value chain analysis - aligning income with value creation...contributions to value creation by...

2019 U.S. Cross-Border Tax ConferenceMay 14 – 16, 2019

tax.kpmg.us

Value Chain Analysis –Aligning Income with Value Creation

2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761

#kpmgxb

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Notices

AgendaIntroduction to Value Chain Analysis

Application of a Value Chain Analysis todocumentation

Application of a Value Chain Analysis to DEMPE gap analysis and remediation planning

Application of a Value Chain Analysis to controversy & APAs

Questions

01

02

03

04

05


#kpmgxb

Today’s presentersName Title Firm/Company Name EmailSteve Blough Principal KPMG US [email protected]

Michel Braun Director KPMG Germany [email protected]

Karen Hirsh VP, International Tax Thomson Reuters [email protected]

Theresa Kolish Managing Director KPMG US [email protected]

Marcus Heyland Senior Manager KPMG US [email protected]

Introduction to value chain analysis


#kpmgxb

A Value Chain Analysis (“VCA”) is a framework to analyze a company’s global value chain for purposes of drawing tax and transfer pricing conclusions, with a focus on identifying value drivers and aligning them with the associated functions, assets and risks

What is a VCA?

Value Chain Analysis

— Top down approach

— Industry / enterprise focused

— Identifies value drivers and the associated functions, assets and risks

Traditional Functional Analysis

— Bottom up approach

— Transaction focused

— Little direct attention paid to the relative value of the functions, assets and risks


#kpmgxb

KPMG’s VCA methodology

1. Map

2. Evaluate

3. Apply

High level

industry analysis

Develop initial

activity map and

value driver review

Conduct interviews

1. Prepare activity map Capturing activities acrossvalue chain

2. Identify and map assets and risks Identifying assets, risks and synergies, map to activities

—Identify gaps/risks in the current pricing arrangements – Assess whether profit outcome is aligned to value creation.

—Identify activities within the value chain that require a detailed review of current pricing mechanism.

—Plan next steps.

7. Overlay entity perspective

Match activities to entity/location

4. Value hypothesisEvaluate and assess relative contributions of different value drivers

5. Prepare Value-weighted asset and risk mapIdentify relative importance of assets and risks

6. Prepare valueheat map

3. Summarise key factsDocument findings of interviews


#kpmgxb

Kick off & information gathering

Review and

analyzethird party

data

Valuefocused

interviews

Develop value

hypothesis

Kick off

1. Map

2. Evaluate

Detailed industry insightsThird party insights

Knowledge of taxpayers business/ Review of information provided by the taxpayer

Build a full list of potential value drivers and draft activity map

Value drivers Sub value drivers Value in industry

1

2

3

4

TOTAL 100%

VCA requires targeted interviews, which:1. Manages the subjectivity of the information

gathered in the best possible fashion 2. Efficiently captures evidence on the relative value

of drivers of value


#kpmgxb

Illustrative VCA outputActivity Map


#kpmgxb

Illustrative VCA outputValue Heat Map


#kpmgxb

—Drive consistency across Local File, Master File and CbyC—DEMPE gap analysis and remediation planning—Controversy / Advance Pricing Agreements—International tax planning—Many other potential use cases

Common VCA use cases

Focus of presentation


#kpmgxb

—The short answer is no—Transfer pricing method analysis involves factors not covered in a VCA

such as contractual terms—In practice, VCA’s commonly support treatment of entities as “routine”

and the use of one-sided methods such as TNMM—Even if an entity participates in an important value driver, external

comparables may have similar activities—VCA based gap analysis and remediation is the use of a VCA to identify

and mitigate risks to the existing transfer pricing—There are use cases where VCAs are used to drive global profit split

analyses, but these are not inherent (or even common)

Does a VCA imply a profit split?

Application of a VCA to documentation


#kpmgxb

Driving consistency across MF, LF and CbyC

Country by Country reporting

Operating Model and TP Model optimised and aligned?

Value chain analysis

[Profit outcomes = value creation?]

Local files


#kpmgxb

MF requirements using VCA

MF Requirement VCA ItemImportant drivers of business profit Industry and company value driversA brief written functional analysis describing the principal contributions to value creation by individual entities within the group, i.e. key functions performed, important risks assumed, and important assets used

Principal value creating activities and legal entities

A general description of the MNE's overall strategy for the development, ownership and exploitation of intangibles, including location of principal R&D facilities and location of R&D management

Consistency important. Intangible may or may not be a value driver

A list of intangibles or groups of intangibles of the MNE group that are important for transfer pricing purposes and which entities legally own them

Consistency important

A general description of the group's transfer pricing policies related to R&D and intangibles

Consistency important


#kpmgxb

Driving consistency across MF, LF and CbyC

Principalcontributions to value creation

by Legal Entities (Master File)

Important drivers of

business profit (Master File)

Intangibles (Local File & Master File)

DEMPE(Local File) Functional

analysis & most appropriate method

(Local File)

CbyCReporting

Value Chain Analysis

Application of a VCA to DEMPE gap analysis and remediation


#kpmgxb

BEPS Actions 8-10: Aligning Transfer Pricing Outcomes with Value Creation— Legal ownership of IP does not alone entitle owner to any return— Group members performing important functions, controlling economically

significant risks, and contributing assets are entitled to an “appropriate return”— Focus on “DEMPE” functions: development, enhancement, maintenance,

protection, and exploitation— “Cash box” companies may be limited to a risk-free return

DEMPE

The OECD Final Report greatly reduces taxpayers’ ability to rely on contractual arrangements and funding of development to determine entitlement to IP profits


#kpmgxb

A VCA is typically the best way to perform a current state DEMPE assessment for an existing IP Co, including identifying:— Which elements of DEMPE are most important to the company and why?— Where are the functions related to those elements currently being

performed and by whom?— Where do gaps exist?

Even if robust DEMPE functions are present in the appropriate jurisdictions, many taxpayers lack the documentation to prove it to tax authorities— A VCA can be used as a component of “DEMPE documentation” along with

RACIs, process maps, etc.

VCA applied to DEMPE gap analysis


#kpmgxb

In addition to an assessment of the current state DEMPE, a VCA can be used in other contexts, including:—DEMPE assessment and integration of Target IP Co—DEMPE assessment of IP Co following a divestiture

Other VCA applications to a DEMPE analysis

Application of a VCA to controversy & APAs


#kpmgxb

Value?

Diverted Profits Facility

FCD ModelDigital

Services Tax

Marketing Intangibles

Significant Economic Presence

VCA & Controversy – Tax authorities are still trying to determine where is value created and who is benefitting?


#kpmgxb

China requires disclosure of an MNE’s profits across global value chain

Germany has discussion documents concerning the value chain as part of TP

documentation

Tax audits in Spain now start with understanding the group’s value chain

ATO requires a value chain disclosure

Tax authorities requiring a VCA

Key takeaways


#kpmgxb

—Strong and defensible transfer pricing requires a clear understanding of value drivers and ultimately how the company makes money

—A VCA is a structured way of identifying value drivers and aligning them with the associated functions, assets and risks and thus is complementary to traditional FAR analysis

—The VCA framework can be deployed across many use cases, including documentation, planning and controversy / APAs

Takeaways

Questions

Thank you

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761

The KPMG name and logo are registered trademarks or trademarks of KPMG International.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

kpmg.com/socialmedia

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

value chain analysis - aligning income with value creation...contributions to value creation by...

Documents