Documentation. Rakesh G. Alshi

Transcription

1 Documentation Rakesh G. Alshi August 2011

2 Agenda Introduction Concept and deliverables The approach Post-completion Takeaways

3 Introduction

4 Documentation Why take the Trouble?? Because you have to - i.e. legislation (Sec 92D read with Rule 10D) To be prepared for a Transfer Pricing assessment As a contemporaneous record To demonstrate how pricing decisions were made To show that you did adopt arm s length principle To eliminate/ minimise penalties

5 Indian TP Regulations and OECD recommendations Extensiveness of documentation process to be determined by prudent business management principles Greater the complexity & unusualness of the case, the more significance will attach to documentation Key considerations: Nature and terms of the transaction An outline of the business (financial or otherwise) Management strategy, market penetration strategies Organisation structure Ownership linkages within the group Factors influencing the setting of prices Special circumstances Business environment / trends competition, technology, etc. Functions, assets, risks

6 Objectives At a high-level, objective or purpose of a documentation can be viewed along a spectrum Design and planning documentation Compliance documentation Significant differentiating aspects Not interchangeable but planning documentation can be converted into compliance documentation Implementation aspects

7 Documentation Flow

8 Economic analysis Evaluation of methods Conclusions Executive summary Documentation Flow Functional analysis Intercompany transactions Industry analysis Company analysis

9 Sources Company information Financial statements Corporate entity structure charts TP policy Intercompany agreements Industry research Investment banker reports Market research, university studies, industry reports from government agencies or industry bodies Websites Newspaper or journal articles Functional analysis Interviews It s important to connect all these and build a story!

10 The Approach

11 Getting started Executive summary: Summarise key elements Objective Scope Conclusions Important to first identify conclusions one would like to reach based on facts of each individual case Develop remainder of document to reach those conclusions Each section leads to the next List conclusions a provide link to show how those conclusions were reached Industry Analysis Company Analysis Intercompany Transactions Functional Analysis Evaluation of Methods Economic Analysis Conclusions

12 Industry analysis what s this? Provides reader with description of industry in which the company 0perates Focus on those industry factors which have the greatest effect on company s profitability Listen to operational personnel as to which factors they consider most important and review the research, highlighting areas which are most supportive or demonstrative of company s case Make sure focus is on competitive conditions faced by the company

13 Industry analysis contents Background Products Structure Market segmentation first describe broad parameters, then focus in more detail on the company s backdrop Overview Market overview focus on relevant industry and market trends Main competitors discuss where the company falls within competitive makeup, compare financial successes and failures

14 Industry analysis contents (contd.) Key drivers of profitability Analyse industry profitability Discuss factors that explain differences in profitability Risks Identify and define individual risks by considering key drivers of profitability and the items that affect them Critical success factors Describe those capabilities that companies must have to respond to industry trends and structures. This section will be used in the company analysis to analyse the company s own core competencies.

15 Industry analysis contents (contd.) Goal of this section is to set the stage for future analyses Key conclusions for TP Aim at establishing a link between industry analysis and what is to come later in the report Depends on what it is important to highlight for the company Summarise most important points for influencing further conclusions

16 Company analysis what s this? Provides reader with a background of the company, placed in the context of the transactions Prepared to understand legal & business structure / operations of the company Objective is to describe the group s: Competitive and corporate strategy Financial performance Strengths and weaknesses (SWOT analysis?) Legal structure Make use of major points identified in industry analysis

17 Company analysis contents Background History Corporate strategy Overview Vision / mission statement Business overview Financial performance describe over time

18 Company analysis contents (contd.) Core competencies Few skills that the company possesses to a greater extent than most others (may be identified in relation to industry critical success factors) Key conclusions for TP Discuss company s strengths and weaknesses relative to immediate competitors Company s profitability compared to its strategic group / sector

19 Intercompany transactions what s this? Provides a description of intercompany transactions under review Pricing policy and intercompany agreements Aggregation of transactions

20 Intercompany transactions contents List transactions Provides clarity on which transactions have been analysed Aggregation of transactions Discuss whether appropriate to consider transactions one by one or on a grouped basis (whole entity?) TP policy Describe the company s TP policy document (if any) Terms and conditions that apply to transactions Intercompany agreements / contracts

21 Functional analysis what s this? Describes functions performed, assets utilised & risks borne by each transacting entity Analyses how company manages its core competencies, critical success factors & risks Examines how conclusions reached in industry & company analyses translate into specific activities undertaken by the company Basis for entity characterisation

22 Functional analysis process flow Organisation structure a) Management b) Operations c) Support Roles & Responsibilities a) Manager (Treasury) responsible for hedging risks b) Staff (Research) responsible for specific tasks that form part of designing and developing new products Activities a) Treasury includes cash and risk management, hedging, financing, forecasting and insurance b) R&D includes generation of innovations, product improvements, advances in manufacturing processes, etc. Functions Treasury Research & Development a) Industry Analysis b) Company Analysis c) Inter-company Transactions Risks Business factors that may expose company to possibility of loss / damage market risk, warranty risk, credit risk, etc. Assets a) Tangibles b) Intangibles Functional Analysis

23 Functional analysis contd. Functions / Assets / Risks can be summarised by way of a chart showing the contribution of each party Overview of economically relevant contributions made by each entity, key performance indicators and assets contributed Summary of contributions helps in entity characterization Entity characterization important in finding out the simpler party Simpler party typically leads to conclusion on choice of tested party

24 Economic analysis what s this? Summarises evaluation of TP accepted methodology, comparable search process and results of benchmarking analysis Choice of most appropriate methodology is based on FAR Choice of tested party Which PLI should be applied? Core benchmarking consists of searches performed on databases to arrive at a list of comparable independent companies PLI is applied to comparable companies financials Economic adjustments may need to be performed to enhance comparability

25 Economic analysis process flow Functional Analysis Functions Risks Assets Entity Characterization Choice of Tested Party Economic Analysis Selection of Most Appropriate Method Benchmarking Financial Analysis Profit Level Indicator Multiple year / data availability Arm s length range of results??

26 Conclusions what s this? Provides the findings of each section of the report Analyzes how these conclusions were reached Comment on whether the objectives of the report have been met

27 Post-completion

28 Post-completion Draft and implement TP policy and / or intercompany agreement Living document

29 Takeaways

30 Takeaways Build a TP story Understand the issues Connect the dots / Make the complex understandable Speak easy language Seek a fresh perspective

31 Takeaways The Revenue will never understand your business as well as you - but if you fail to explain your business and pricing in easy language, you will encounter ongoing expensive difficulties.

32 Questions? Seek a fresh perspective and ring fence the risks!!

33 33 Firm Name/Legal Entity and Legal Copy Presentation Name (View / Header and Footer)