In today's dynamic commercial landscape, businesses must contend with the rapid evolution of supply chains driven by technological innovation. Traditional supply chain models have become agile, resilient ecosystems. Within this evolving landscape, the implications for transfer pricing can be significant and have gained increased attention of tax authorities worldwide.

This article was written by Vera Zhuravleva and Michael Kratz. Vera ([email protected]) and Michael ([email protected]) are part of RSM Netherlands International Tax Services Practice with a focus on Transfer Pricing.

The world is changing faster than ever before, and businesses need to keep up with the pace to stay afloat. Supply chain challenges and disruptions continue to persist, forcing companies to adapt their operations and commercial strategies to survive and thrive in this dynamic environment, to stay relevant and profitable. Every day, new technologies reshape business practices. AI tools revolutionize supply chain management (SCM), providing real-time decision-making capabilities to supply chain managers. An AI-powered, more agile and better-informed SCM system allows companies to make strategic and operational changes to their businesses, such as centralizing functions or outsourcing to other group entities, for greater efficiency and sustainability.

Depending on the changes, they may fall in-scope of the business restructuring framework set out in the Organization for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines and require careful analysis to prevent adverse tax consequences (i.e., exit tax for the value transfer and change in transfer pricing policies going forward). Our observation indicates that companies sometimes overlook tax implications of such internal business restructurings. They often justify this by asserting that either no valuable assets are being transferred, or that the value of such transfers is negligible.

A complicating factor arises from the fact that finance and tax managers may not immediately discern whether an event triggers business restructuring implications from a transfer pricing perspective. For example, scenarios such as transferring a customer contract from one group entity to another or moving inventory to a different group entity and subsequently closing the business at the transferor’s jurisdiction may not always be straightforward in terms of their tax impact.

Another instance involves the partial replacement of human functions with technology. For example, an AI-powered SCM system, considered a significant intangible asset itself, can transform data into strategic foresight and competitive advantage. The implementation of such a system may lead to the “routinization” of operations across other group entities, potentially triggering diverse tax implications.

Tax audits and court cases related to business restructurings have become increasingly common in recent years. For instance, in one of the most recent court cases  in the Netherlands a Dutch taxpayer of a multinational tobacco group underwent a business restructuring under the pretext of streamlining their business model. The court concluded that the business restructuring in question involved the transfer of people, inventory, and contracts. Taken together, this meant that there had been a transfer of an ongoing concern (i.e., transfer of profit potential). Ultimately, the court ruled that the Dutch taxpayer had underreported its profits by approximately 1.7 billion euros during the 2013-2016 period and ordered the payment of taxes on the underreported profits and fines.

We observed other cases and audit practice worldwide related to this topic. It is critical to gain a holistic understanding of the business restructurings concept. Ideally, any strategic or operational business changes should undergo thorough assessment within this context. Some essential steps of such assessment would include:

  • Identifying the change: what has changed and how? What and when specifically, is being transferred or ceased to exist (business, contracts, people, functions, risks, assets, etc.) and how it impacts the post-restructuring profit potential of the entities involved. 
  • Determining if third parties would be willing to pay for this transfer or would expect that such transfer of change is reimbursed – and, if so, assessing the value of that transfer or change.
  • Identifying what has changed or should change in intragroup transactions and how it impacts the remuneration of the entities going forward.  
  • Documenting the restructuring and methodology applied for determinizing the value of transfer and the remuneration going forward.     

Key take-aways

As supply chain disruptions and technological advancements drive economic shifts, businesses must ensure that their restructuring efforts and the corresponding (self-reported) tax implications are in alignment with transfer pricing regulations. This requires a thorough economic analysis for every business restructuring and compliance foresight.

Success hinges on accurately assessing the economic impact of changes, documenting transactions meticulously, and engaging proactively with regulatory frameworks to navigate the complex economic landscape effectively.

RSM is a thought leader in the field of International Tax and global tax policy. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of global tax reforms, regulatory obligations, and practical applications in working with multinational corporations. If you want to delve deeper into the complexities of international tax policy in a constantly evolving world, please reach out to one of our consultants.