Business restructuring

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Rethinking International Tax Law

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Universiteit Leiden

Rethinking International Tax Law

562 classificações

In recent years, the international tax planning strategies of multinationals have become a source of – often heated – debate. This course provides learners with the tools to become fully informed participants in the debate by explaining the foundations and practice of international tax law as well as addressing current developments and the ethical aspects of tax planning.

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Transfer pricing

In this fourth module, we will be focusing on transfer pricing, a technique which is used to allocate the profits made by a group of companies to the individual group members. Transfer pricing is an area of tax law which is becoming increasingly important. Our study will focus on the basics of transfer pricing: the 'arm's length principle', comparability and transfer pricing methods, but will also address business restructurings and include a case study.

Business restructuring6:08

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Prof. Dr. Sjoerd Douma
Faculty of Law
International Tax Center

Hi, and welcome back to the fifth video of the module on transfer pricing.

In this video we will be dealing with the application of the arm's-length

principle to a peculiar kind of transaction, business restructuring.

Business restructuring is the cross-border redeployment

by a multinational group of functions, assets, and risks.

A business restructuring can involve cross-border transfer of valuable

intangibles, or the termination or

substantial renegotiations of existing arrangements.

Restructurings are implemented by multinational groups to maximize synergies

and economies of scale, to streamline the management of business lines,

and to improve the efficiency of the supply chain.

Thus taking advantage of the development of internet based technologies

that have facilitated the emergence of global organizations.

In addition, in recent years, business restructuring have been

used to preserve profitability or limit losses in a downturn economy,

such as in the event of an over-capacity situation.

In this example, we see a typical supply chain restructuring,

implemented by many multinationals in the last years.

The two main benefit of this type of restructuring are the possible economies

of scale and higher efficiency in the production process.

The starting point is given by an operational model in which every

country is managed by an entity acting as a full entrepreneur,

with its own factories and licenses of the relative intangibles.

This operational model can lead to an excess of production capacity and

obsolete products.

The group can therefore decide to centralize the supply chain's

strategic activities by incorporating a supply chain company and

by transferring to this company all the strategic functions and

correlated risk relating to manufacturing, logistics, sourcings, and planning.

In this scenario, the group's local companies will act as

as countered manufacturers on behalf of the supply chain company, and as low risk

distributor buying all the finished goods from the supply chain company itself.

Finally, all the relevant tangibles will be

transferred to the supply chain company.

This process leads to a structuring with a central entity acting as the principal for

all areas being entitled to all extra profits and

local low risk entities being entitled to routine profits only.

A multinational group can obtain two main benefits from this process.

First, the generation of economies of scale and joint efficiency.

And, second, the shift of the extra profit to the supply chain company.

In 2010, the OECD has included in the transfer pricing guidelines,

a new Chapter IX on transfer pricing aspects of business restructuring.

This new chapter on the one hand points out that the arm's

length principle applies also to this kind of transaction.

And on the other hand,

it recognizes that it is difficult to find similar transactions among third parties.

In light of these, the OECD requires that the taxpayer is able to prove

that the transaction has not been carried out only for achieving tax savings, but

for business reasons such as generating economies of scale or

improving a particular process, for example innovation.

In this respect, one of the key documents for proving the arm's length nature

of the business restructuring, is the business case.

The most important elements to be proven

are the benefits deriving from the restructuring at the group level.

Once the business reasons are proven,

the next element to be addressed is whether the entities involved in

the restructuring are entitled to a compensation for the restructuring itself.

In this respect, the effects on every group entity must be determined.

This turning point is the identification of the activities, functions,

risks, and assets transferred to other group entities.

Then, an analysis on the expected future profits must be performed.

There are restructurings leading to a better situation for

all the entities involved.

In this case, no compensation is normally due.

On the contrary, where the restructuring leads to a profit reduction for

a specific group entity, a compensation may become due.

This compensation is generally determined by using the discounted cash flow

analysis.

In the end, such compensation is the difference between the net present value

of the expected future profits under the restructuring scenario and the net present

value of the expected future profit under the best option realistically available.

This concludes our video on the application of the arm's

length principle to business restructurings.

We learned that even business reorganization when taking place within

multinational group must be consistent with the arm's length principle.

Why? Because a business restructuring can turn

to be an aggressive tax planning scheme aiming at shifting profit to low tax

jurisdictions.

Do tune again for our next video analyzing the landmark transfer pricing

case involving a well-known international company, Apple.

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