TAX AND REGULATO RY SERVI CES

Tax Efficient Supply Chain Management
Rohan Phatarphekar
KPMG India - Partner and National Head, Global Transfer Pricing Services

TAX

Agenda
What is TESCM TESCM structuring TESCM – Key tax issues Recent developments Golden rules

© 2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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assets and risks © 2008 KPMG India Private Limited. an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. post-merger integration and/or plans of new market entry © 2008 KPMG India Private Limited. assets and risks (FAR) – allocation of taxable income among various entities in the MNE based on FAR – optimization of operational efficiency – optimization of global effective tax rate The integration of tax efficiencies through the realignment of functions. an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. a Swiss cooperative. 4 2 . 3 Key Triggers Local business models giving way to regional and global supply chain structures Growing centralization of multinational decisions at a regional or international level Reviewing sourcing. All rights reserved. All rights reserved. a Swiss cooperative.What is TESCM Tax Efficient Supply Chain Management (TESCM) – Integration of tax considerations into business process changes – realignment of functions. manufacturing or distribution strategies High effective tax rate relative to competitors Losses in certain group entities while high profits in others Acquisition.

an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International.Global Operating Co. deployment and compensation? © 2008 KPMG India Private Limited.Contract Manufacturer .Full Manufacturer .Intra-group services .Cost sharing arrangement .Limited Risk Distributor .Toll Manufacturer Sales Supply Chain . a Swiss cooperative.should the company make use of consignment v.Onshore / Offshore Service contract structuring 6 © 2008 KPMG India Private Limited.Full Risk Distributor . an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. a Swiss cooperative.should raw materials or finished goods be acquired from third parties in low cost countries? Production . . All rights reserved. Manufacturing Supply Chain .IP Holding Co. All rights reserved. 5 TESCM structuring Principal Company Structure . .Commissionaire Model .Global Trading Co.TESCM planning consideration Procurement . 3 . buysell contract manufacturing? Services – should common back-office and support services be centralised. regionalised or localised? How the cost of common services be allocated and charged out across the group? Sales & Marketing – how much risk should be borne by distributors? Intangibles – how should intellectual property (IP) be managed in terms of development.

Perform routine functions .Intangibles Commercial intangibles Product designs Manufacturing process Software code Know-how Marketing intangibles Trademarks Trade names Brands Customer lists © 2008 KPMG India Private Limited. a Swiss cooperative. All rights reserved.Located in favorable jurisdiction . an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International.Bear subordinate risks .Entitled to entrepreneurial profits Operating entities . 8 4 .Global Operating Co. 7 IP Planning . . All rights reserved.Centralization of management / risk . .Receive stable and relatively low return © 2008 KPMG India Private Limited. a Swiss cooperative. an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. Review of the allocation of the Groups – Value-added functions – Income earning assets – Commercial risks with a view to rationalize tax costs Overall profits – Remuneration for normal functions / risks – Residual profits – reflecting entrepreneurial remuneration Global Operating Co.Principles Aggregation of entrepreneurial risk at Global Operation Co.

a Swiss cooperative. R&D services Services Sale 1 (flash title) Sale 2 Suppliers Purchase of materials HQ & Global Operating Co. • Intangibles • Trading risks Customers Delivery of materials Manufacturing services Distribution and logistics services Delivery of goods Manufacturing (consignment) Delivery of goods Distribution Centers Key to flows: Legal title Physical flow Services 10 © 2008 KPMG India Private Limited. 5 . All rights reserved. 9 TESCM illustration Example of an end-to-end tax efficient supply chain Corporate Headquarter Research Centers Shared Services Services Sales & Marketing (limited risk distribution] Management Services. an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All rights reserved. a Swiss cooperative.Intangibles – Review intangibles in current structure Determine where intangibles are currently owned and developed Consider business strategy Is ownership of intangibles aligned with business strategy © 2008 KPMG India Private Limited. an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International.

a Swiss cooperative. All rights reserved. Tax should not lead to sub-optimal operating models © 2008 KPMG India Private Limited.Key tax issues to be considered Exit / Migration related issues – Starting point for tax authorities – Drop in profits may lead to scrutiny by tax authorities – Some Jurisdictions have introduced/proposing to introduce Exit tax Permanent Establishment (PE) exposure – Appropriate structuring of arrangement (including movement of key personnel) to shield from PE exposure – Potential PE risk under Toller / Commissionaire structures in some countries Transfer Pricing – Documentation for realignment of FAR to justify change in level of profits at various entity level – Valuation of intangibles The premise of TESCM is that tax planning and operational planning should be integrated © 2008 KPMG India Private Limited.TESCM . etc. a Swiss cooperative. an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All rights reserved. 12 6 . ability to serve customers.Key tax issues (…conti.) Indirect tax / VAT – Not optimizing indirect taxes may reduce or negate corporate tax benefits Withholding tax – Payments to Principal for services rendered may result in withholding tax in the recipient’s jurisdiction Tax incentives / use of tax losses Operational – Systems issues – Shifting of functions may have an impact on efficiency. 11 TESCM . an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International.

Global Developments OECD – Business Advisory Group to issue a discussion draft on business restructuring by end of 2008 Germany has introduced Exit Tax w. an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. All rights reserved.f January 2008 © 2008 KPMG India Private Limited. documentation and maintenance Companies have successfully re-engineered their value chain resulting in permanent cost reductions and associated savings © 2008 KPMG India Private Limited. an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International. a Swiss cooperative. 13 Golden Rules Must introduce substantive business change Aligned investment structuring and tax efficient supply chain management creates value One size does not fit all Implementation. a Swiss cooperative. All rights reserved. 14 7 .e.

com www. KPMG and the KPMG logo are registered trademarks of KPMG International. All rights reserved.Presenter’s contact details Presenter’ Rohan Phatarphekar Partner and National Head Global Transfer Pricing Services KPMG India +91 22 39836082 rohankp@kpmg.com rohankp@kpmg. a Swiss cooperative. KPMG and the KPMG logo are registered trademarks of KPMG International. a Swiss cooperative.com The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. KPMG International provides no services to clients. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 15 8 . © 2005 KPMG International. there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. Although we endeavor to provide accurate and timely information.kpmg.