1. Transfer Pricing
415© IBFD ASIA-PACIFIC TAX BULLETIN NOVEMBER/DECEMBER 2013
Anis Chakravarty
and Shuchi Ray*International
Is Business Restructuring and Tax-Aligned
Supply Chain Planning Still Viable?
In this article, the authors outline the pertinent
transfer pricing issues of supply chain
management, in the context of a business
restructuring contemplated by a multinational
company.
1. Introduction
The current global economic environment shaped by the
need for identification of strategic international opportu-
nity areas by businesses has accelerated growth in cross-
border investments.1
It is well known, that effective tax
management in line with business objectives can add sig-
nificant value to the overall business.
Traditionally, the underlying objective of maintaining a
globaleffectivetaxratealignedwithoverallvalueenhance-
mentforthebusinesshasbeenachievedbyfocusingonthe
value chain. This is where the astute use of transfer pricing
has become important over the past few decades. Trans-
fer pricing revolves around actual functions and risks of
the taxpayers, providing ample opportunities to structure
operations in a manner that meets business objectives,
i.e. operational cost reduction, intellectual property pro-
tection and effective tax management. By its very nature,
transfer pricing is a good management tool and if applied
correctly, it helps ensure remuneration in line with “sub-
stance over form” in any business model or restructuring.
Applied incorrectly, it raises risks of the disregarding of
transactions, disallowance of deductions and worse of all,
negative publicity.
In the current business environment of heightened scru-
tiny by tax authorities, more audits and unresolved dis-
putes and penalties, business restructuring or supply chain
planning is viewed with suspicion. Often, such structures
have been abusive having being set up for tax evasion
rather than tax planning. Further, the question of moral-
ity in taxes has recently come up and ethical questions are
being asked around planning and the obligation to pay the
right amount of taxes.
ConsiderthecasespickedupbythePublicAccountsCom-
mittee (PAC) in the United Kingdom and the discussion
* © Anis Chakravarty and Shuchi Ray.
Anis Chakravarty is a Senior Director at Deloitte India, while
Shuchi Ray is a Director at the firm. The authors can be contacted at
anchakravarty@deloitte.com and shuchiray@deloitte.com respec-
tively. The views expressed in this article are personal.
1. Global cross-border investment increased by 60% year on year and
accounted for 40% (USD 130 billion) of all direct commercial real estate
investments in 2010 (USD 318 billion), according to new research from
Jones Lang LaSalle’s global capital markets experts. Source: The Nation,
published on 4 March 2011.
around “immorally” minimizing UK tax obligations. The
PAC has criticized companies for the “unconvincing and,
in some cases, evasive” evidence they gave on why corpo-
ratetaxpaymentsweresolow.TheOECDhasalsorecently
released its report on Base Erosion and Profit Shifting
(BEPS). The BEPS project examines whether current
rules allowing for the allocation of taxable profits to loca-
tions different from those where the actual business activ-
ity takes place need review. The aim as per the OECD is
to provide comprehensive, balanced and effective strate-
gies for countries concerned with base erosion and profit
shifting.Inaddition,theOECDisseriousaboutaddressing
aggressive tax planning. The OECD has set up the Aggres-
sive Tax Planning (ATP) Steering Group, a subgroup of
WorkingPartyNo.10onExchangeofInformationandTax
Compliance, to act as a competence centre for the OECD
in this regard.
The current environment inspired by questions on moral-
ity in taxation, profit shifting and a backlash on aggres-
sive tax planning, raises the question whether planning
structures are truly dead? This article focuses on transfer
pricingaspectsofsupplychainplanningparticularlyinthe
context of business restructuring and explores boundaries
of tax planning based on country legislations and existing
international guidance.
2. Business Case
Thoughanybusinessrestructuringposeschallengesbefore
tax authorities, transfer pricing (emphasizing of compen-
sationinlinewithfunctionalprofile)minimizessuchchal-
lenges along with assisting in achieving a variety of busi-
ness objectives. Transfer pricing provisions are attracted
whenamultinationalenterprise(MNE)withahighdegree
of cross-border flows of goods and services undergoes
business restructuring. In addition, some MNEs restruc-
ture to move from a traditional country-based organiza-
tional structure to a pan-continental or global organiza-
tion through a number of measures such as consolidation
ofmanufacturing,centralizationofdistributionorcentral-
izationofstrategic,financialandadministrationfunctions.
It is important at this juncture to note that supply chain
planning should be in line with the country legislation
and laws prevailing on business restructuring. Global
companies that undergo business restructuring do so to
take advantage of business realities. Though there is an
increased focus on such transactions, there exists detailed
guidance from the OECD as well as in tax legislation of a
numberofcountriesonhowbusinessrestructuringshould
be viewed from a tax and transfer pricing perspective. Any

2. Anis Chakravarty and Shuchi Ray
416 ASIA-PACIFIC TAX BULLETIN NOVEMBER/DECEMBER 2013 © IBFD
supply chain planning should consider such guidance
prior to undertaking any restructuring.
