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Diversified Industrials: Horizons

Digitalization. Complex supply chains. Growing regulation and compliance. Conglomerates and industrials operate in an increasingly dynamic environment – one which requires creative solutions and forward thinking.

Transfer pricing in the new global economy

By Fabrizio Lolliri and Nika Sinjeri

Driven by ever-advancing technologies, today’s multinationals need to quickly adapt to new ways of doing business — a process that can often leave them more vulnerable to risk including tax and transfer pricing, especially since new legislation and rules have been introduced post Base Erosion and Profit Shifting ("BEPS") project outcomes. Adequate and supportable transfer pricing model implementation can be a challenge for those who hope to withstand heightened scrutiny.

Take a manufacturing business. In the past, when brick and mortar factories still ruled the day, value created along the supply chain was easier to identify and therefore, where profit should arise and be taxable. With the rise of 3D printing and IP becoming one of the core drivers of the business, for example, that value chain has been altered, mostly centering around software, know-how and the key R&D people who develop the IP.

Identifying these new value drivers can be challenging for businesses with matrix structures. Management typically looks at reports showing financials for teams where the people might be both in various locations and adding different value depending on the functions and risks they manage. In other words, there is an increasing misalignment of management and statutory reporting. In the midst of rapid change, where an individual’s function may become more important than the team’s function as a whole, this missing information is crucial. What’s more, the mere number of team members in a given location is not the only significant factor at play; tax authorities look to see who the key decision makers are within a team.

Misalignment exposes conglomerates to tax and transfer pricing challenges, problems that can be exacerbated in the event of impending M&A. Furthermore, tax and transfer pricing are only one area businesses have to consider in the midst of constant change to stay ahead of the curve. In aligning matrix structures towards a new commercial model, businesses need to have complete sight of the impact a potential change would have on their operations to be able to make commercial decisions. Therefore, if there are regulatory restrictions or implications, for example in the area of IP protection, this will impact the feasibility of the business model and may lead to a decision to take a different commercial approach.

To head off these potential threats, organizations would do well to engage a team that can provide a 360-degree approach on matrix structures at the outset of M&A integrations or operating model changes. The chosen advisors should not just have experience in accounting, management structures, and tax law, but also in IP protection and regulatory restrictions to name a few. By identifying each layer and associated risks at this early stage — and working through various options with the overall commercial goals top-of-mind — companies can align their operations and make any necessary changes in time.

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