# Transfer Pricing & Economics Institute of Chartered Accountants of New Zealand - 2003 Tax Conference Leslie Prescott-Haar Anton Nannestad Leslie Prescott-Haar

Transfer Pricing & Economics

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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 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


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


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


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




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




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



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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


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


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


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


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


Portability of Functions, Assets and Risks

Portability of Functions, Assets and Risks


Ability to move profit

Low

High

Return = Risk

Low

High

SalesManufacturing

Bad debtsForeign exchangeMarket

Trade marksTrade names

Functions

Intangibles

Functions

Commercial Risks

Intangibles


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



Understanding Optimal SolutionsUnderstanding Optimal Solutions

Optimal Solutions – Case Study IIOptimal Solutions – Case Study II


Ltd


New Zealand


Other US Optimalgroup Companies

Australia

United States


Subsidiaries

100%

Fully fledged Marketer/Distributor



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



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 - Personnel Optimal Solutions - Personnel Aust.Aust.

NZNZ


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


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


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)


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


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


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


PE Issue – Common vs Civil LawPE Issue – Common vs Civil Law


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


PE Issue – Common vs Civil LawPE 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 In

Common Law Contract

i.e. NZ, US In

Civil Law Contract i.e France, Germany

Out

Rebuttable Presumption

NO PE


NO PE

Common Law Contract

i.e. NZ,US Out


NO PE


PE


Finding Optimal SolutionsFinding Optimal Solutions

Optimal Solutions – Case Study IIIOptimal Solutions – Case Study III


Ltd


New Zealand Australia

United States


Subsidiaries

100%









Ltd



United States


Subsidiaries

100%

Consolidating Functions, Assets & RisksConsolidating Functions, Assets & RisksOptimal

Solutions Inc






Ltd



United States


Subsidiaries

100%

Consolidating Functions, Assets & RisksConsolidating Functions, Assets & Risks




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


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


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


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Discussion?Discussion?

Documents

# Transfer Pricing & Economics Institute of Chartered Accountants of New Zealand - 2003 Tax Conference Leslie Prescott-Haar Anton Nannestad Leslie Prescott-Haar