Managing your value chain in a post BEPS environment€¦ · chain in a post BEPS environment Tax...

Managing your value chain in a post BEPS environment Tax Matters Webinar

5 February 2019

With you today

Tim Sarson

Partner,

Value Chain

Management

Erica Perry

Director,

Value Chain

Management

Sinead Murdock

Senior Manager,

Value Chain

Management

© 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Document Classification: KPMG Public

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“ ”

Agenda

3 © 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


1 What is Value Chain Management?

2 How value chains are changing

3 How businesses should approach these challenges

What is VCM?

What is value chain management? VCM is about

designing and

changing your

international

operating model. It

includes: where to

put activities like

manufacturing, R&D

or headquarters;

how goods and

services flow

around the group;

where and how

assets are held

Technology Corporate tax and

transfer pricing

Legal VAT and customs

Operations Trade compliance

Multinational

businesses

Business

model

change

© 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


5

Multiple

taxes VCM

“ ”

What is a value chain? Porter’s value chain concept

A set of activities that a firm operating in a

specific industry performs in order to deliver a

valuable product or service for the market.

Competitive advantage cannot be

understood by looking at a firm as a whole.

It stems from the many discrete activities a

firm performs in designing, producing,

marketing, delivering and supporting its

product. Each of these activities can

contribute to a firm's relative cost position

and create a basis for differentiation.

Support

process

Core

process

Human Resource Management

Technology Development

Firm Infrastructure

Procurement

Operations Outbound

logistics

Marketing and

sales

Inbound

Logistics Service

Margin



6

Historical tax context Tax takes many shapes and forms

Movement of goods

Movement of money

Taxes on consumption

Taxes on income

Taxes on assets

Three traditional types of tax regime

-

Resource-rich

primary producers

Diversified

industrial

economies

Smaller trading

nations

Post global financial crisis we see tax rate harmonisation, protectionism and

negation of harmful tax practices

© 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms

affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.


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© 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),

a Swiss entity. All rights reserved.

Business models – evolution over time Technology

Industrialisation Computerisation (IBM) ERP Cloud AI…

VCM

1940 1980 2000 20101990

Fordism –

International

companies/MNCs

Imperialism

Greenfield US Tech

Cos – principal

models

Consumers goods –

principal models European MNCs –

LRDS & CM

US toll manufacturing

and commissionaire

structures

Service

principals

Procurement

companies

US Tech – double

Irish structures

Above market

models

VCM,

DEMPE, CBCR

Return of

traditional supply

chain models?

US Tax

reformUS Tax

reform

BEPS

Politics

— Portuguese new ocean

route to India

— Dutch East India

Company

— Opium Wars

— Bretton Woods –

WB/IMF

— Founding of EU

— Fall of the Berlin

wall

— Maastricht Treaty

(EU)

— Growth of BRICS — Financial crisis

— Tax in the media

— BREXIT

— Trump

— NAFTA

9




Traditional VCM models – degrees of centralisation

Sales and

Marketing

Supply Chain

and

Manufacturing

Back office and

Support

Services

Where does profit belong?Local entities Principal

Sales

Brands & IP

Commissionaire LRDSales agent Full Buy/sell

Owned locallyStrategic brands

owned centrally

Managed in a tax

optimised location

Manufacturing

Fully-fledged

manufacturerContract manufacturer Toll manufacturer

Procurement

Sourcing Company Buy/sell entityProcurement AgentFull Procurement Company

Buy/sell/Centre-led

Local CentralCorporate functions

shared services

How value chains are changing

“ ”

-

-

‘ - ’

A perfect storm… Operating

model

Business disruptors

1. Customer-centricity

2. Industrial Revolution 4.0

3. Internet of Things

4. Digital workforce/Robotic

process automation

5. Big data/Cognitive computing

6. Sector convergence

Tax and regulatory disruptors

Disrupters are a catalyst for change

1. US tax reform

2. OECD BEPS-related legislation/audits

3. Trade taxes in a ‘post-global’ world

(i.e. Brexit, abandonment of TPPA,

changes to NAFTA, etc.)

4. Digital economy proposals

5. More deregulation in developing countries and regulation in developed

© 2019 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11


1. Customer-centricity

2. Industrial Revolution 4.0

3. Internet of Things

4. Digital workforce/Robotic process automation

5. Big data/Cognitive computing

6. Sector convergence

Reinvention is a prerequisite for survival Lifespan of companies in the S&P 500

33 years

20 years

14 years

1965 1990 2026

Source: Innosight



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Challenges with traditional VCM models Is the model fit for purpose?

— Still aligned with the business model?

— Systems expensive to create and maintain

— Not viable to co-locate all important functions

— Too inflexible for today’s commercial/sales entrepreneurship?

— Lack of substance ever more vulnerable to challenge

— Contractual assumption of risk no longer tax meaningful?



13

-

Increased variation in models

De-linking value and reward from inventory title chain

and asset ownership

Customers are changing

Business change

— Customer centricity - new levels of

choice, access and service for

customers

— Customer expectations driving

supply chain strategy

— Monetisation of customer content

— New channels to market/delivery

models, e.g. e-Commerce,

subscriptions

Value chain impact

— Tax authority challenges on value of

customer/marketing intangibles

— Supply chain decisions made closer to

customer/increase in regional models

— Increase in above market fee models for

commercial decision making

— Digital tax proposals, particularly around

new delivery models

— PE challenges



14

“ ”

Case study – industrial manufacturerCase study overview

—— Customer demand for bundled product and services

offering, rather than just product

—— Higher percentage of service revenues relative to

peer group and higher margins

—— Sharper fall in equipment sales during the financial

crisis than service sales

—— Management cited services as critical driver of

growth, brand reputation, customer loyalty and

competitiveness

Impact on value chain

—— Potential realignment of value attribution:

