However, cutting costs in a sustainable but effective way is becoming increasingly challenging. Most obvious savings have now been identified and made by retailers. So where else can retailers look to improve their business and make those all important long-term savings?
It is crucial that management avoid the “slash and burn” approach, which can see knee jerk cuts made in response to the significant financial stress that the business is under. Instead I believe that retailers should look for changes which will improve the future efficiency of the business while delivering the immediate cost savings required.
Some innovative businesses have identified that so-called ‘transfer pricing’ holds significant opportunities to improve cost efficiencies and improve cross-border operations. Transfer pricing is the pricing of transactions between the divisions of a multi-national company or between the companies in a group to ensure that they are occurring at an “arm’s length” basis and not at preferential rates. In effect transfer pricing rules ensure that a multinational operating in many jurisdictions is not able to artificially shift profits into lower tax countries. It therefore affects many retailers with complex supply chains involving a number of overseas jurisdictions. The documentation that supports transfer pricing contains valuable management information that can provide clarity to business leaders on how the transactions flow through their business.
It’s a real opportunity to better use information that is already present in the business: every UK retailer with overseas related party trading has a legal requirement to properly document these transactions to justify the pricing set to HMRC. With tax revenues under pressure and businesses becoming more and more complex and global, it’s an area that HMRC is looking at increasingly closely. This documentation must be contemporaneous to the submission of the tax returns and include the following information:
- The general commercial and industry conditions affecting the business;
- An in-depth analysis of the functions performed, risks assumed and assets used by the parties to the intra group transaction;
- A detailed review of the financial results of all parties to the transaction to ascertain a suitable arm’s length price. This step is likely to include a benchmarking study to provide evidence for the arm’s length nature of the company’s pricing policy.
This detailed information can give retailers an excellent insight into these transactions and can help them to determine if they are structured in the most efficient way. By reviewing this and taking advice businesses can also check that they are paying the correct amount of tax.
This has led to some businesses to identify significant efficiencies resulting in tax savings that continue to benefit the business year on year.
It is clear that in order to survive in the current low growth environment, retailers must create a sustainable cost base and move away from short term cost cutting initiatives. By better understanding the in depth working of the business, retailers can make savings to create a cost base that is fit for today and provides a sustainable platform to enable future growth.