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Maximising The Opportunity Of Transfer Pricing Design Through Centralised Procurement
In the current economic environment, many transfer pricing optimisation strategies have come under heavy attack from both tax authorities and the general public. Taxand UK and US focus on the potential benefits associated with establishing a tax-efficient procurement company and the associated transfer pricing considerations.
The transfer pricing structure put in place as part of a supply chain planning project is critical to sustaining the benefits. This structure must be:
- Commercially justified - for example, the company may already possess senior procurement expertise in a particular jurisdiction, such as Singapore or Hong Kong for Asia-Pacific sourcing
- Compliant - the transfer pricing must meet tax requirements in all major jurisdictions making use of the centralised procurement function, as well as the jurisdiction that the procurement company resides in
- Non-aggressive - there should be a reasonable charge commensurate with third-party competitors and based on an analysis of arm's length comparable transactions
- Supported by robust analysis - the economic significance of the relevant functions and risks must be thoroughly analysed and documented.
From a transfer pricing technical standpoint, one of the keys to driving profits into a centralised procurement company lies in how third-party service providers often price for such services. It is commonplace to put in place intercompany service arrangements that involve remuneration derived from the cost (generally with a markup or other profit element) associated with providing the service. Third-party arrangements in the procurement field, however, often involve remuneration based on the cost of the goods procured.
To leave cost savings and other commercial benefits in the centralised procurement company, a taxpayer must identify strategic functions and ensure the assets and risks associated with providing those functions are borne by the procurement company. The level of income left in the procurement company must be commensurate with the functions and risks and, ultimately, supported by what third parties earn engaging in similar activities in the free market.
Centralising procurement does not necessarily require a significant change to the business operating model and often does not involve a significant disruption to the supply chain. Centralising procurement can provide multinational businesses with supply chain savings, tax efficiencies and other economic benefits. Through effective planning, this can be achieved while bypassing many of the anticipated cost and time issues that arise.