How an analysis of the value chain is able to benefit a company?

How an analysis of the value chain is able to benefit a company?

The value chain shows, separately, each action carried out by a company within the framework of its core activities.

A value chain can include two types of activities according to their involvement in the development of the main company’s activity. These are primary and support activities. Primary activities are those that take part directly in the production process, like i) internal logistics, ii) production, iii) external logistics, iv) marketing and v) after-sales service. On the other hand, the support activities usually reinforce the primary activities but are not directly involved in the manufacturing process. Support activities are, among others i) procurement, ii) technology development; ((iii) human resource management and iv) infrastructure of the company (Administration, control and management of the company).

From a business point of view, an analysis of the value chain allows to identify the sources of competitive advantages (lower costs or higher quality of products or services compared to the competitors). The identification of these advantages is useful to improve the efficiency of the company, identifying areas of risk, reducing costs, etc.

On the other hand, from a transfer pricing perspective, an analysis of the value chain is very helpul for groups of multinational enterprises that decentralize their activities because it provides a detailed description of the functions of each company that belongs to the group, the assets used to carry out its functions, as well as the risks they assume. It also, allows to determine the value of each company and, depending on the results, the group can apply relevant solutions in order to pay taxes where it should pay, according to the functional profile of each related company.

This type of analysis has become more important after the publication, by the Organization for Economic Co-operation and Development (OECD), of the action 8-10 of the Base Erosion and Profit Shifting project (BEPS Project). This action proposes some guidelines to align transfer pricing outcomes with value creation. So, to define the value of a company (from TP perspective) is necessary to perform an analysis of its functions, assets and risks.

At the same time, this exhaustive analysis is relevant to determine the existence of a permanent establishment and, thus, meet the tax obligations of a company in one or more countries. In this regard, is worth mentioning that the OECD published last March, a guide called “Additional Guidance on the Attribution of Profits to Permanent Establishments“. This guide establishes important principles for the attribution of profits to permanent establishments derived from article 5 of the model of Convention of the OECD and, in addition, it includes examples of a structure of a commission agent for the sale of goods, a structure of online advertising and a structure for the supply of goods for sale.

Considering all the previous comments, is interesting for the companies to perform a deep analysis of the functions, assets and risks to be more efficient from a business and transfer pricing point of view.

For further information, please, feel free to contact us at the email address e.valero@diligens.es