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.