Transfer Pricing – Sales agent and working capital adjustments
The transaction
The Group, which operates both in the distribution and production in a particular industry sector, has decided to centralize in a single country the logistics and its related services of management and maintenance of the stock and to operate in single local markets through companies belonging to the group and acting as agents.
Activities performed
- An economic analysis on transfer pricing has been carried out in order to support the compliance with the Advice on the redetermination of the value chain in the case of corporate restructuring and reallocation of functions abroad or in Italy.
- Assistance in case of tax audits and defense in case of tax litigation.
- Arm’s length principle Advice on the redetermination of the value chain in the case of corporate restructuring and reallocation of functions abroad or in Italy.
- Assistance in case of tax audits and defense in case of tax litigation.
Details of the project
In particular, the analysis has been aimed at identifying the correct Italian agent’s remuneration for his work as a sales promoter (exclusive agent) of the European parent company’s products.
For this purpose, a benchmark analysis has been carried out through an international database used also by both the Italian and foreign tax authorities. This analysis has been developed through four main stages:
• Phase 1 – In-depth study of the Group, in terms of business areas, products/services offered, subsidiaries and functional analysis of the same, analysis of the major intercompany agreements, supply chain analysis of the Group and identification of the transactions relevant to the study;
• Phase 2 – Selection of the most appropriate method, among those recognized by the OECD and by the Italian financial administration, for the determination of transfer prices, on the basis of the functional and risk profile of the Group’s entities involved in intercompany transactions, as outlined in Step 1;
• Phase 3 – Quantitative and qualitative analysis aimed at identifying, through a gradual screening process, a sample of comparable companies in terms of functional and risk profile and consequently determining the levels of market remuneration reached by them for the activities carried out;
• Phase 4 – Make working capital adjustments on the sample of companies resulting comparable from Phase 3 in order to eliminate the differences related to the assets used in the maintainance/management of the stock, receivables from clients and accounts payable.
The analysis has then been completed with the identification of a range of market values (interquartile range) within which the Group may determine the arm’s length remuneration to be achieved in the field of the intercompany transaction.
The preferred profit level indicator, considering that the agency activity is in many ways comparable (with appropriate adjustments) to that of distribution and that many of the companies identified effectively conduct distribution activities, is the Operating Margin (OM), or Return on Sales (ROS)
O.M. = EBIT / Net Sales.
This indicator is the most suitable to highlight the profitability of companies that perform functions related to sales activities, considering furthermore that this activity does not require significant investments in assets and that, therefore, the indices related to the rates of return do not appear to be appropriate.
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Mr WordPress
April 15th, 2013 on 10:39 PM