating distributors and intermediaries, and increasingly relying on software and data to provide customers with new and better solutions.
These drivers of change allow companies to pursue new economic opportunities in virtual markets, and to mix their product and service offerings, with the consequence that contributors to value creation are becoming increasingly blurred.
Over time, these accruing changes can transform everything about the business model – that is, how the business earns and distributes its profits, how it invests and how it deploys its capital.
Simultaneously, external factors are forcing companies to rethink their business operations, and among these the Covid-19 pandemic is at the forefront. The outbreak has accelerated the adoption of some of the trends seen above, while also creating new issues such as increasing trends towards flexible working that companies must monitor carefully.
The unprecedented impact of the pandemic has led to practical challenges for many companies. During this period, multinational enterprises (“MNEs”) have been forced to adapt their business models and have experienced significant changes in their organization. The dispersion of key personnel into different jurisdictions which occurred during the pandemic could also have led to reallocation of functions, resulting in increased risk of permanent establishments.
In the same vein, MNEs have had to re-think the allocation of the risks that materialized over the course of the pandemic across group entities (and the resulting costs, such as lockdown costs).
The importance of assessing the impact that these changes have on MNEs is further exacerbated by the confluence of existing and impending tax considerations such as BEPS 2.0, EU-style digital services taxes and unilateral tax reform in many jurisdictions.
Whilst the driver for these changes are for taxes to be paid where value creation occurs, allowing the fair taxation of profits generated by businesses that do not have a physical presence in the market jurisdiction, they create complexity in terms of increased compliance and administration, and uncertainty on the potential impact for many businesses, at least in the short term.
MNEs whose organizations are not compliant with these requirements face, in addition to potential tax inefficiencies, reputational and financial risks, which are magnified by the recent initiatives aimed at increasing tax transparency for taxpayers.
Although these changes affect all companies with international operations, those which will be particularly impacted include:
Value Chain Analysis (“VCA”) is an ideal methodology for quantifying risk levels and ensuring that tax planning is structured in a compliant and tax-efficient manner. VCA allows companies to:
In order to maximize tax efficiencies, and reduce tax risks associated, it is important to follow VCA’s multi-step approach. More specifically, companies can focus on: