The Organization for Economic Cooperation and Development’s (“OECD’s”) Base Erosion and Profit Sharing (“BEPS”) has resulted in the worldwide implementation of more stringent requirements for justifying transfer pricing policies and preparing appropriate transfer pricing documentation. The BEPS new disclosure requirements coupled with tax authorities’ increased scrutiny of economic substance places a newfound emphasis on a company’s ability to develop and document an accurate and informative value chain analysis.
Creating A Value Chain Analysis
While this skill will be paramount when planning and defending transfer pricing guidelines in the future, guidance from the OECD and tax authorities regarding the preparation of transfer pricing value chains is remarkably limited. Moreover, identifying and defining value chains has not historically been of such importance. With this in mind, our team at BT compiled some a transfer pricing documentation template and example on conducting a value chain analysis.
- Collect raw data and information
- Identify entities and Process Functions
- Connect the entities and functions
- Value the links in the value chain
- Create a diagram for documentation
What type of information can I gather with a value chain analysis?
Great question. A transfer pricing value chain analysis is a valuable exercise for taxpayers and transfer pricing professionals alike. It helps give perspective on the way a business functions and how each component of the business contributes value to the whole. Our BT value chain 5 step process spans from gathering and organizing necessary information to ultimately defining the value chain(s) that underpin a multinational operation.
Information requirements achieved via a value chain analysis include:
- Important drivers of business profit
- Description of supply chain for the group’s 5 largest products and/or service offering by turnover
- A list and brief description of important service arrangements between members of the group
- Description of the main geographic markets for the group’s products & services
- Written functional analysis describing contributions of value creation by entities
- Description of business transactions occurring during the fiscal year
Ready to get started? Read the full article that describes in detail how to conduct a value chain analysis in 5 steps.