Transfer pricing – Worldwide distributor

The transaction

The multinational group, headquartered in Italy, is engaged in the development and manufacture of machines and plants for production of goods belonging to a specific industry sector. In particular, the Italian company  is engaged in the production of machinery and equipments which are then sold to the Group’s foreign subsidiaries engaged in the distribution.

Activities carried out

An Economic Analysis on Transfer Pricing has been performed to support compliance to the arm’s length principle of the transfer prices applied to the transaction under analysis.

Details of the project

The work was meant at identifying the proper remuneration of the foreign group distributors. On the basis of the functional analysis performed the latter resulted, in fact, the most appropriate parties to be testified.

Considering that the trading partners were located in Europe, USA and Canada with a level of functions and risks lower than those of the Italian company, the tested parties of the transaction were considered the foreign distribution companies on the basis of the OECD guidelines and the Italian transfer prices regulations.

For this purpose  ​​two benchmark analyses were performed (one for the European market and the other for the North American market that included USA and Canada) through international databases also used by both Italian and other foreign tax authorities. This analysis was developed through three main phases:

• Phase 1 – Understanding the Group, in terms of business areas, products / services offered, subsidiaries and their functional analysis; analysis of the  major intergroup agreements, analysis of the Group’s  supply chain and identification of the relevant  transactions pursuant  the TP study;
• Phase 2 – Choice the most appropriate transfer pricing methodology, among those recognized by the OCSE and the Italian tax administration, based on companies’ functional and risk profile specifically involved in intercompany transactions, as outlined in the above Phase 1.
• Phase 3 – Qualitative and quantitative analysis aimed at identifying, through a gradual process of skimming, a sample of comparable firms in terms of functional and risk profile and to determine accordingly a proper level of market remuneration for the specific activities carried out.

The analysis was then 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 applied in the intercompany transaction under analysis.

As a preferred profit level  indicator, the Operating Margin (O.M.) or Return on Sales (R.O.S.) was chosen:

O.M. = EBIT / sales.

This indicator appears to be most suitable to highlight the profitability of companies that perform functions related to sales activities, considering also that such activities do not require significant investments in assets and therefore the indices related to rates of return do not appear to be appropriate.

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  mirko

  May 18th, 2013 on 01:45 PM

  Grazie all’autore del post, hai detto delle cose davvero giuste. Spero di vedere presto altri post del genere, intanto mi salvo il blog trai preferiti.

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