Multinational Business Strategies and Transfer pricing in a global MarketplaceMartin PrzsuskiEn un mundo dominado por las MNE, no es sorpresa que estrategias de Mercado agresivas sean la regla.En un tax environment, uno de los problemas que una MNE debe considerar es como sus business strategies reconciled con los precios de transferencia en los mercados que sirven.Normalmente, existe una necesidad de ofrecer precios bajos, descuentos y otros incentivos.El tradeoff (entre ganar mercado y establecer transfer pricing policies) afectar el profit margin en el mercado invidivudal pero tambin a la MNE en el nivel global.

Mercados, Estrategia de Negocios y Precios de transferencia IntroduccinDefinicin tradicional: Dese una perspectiva MNE un mercado es definido por su geografa y lo que la MNE hace en ese territorio. Como resultado, la MNE desarrolla una estrategia de negocio a nivel local. Puede pasar tambin que los agrupen como la Unin Europea. Sin embargo, para el punto de vista de international taxation, una geografa es un nico pas con los lmites bien definidos.Tax authorities han planteado criterios especficos bajo los cuales las estrategias de negocio pueden ser consideradas legtimas para sobrellevar lo siguiente: Justificar precios de transferencia que difieran del estndar internacional Permitir que las MNE Subsidiaries incurran en prdidas dentro de su tax jurisdictionLA OECDHave specific recommendations on business strategy considerations that may be taken into account when evaluating the transfer prices set by MNEsMost OECD countries follow the OECD guidelines. Each of these countries has its own transfer pricing regulations that specify unique requirements for transfer pricing and tax compliance in its respective tax jurisdictions. In this context, MNEs are well advised to refer to each country's interpretation of the OECD's stance on MNE business strategy and the extent to which it may be allowed to explain discrepancies in transfer prices for entities operating in their tax jurisdictions.The OECD Guidelines clearly specify that business strategies should be considered when examining comparability for transfer pricing purposes

BUSINESS STRATEGIESAn MNE's business strategy is crucially dependent upon the characteristics of the external environment, such as the following: The opportunities and constraints of pursuing such a strategy in the environment An MNE's internal capabilities The tradeoffs associated with responding to the pressures for national responsiveness and global integrationThe pursuit of business strategy across international boundaries by an MNE hinges on the need to provide for both external flexibility that helps respond to changes in the external local environment while maintaining the internal efficiency of firms to deliver quality products globally. The tradeoff manifests its tension in many ways but most critically influences the business strategy that is followed by an MNE to achieve its objectives.Corporate MNE managers face two, often conflicting, objectives. On one hand, they have a need to be responsive to the demands imposed by local environmental factors that are specific to the particular local market such as political and economic factors On the other hand, such corporate managers also need to be cognizant of global market dynamics and attempt to achieve a coherent global strategy through internal integration efficienciesSELECTING ALTERNATIVESMNEs have to be flexible on a local level and be able to cater their operations and products to satisfy local demand. On a global level, in order to achieve efficiencies of scale, MNEs need to standardize operations and products and integrate their international operations. In essence, the pressures of adapting to the local demand promote external flexibility at the expense of internal efficiency, while the pressures of standardizing at the global level promote internal efficiency at the expense of external flexibility. You have to choose one. Han querido separarlos y algunas ideas sobre esto son: fragmentation versus unification," differentiation versus standardization national responsiveness versus global integration.INTEGRATION-RESPONSIVENESS (I-R Framework)Prahalad and Doz classified the environmental pressures on corporate managers of MNEs along three main dimensions: The need for global integration of activities The need for global strategic coordination The need for local responsiveness

Global StrategyIn a global strategy, the focus is on internal efficiency through global integration, with a low degree of national responsiveness plus high degree of global integration, and strategic decisions centralized to offer standardized products, services, and/or operations across national markets. Most functions in these firms are concentrated in a few key locations, and the decision-making is largely centralized. But the MNE may disperse a few functions worldwide.Multidomestic StrategyIn a multidomestic strategy, the focus is on external flexibility through national responsiveness with a high degree of national responsiveness plus low degree of global integration Strategic decisions are decentralized to each country to enable adaptation of products, services, and/ or products to local demands. In these firms, the subsidiaries are treated as autonomous entities, with locally responsive management and little coordination with the MNE headquarters or other subsidiariesMultifocal StrategyA multifocal strategy is an intermediate strategy between multidomestic and global strategies that attempts to attain both national responsiveness and global integration by seeking a tradeoff between the conflicting