Tax & Legal A bridge to align operating and governance models with tax/TP set-up

What is Value Chain Analysis?

The value chain refers to the entire performance process of a company, which begins with the research and development and ends with the delivery to the end consumer. While a functional and risk analysis is geared to individual group companies, a value chain analysis applies on cross-company processes within the Group.

As there is no objective method to conduct a value chain analysis, the basic approach to be followed for any value chain analysis should start with identifying the industry-wide value chain and mapping the value linkages of the MNE within the industry. A value contribution analysis should contain evidence as to what prices, cost premiums, margins, etc. are, in light of the economic contributions of individual companies, considered reasonable.

Is there a burning requirement for value chain analysis?

YES! This is because of the following key reasons:

  • BEPS = Full tax transparency i.e. it drives the requirement of performing a full value chain analysis to stay “in control”
  • BEPS = a merger of residence of “taxable income” with the residence of “people functions” responsible for generating it;
  • BEPS feeds “greed at the level of tax authorities”, i.e. the wide and/or different interpretations by different countries’ tax authorities of the BEPS/TP guidance can trigger even more than double taxation on the same profits;
  • BEPS has already triggered some tax authorities to:
    • Open the hunting season for aggressive tax structuring(s). For example, the Australian Tax Office; and
    • Request a full value chain disclosure in TP local country files and CbC reporting. For example, the Chinese Tax Authorities require a full VCA effectively as from January 01, 2016.

This means that the only way an MNE can defend its current tax/TP structure is through:

  • Full transparency on tax sensitive data;
  • Complete analysis and disclosure of their value chain;
  • Syncing its corporate governance, operating model and tax/TP structure in the same way as syncing its economic, legal and financial realities.
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