Questro International provides a full range of transactional/functional transfer pricing solutions across the entire transfer pricing lifecycle. In this respect, we have worked on a broad spectrum of different transfer pricing projects. Below, we have listed a few reference project areas within which Questro professionals have recently completed client engagements as well as a Matrix outlining additional project expertise.
Centralised management of excess liquidity is becoming increasingly important for Multinationals to decrease group funding costs. Also, operating companies should not have to allocate resources and maintain expertise in the area of funding. Typical transfer pricing challenges with cash pooling are that: independent parties do not engage in cash pools, thus, no transaction specific third-party comparables exist; neither the OECD’s Transfer Pricing Guidelines, nor local country guidelines across European jurisdictions, provide much useful guidance; and case law is very limited in this area and difficult to use.
Whilst independent parties do not engage in cash pools, comprehensive transfer pricing solutions in this area do exist, and the OECD Transfer Pricing Guidelines explicitly recognises at Para. 1.11 that the mere fact that a transaction may not be found between independent parties does not of itself mean that it is not arm’s length.
Questro International has worked on a number of client engagements regarding the establishment, documentation and defence of cash pools. Our solutions have included the following: remuneration of a cash pool leader’s functionality expressed in basis points of the loan volumes of the cash pool; additional compensation for any “risk taking” by the cash pool leader; benchmarking interest rates for deposits and advances determined with reference to a joint floating base rate, adding individual spreads as company specific risk premiums; and defending interest rates for cash pool participants against local tax authority challenge.
Depending on the specifics of a cash pool arrangement, a well thought through structure should also have policies for the investment of excess liquidity in the money markets as well as a transfer pricing policy for the sharing of returns on such money market investments.
Regional or global centralised business structures are increasingly common and are attractive if you can ensure the principal company possess the appropriate competences to manage the business and related risks. If such centralised business management can be implemented from an operational perspective, a number of cost savings can typically be achieved, and there are several tax optimal transfer pricing options available.
Typically a central entrepreneur acts as the Principal within the supply chain assuming central management of the supply chain and all major business risks and assets. The central entrepreneur operates via a network of low risk "helpers" such as:
If marketing intangibles, (trade names and trademarks), are licensed (or used) within a group, a royalty should be paid by the licensee (or user). The professionals of Questro International have been involved in benchmarking branding fees in many industries and in setting detailed transfer pricing policies based on both benchmarks and the "value and usefulness of the intangible property". For example, this could mean that some licensees of a brand pay a limited or reduced royalty rate if the brand does not support their local business profitability while licensees in countries with large market shares and/or profitability attributable to the brand pay a higher royalty rate.
Where a corporate owns patents, know-how or other trade intangibles that are being licensed or used by other group companies, an arm’s length royalty rate should be charged for such use. Whilst charging for marketing IP is very common, we find many companies fail to fully charge for their technical IP and know-how between group companies. Benchmarking such technical royalty rates will also make it visible if R&D efforts on a "full cost basis" generate an appropriate return. A transfer pricing policy for the licensing of trade intangibles should be based on both benchmarks and "the value and usefulness of the intangible property" to the licensee.
We have extensive experience in determining the net or gross margin for intermediate finance companies. Typically, European intermediate finance companies are located in Luxembourg or the Netherlands, and both countries have specific transfer pricing regimes for such companies where a certain amount of equity and assumption of credit risks are required. We also have experience in setting transfer pricing policies where a chain of finance companies are used in one or more countries as part of a finance structure. In addition to determining the net or gross margin, we can also benchmark the interest rates on the intercompany loans as well as assist with obtaining an advance pricing agreement, which is common for long-term transactions involving finance companies.
Questro International has been involved in projects for multinational groups that are exposed to a significant level of third-party receivables. Based upon an upfront sale of trade receivables by a trading company to an intra-group factoring company, a tax deduction can be claimed in respect of the "factoring discount". We have seen both "Recourse" and "Non-Recourse" factoring arrangements implemented depending upon whether the bad debt risk is associated with the factored receivables or not. Such projects can be very attractive in certain situations since they enhance the trading company’s cash position, are generally treated better from a withholding tax perspective than traditional financing arrangements, and may fall outside certain anti-avoidance/thin capitalisation rules.
Financial guarantees are commonly used by multinationals, from single guarantees to more complex policies on providing guarantees for the benefit of all group members. In addition to charging a guarantee fee, it is also critical to make sure that the guarantor is compensated at arm’s length for the credit risk it assumes. In recent years, there have been cases where tax administrations have questioned the deductibility of losses stemming from guarantee obligations where no or very limited guarantee fees were charged intercompany. There are a range of other guarantees and sureties that may be essential to a local companies’ ability to conduct business.
The profit accruing to manufacturing is directly related to its functional profile. Establishing (or converting to) a contract or toll manufacturing structure, opens the door to a number of interesting tax and business planning opportunities. A contract manufacturer produces goods to order for and at the risk of another group company. A toll manufacturer processes goods belonging to the other company, never taking ownership of the raw materials or goods it produces. We have implemented a number of manufacturing models across a variety of industries.
In case of acquisitions, a transfer pricing due diligence should be performed whereby the transfer pricing risks of the target group are mapped and quantified on the basis of the legacy transfer pricing policy, benchmarked profitability levels, actual results, country risks (incl. statute of limitations), and optimisation opportunities based on corporate income tax rates. After an acquisition, there is often a need to re-design the TP model depending on how the target is being integrated into the group of the buyer. Questro can help during the due diligence process and then support post acquisition integration.
For multinational groups operating in R&D intensive industries, the importance of R&D activities as a business profit driver is universally accepted. However, the importance of a good transfer pricing structure is less well understood. Questro International has broad experience of implementing Contract R&D arrangements, Entrepreneurial R&D structures, and Hybrid Models, where the risk and reward profiles vary significantly. These structures can offer interesting tax planning opportunities, and we can coordinate with our network partners to manage associated R&D credits, withholding tax, and other local tax issues.
Corporates may set up re-invoicing companies to simplify the re-invoicing of support services, for example. This is also referred to as clearing houses. Questro International can assist with setting pricing policies for such clearing houses and for the related services charges as well as the selection of an appropriate jurisdiction for a re-invoicing company.
Whilst many multinationals have some flexibility in choosing where to manufacture globally, nearly all companies require a more fixed sales structure where their customers are located. This can result in a large footprint of fully-fledged distributors in higher tax countries. Questro International can explore with you a variety of sales models that may better fit your operating model within a tax-optimised framework. In any analysis, careful management of economic substance requirements, arm’s length pricing, Permanent Establishment risk, and Customs/VAT implications are key.
Whilst the basic concept of Company A providing services to Company B is well understood, there are many different models available for remuneration of services. Questro International has implemented models based on simple cost reimbursement, mark-ups on costs or expenses, and more complex value based service fee arrangements. We work closely with local tax advisors to ensure any model is optimized from a withholding tax perspective and locally compliant documentation is prepared to ensure acceptance of the deduction (a common problem in developing economies).