Multinational enterprises, particularly active in the chemical industry, are generally organized on the basis of a business model which requires a form of vertical integration and as such transcends national boundaries. Despite the international dimension of such companies, certain fundamental (and value creating) activities, such as research and development (R&D), are often performed for the major part in just one country, often the companies' country of origin. Moreover, the manufacturing of finished products normally takes place in just a limited number of countries.
At the same time, the marketing and distribution of the products invented and produced centrally must be carried out through numerous affiliates around the world. Regional sales organizations offer the advantages of understanding their local marketplaces and satisfying e.g. individual countries' regulatory requirements.
This type of international business model can trigger a huge number of transfer pricing issues, in addition to the many regulatory issues that already exist. These transfer pricing issues essentially boil down to the fundamental question of how to measure the remuneration that should be allocated to the marketing efforts of the local sales and distribution entities, responsible for further processing the products as they leave the manufacturing facilities.
From a transfer pricing point of view, these local efforts and associated value should be compared with the value that is derived from the intellectual property (IP) built up centrally within the group, for instance in the form of patents obtained or trademarks registered.
At the same time, the business model under consideration here has created new opportunities for companies to implement a strategy nowadays known as Tax Efficient Supply Chain Management (TESCM). TESCM will help organizations to enhance the efficiency and effectiveness of their value chain, reduce operating costs and transform operational processes. It is the integration of tax planning into business and supply chain restructurings that may involve the relocation of assets and functions across jurisdictions. Chemical companies that choose to implement TESCM can potentially enjoy very significant tax savings: by considering the optimal tax structure when designing or remodelling the current and future supply chain structure and strategy, the profitability of the company's supply chain can be significantly enhanced.
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