demands (e.g., decisionmaking decentralization versus centralization, adaptation versus standardization, and external flexibility versus internal efficiency) of the two approaches. In essence, a firm pursuing a multifocal strategy is subjected to moderate levels of global integration and national responsiveness pressures and attempts to create a creative balance between the two objectives.Transnational StrategyA transnational strategy attempts to achieve high levels of both national responsiveness and global integration simultaneously by overcoming the tradeoff between the conflicting demands of the two pressures. In essence, transnational firms operate in a transnational environment characterized by high global integration and high local responsiveness pressures. In these firms, the aim is to simultaneously achieve global efficiency, local responsiveness and learning on a worldwide basis.MNE MARKET SHARE STRATEGIESOn a general strategic level, the market share strategies pursued by MNEs can be divided into three main categories as follows: Market maintenance strategy Market expansion strategy Market penetration strategyActual Market StrategiesIn essence, market "maintenance" occurs when an MNE has already entered a market and is required to maintain its market share by responding to attempts of its competitors to take away market share.An MNE might also actively pursue a market "expansion" strategy to increase market share in a highly competitive market. On the other hand, market "penetration" occurs when an MNE is a relative newcomer to a particular market and is seeking to enter and establish its products/services in the new marketthe pursuit of such general market share strategies would involve management's pursuit of certain tactical objectives: In currently serviced markets: To sustain market share held by current products (market maintenance) (mercado actual) To increase market share held by current products (market expansion) (mercado actual) To increase market share of new products (market penetration) (nuevo mercado)Tactical Strategies at Market Levelwhen an MNE pursues a market maintenance/expansion strategy in a currently serviced market, the tactical strategy at the market level might be focused on a combination of the following: Attracting users of competitive brands Persuading current users to increase usage Attracting nonusers of the product categoryTactical strategy might involve some combination of: attracting existing users of competitive brands to the new product, or attracting nonusers to the product category to which the new product belongs. These three market share strategies, be it market maintenance, market expansion or market penetration, are executed by MNEs using two fundamental tactics: Increasing their marketing and/or selling expenses through a variety of avenues such as using more salesmen and commission agents, increased advertising, offering rebates, coupons, free samples, offering extended warranties, etc. Lowering prices on their products on a temporary basis by offering discounts on the product to become extremely competitive in the marketCurrent Transfer Pricing Guidance on Business StrategyThe OECD Guidelines also specifically identify market penetration schemes as one of the variations of business strategies that should be considered for determining comparability (taxes comparability)Alternative Market Share ApproachesBoth reducing prices on costs and increasing expenses are considered legitimate means to execute a market maintenance, market expansion or market penetration strategy.(ejemplos en la pagina 19)OECD Guidelines specify various issues that may have to be examined to determine whether the taxpayer's business strategy is a valid one for transfer pricing purposes. One of them is the conduct of the parties to the related-party transactions and the examination of whether or not their conduct is consistent with the professed business strategy.Another fact to examine is whether unusually intense marketing and advertising efforts are taking place, since these marketing and advertising efforts would signal a market penetration or market share expansion strategies.^' It is vital to examine the nature of the relationship between the related parties and the relative costs borne by either party, especially when intangibles are concernedOECD Guideline IssuesOECD GuideHnes propose an explicit time limitation as a condition to allow taxpayers to pursue legitimate business strategies such as market penetration or market expansin. Nonetheless, what constitutes an appropriate timeframe is unclear. This advice, is of course, fraught with problems since their taxpayers and tax administrators might disagree on what evidence of commercial strategies demonstrate with regard to acceptable time frame to pursue a business strategy in a particular tax jurisdiction.Code Sec. 482 ConsiderationsUnder the U.S. transfer pricing regulations, the pursuit of a "market share strategy" is recognized as a "special circumstance" that might impinge negatively on the comparability of a transaction.In addition, the transfer pricing regulations limit the market share strategy to "certain circumstances." Such "circumstances" are also not defined by the regulations, and the only guidance given is that taxpayers "may adopt" strategies to either (1) enter new markets, or (2) increase a product's share of a existing market.Canadian ConsiderationsIn essence, the Canadian guidance only comments on the market penetration strategy and on lowering product prices temporarily as the tactical means to achieve such a strategy in a new market.Notwithstanding the ambiguity, the