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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
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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
4© 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
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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
6© 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
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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
7© 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
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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
8© 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
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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
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Illustrative VCA outputActivity Map
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Illustrative VCA outputValue Heat Map
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—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
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—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
14© 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
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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
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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
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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
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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
19© 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
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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
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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
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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?
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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
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—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.
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Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.