-- decision makers and controllers of risk for

services business

-- synergies with original product sale

Value drivers

Customer

relationships

R&D and

innovation

Trade in

services Pricing strategy

Product

reputation



15

Supply chains are changing

Business change

— Decline in trade intensity for goods-

producing value chains – increased

domestic consumption

— Increase in trade in services

— Shortening of supply chains due to

protectionist policies, environmental

concerns and technology

— Reduction in labour cost arbitrage

— Increase in ‘virtual manufacturing’

Value chain impact

— Pressure on principal models where

predominately manufacturing for domestic

supply

— Increase in above market fee models for

services

— Scrutiny of in-country margins, particularly

where local manufacturing or agile supply

chain decision-making close to customer

— Exit charges where changes to

manufacturing footprints and decision-

making

— Shift in value creation to both upstream and

downstream activities



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Case study – pharma companyCase study overview

— UK principal company and manufacturer owns IP and

sells products into European market

— Brexit has led to setting up a new Dutch master

distributor selling in to Europe (for regulatory reasons)

and relocation of manufacturing to Czech Republic

— UK Co still houses IP, DEMPE and control of risk

functions


— Separate remuneration of UK value creation/control of

risk

— Exit of European distribution rights and manufacturing

operations

— VAT/customs compliance

UK Co

Transfer of

European

distribution rights

Dutch Co

Transfer of

manufacturing

operations/know-how

Czech Co

Organisations are changing

Business change

— Virtual organisations/dispersed

leadership teams and multiple hubs

— Global functional models replacing

national empires or BU models

— Rise of contractors, self-

employment and quasi-employees

— Value chains more knowledge-

intensive

Value chain impact

— Increase in above market fee models

— Increase in profit splits where value creation

(DEMPE/control of risk) spread

geographically

— PE challenges and drive to ring-fence

potential profit attribution through legal entity

structure

— Increased interest in branch models

— Hub and spoke models for innovation,

leveraging incentives



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Case study – technology group acquisitionCase study overview

— Acquisition of technology group

— Both groups have centralized IP with global contract

software development

— Post acquisition new technology will be developed based

on a mix of legacy IP in each group

— The distinction between the assets is not clear cut with

substantial cross-pollination

— Development activity will be dispersed, global and cross-

platform in nature


— Geographic spread of control of risk and DEMPE activities

— Consideration of historic IP value

— Identification of any incentives/reliefs (R&D, Patent box)

IP Owner

Contract

Dev

Contract

Dev

Target IP

Owner

Contract

Dev

New platform IP

How businesses should approach these challenges

Implications for existing operating models Continuous value chain management

1

Consider immediate

changes required

2

Consider what the value

chain of the future will

look like

3

Monitor and maintain

Effective integration of tax in operating model decisions



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How to analyse your value chain – VCA

Hig

h le

ve

l in

du

str

y a

nd

pe

er

an

aly

sis

Deve

lop

in

itia

l pro

ce

ss m

ap

an

d v

alu

e d

rive

r re

vie

w

Con

du

ct in

terv

iew

s

1. Prepare process map

Capturing activities across

value chain

2. Identify and map

assets and risks

Identifying assets,

risks and synergies,

map to activities

— Identify gaps/risks in the current pricing arrangements – Assess whether profit

outcome is aligned to value creation.

— Identify activities within the value chain that require a detailed review of current

pricing mechanism.

— Plan next steps.

7. Overlay entity

perspective

Match process to

entity/location

4. Value hypothesis

Evaluate and assess

relative contributions of

different value drivers

5. Prepare Value-

weighted asset

and risk map

Identify relative

importance of

assets and risks

6. Prepare

value

heat map

3. Summarise

key facts

Document

findings of

interviewsMap

1

2

3Apply

Evaluate

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© 2019 KPMG LL

Continuous program, change, and value chain management

P, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”),


What is a value driver?

Financial ambition

Markets

Propositions and brands

Customers and channels

Core business processes

Technology and operations

infrastructure

Governance, structure

and risk

People and culture

Measures and incentives

Where to play

Business model

How to win

Operating model

‘An internally controllable

attribute that drives business

profitability and upon which

market participants compete.’

— Critical success factors

— Competitive advantages

— Risks

Value driver review 4

Tur

e

dif

fer

te

nia

tors

4

o

nc

e t

ind

us

try

H

igh

imp

ort

an

ce

3 5 3

Imp

ort

a

uti

n

eN

ec

es

sa

ryp

po

rt

2

7 6

Ro

su

1

1 2 3

Weakness In line with market Strength

Company strength/weakness

Categorises the relative importance of each identified value driver

based on industry evidence

Key sources of evidence of value drivers

1. Factual information from interviewees

2. Interview quotes

3. Average percentage score from value

hypothesis

4. Annual report

5. Peer ratio analysis

6. Industry surveys/analysis

7. Broker notes



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“ ”

Ensuring ongoing governance

Operating guidelines

s

Internal audit

Increasing

levels of

governance



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RACI/business process maps/DoAs

Tax model training for commercial team

KPI review and alignment

LinkedIn profiles/job descriptions

“ ”

–

What next?

2 1 Transfer Pricing policies

require alignment to BEPS

principles – identify gaps and

plan solutions

3 Monitor and maintain steady

state operating models with

appropriate documentation to

explain the value chain and

allocation of profit. Consult with the business on

short and long term plans.

Ensure tax is up to date on

the latest business

developments and influence

stakeholders for tax

optimisation and risk

management. Consider

evolution of value drivers in

context of business change.



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received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a

thorough examination of the particular situation.

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International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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