underlying theme in the OECD Guidelines, the U.S. regulations and the Canadian guidance on market share strategies is the strong implicit recognition that such strategies cannot be pursued indefinitely by a taxpayer and that there has to be some definite time limitation in the foreseeable future when these strategies might presumably yield future profitsMNE Business Strategy and Transfer Pricing Reconciliation of TradeoffsEour MNE business strategy models are evident using the I-R grid, i.e., multidomestic, global, multifocal and transnational. A fifth possible strategy could also be conceived, i.e., an export-oriented strategy. However, this export strategy does not imply or necessitate the existence of a related party and hence is not relevant for transfer pricing.".Steps for reconcile transfer pricing and business trategy: MNE taxpayers are well advised to first determine the business strategy model their parent companies are pursuing on a global level Once such a determination has been made, the next issue to consider is the relative contribution of each of the related parties to the transaction The final step is to reconcile the business strategy followed with the associated transfer pricing issues and document the various tactical strategies that are being used to execute on the preferred business strategyMultidomestic Strategy and Transfer PricingMNE parent companies following a multidomestic strategy usually give considerable autonomy to their subsidiary operations. Only a few functions such as financial controls and branding are occasionally coordinated at the parent company level. In essence, the risks of the local market share enhancing activities is primarily borne by the domestic entity, and the MNE parent company sets its transfer pricing policy independently of its subsidiaries, in essence, at arm's length.However, MNEs pursuing this multidomestic business strategy should take care to not set their global transfer prices at too high a level. Having such high prices may adversely affect the fortunes of subsidiary companies in highly competitive markets. (Ejemplo. Precios de transferencia muy altos en pases emergentes)Global Strategy and Transfer PricingMNEs pursuing a global strategy usually have centralized decision-making authority located at the headquarters level within the parent company. Subsidiaries, in contrast, have very little autonomy as compared to the multidomestic strategy.In essence, the MNE parent and subsidiaries act in concert and hence execute on the global business strategy together.An MNE parent may choose to either lower its transfer price or assist in the sales and marketing efforts of its subsidiaries as a tactical strategy to implement the appropriate market share strategy in a local market.Transnational/Multifocal Strategy and transfer pricingMNEs following a transnational or multifocal strategy essentially attempt to creatively balance the pressures of both global integration and local responsiveness. Different subsidiaries may have different related-party transaction arrangements with the MNE parent and there may be cases where no transactions exist between an MNE parent and subsidiary when all related-party transactions are pursued with other subsidiaries in the group.Therefore, when an MNE pursues a transnational strategy, it is imperative that the functions performed, risks assumed and assets employed by each entity engaged in a particular related-party transaction be adequately scrutinized and the relative contribution to the market share strategy be ascertained.MNE Business Strategy and IntangiblesTransfer Pricing IssuesThe issue of intangible creation is intricately linked to the issue of intangible ownership. In terms of marketing intangibles, the OECD recognizes that marketing activities, such as market research, designing or planning products suitable to market needs, sales strategies, public relations, sales, service and quality control and so forth, may all contribute to the creation of an intangible. In the transfer pricing context, there are two main ownership concepts that come into play, legal and economic ownership. Legal ownership is predicated on the existence of legal title and legal protection of any intangible property.Under the legal ownership principle, if a parent company is a legal owner of an intangible, a subsidiary may not be able to create its own "local marketing intangibles" that are separate and distinct from the trademark or tradename owned by the parent company.On the other hand, econoniic ownership is determined based on which entity in a related-party transaction bears the greatest share of the costs of development of intangible property, bears the greatest economic burden (economic costs and risks) of developing the intangible.Notwithstanding the type of business strategy an MNE pursuesglobal, multidomestic or a multifocal/transnationalintangibles may be created when the following conditions are met: An MNE succeeds in enhancing its market share of its products in an existing market An MNE succeeds in entering a new market with its products by executing a successful market penetration strategy

In sum, in the context of increasing scrutiny of transfer pricing issues worldw^ide, it is quite important that MNE taxpayers pay particular attention to how their business strategies on both a global and local market level might affect their transfer pricing policies in particular tax jurisdictions. This result is especially crucial v^hen subsidiaries in these various jurisdictions are in loss-making positions to penetrate a new market or maintain/expand their market share in an existing market