With this background, the question then is: what kind of
companies go in for business restructuring? Companies
that have significant supply chain operations in several
countries with a multitude of functions, risks and assets
within the group are ideal candidates. Effective stream-
lining of operations in line with centralizing certain func-
tions and risks may help in reducing functional duplica-
tion and achieving business efficiencies. Other instances
could be companies setting up new manufacturing, dis-
tribution or research and development facilities. They
would also benefit from aligning tax to the functional and
risk distribution of the new operations. Some companies
may also own valuable intangibles in a particular location
which need realignment to exploit their potential value
and to benefit from supply chain planning.
Overall, it is important to note that business alignment
opportunitiesexistascompanyoperationsusuallydepend
on supply chain tactics. Using the right mix of functions,
assets and risks helps companies achieve and align their
operational intent with tax. In all such instances and
opportunities, one must keep in mind that substance has
to follow form and not the other way round.
2.1. Need for proper characterization and appropriate
transfer pricing
The trigger to undertake such supply chain planning is the
benefits which one can envisage around improved cash
flow, higher earnings, cost reduction and stable effective
tax rates. Given the increasing reach of MNEs in various
spheres of business, companies within a group have also
started specializing in certain aspects which help the MNE
reap economic benefits. For example, consider the cen-
tralization of procurement to reduce overall spending
on goods and negotiate large volume discounts. While
such activities bring forth business efficiency, having the
procurement function within a dedicated procurement
company located in a jurisdiction that provides tax incent-
ives on such functions may bring added value. For transfer
pricing purposes, such companies are looked at as dedi-
cated service providers to the larger MNE group which
may report to a principal management company within
the group. The procurement company, therefore, charges
an arm’s length fee for its services to the group principal
in line with its substance and risk profile.
A large number of MNEs follow a centralized model for
effective administration and business management. The
centralized model assumes the flow of services from
various specialized functional entities to the Principal.
The Principal entity enters into contracts with the sup-
plier and customer for the purchase and final delivery of
goods.Thoughthephysicaldeliveryofgoodsiscarriedout
by the MNE manufacturing plant/factory, the legal risks of
such delivery are primarily borne by the Principal. This is
because the Principal takes decisions around the strategic
manufacturing directions and therefore, is responsible for
any risks associated with the decision making. This model
assumes that routine activities would be compensated
with routine returns such as cost-based routine return for
manufacturing activities/services, revenue-based routine
return for sales activities and the residue goes to the Prin-
cipal company.
While carrying out any such planning/restructuring, one
needs to carefully consider the permanent establishment
(PE)risks,andotheraspectssuchasindirecttax,substance
alignment with form, exit charges and legal compensation
claims. There might be a strong and compelling business
case for a restructuring which could be integrated with the
current and future vision of the management. However,
this would need to be analysed by the management, the
human resource (HR) function as well as from the tax and
regulatory perspectives.
From the management/HR perspective, the areas for
which buy-in is required might be the location of the
Principal company, transfer of key management person-
nel (equipped to make strategic decisions), employee con-
tracts, impact on performance measurement systems and
loss of autonomy/status from an individual perspective.
At the implementation level, change to existing contracts
with customers and suppliers, manufacturing licences,
impact on incentives, etc. are critical considerations for
taking discussions forward. With respect to indirect tax
and management reporting, such structuring may necessi-
tate the need for additional registrations, additional inter-
nal/external reporting and consequential increased com-
pliance requirements.
2.2. Cross-border redeployment of functions, assets
and risks
Implementation of a restructuring often results in cross-
border redeployment of functions, assets and risks
between intra-group companies. Since such changes give
rise to profit shifts and varying tax positions, they create
more concerns with governments and regulatory authori-
ties. In an effort to protect their revenue bases, tax authori-
ties in various countries have been coming up with various
legislations such as general anti-avoidance rules (GAAR)
and transfer pricing rules.
To provide clarity, Chapter IX of the OECD Transfer
Pricing Guidelines for Multinational Enterprises and Tax
Administration, 2010 (OECD TP Guidelines) provides
guidance on transfer pricing aspects of business restruc-
turings.Thoughthisguidanceisnotlegallybinding,itdoes
providedirection,whichiffollowed,willassistinminimiz-
ing tax risks. In addition, it is prudent to follow local busi-
ness restructuring regulations if available.
For example, the OECD has recognized that business
restructurings have often involved the centralization of
intangible assets and risks in line with the profit poten-
tial attached to them. In the last six to eight years, MNEs
have undergone restructuring to maximize synergies and
economies of scale, streamline the management of busi-
ness lines and improve supply chain efficiency by taking
advantage of the development of Internet-based technol-
ogies. Such business restructurings may even be needed

3. Is Business Restructuring and Tax-Aligned Supply Chain Planning Still Viable?
417© IBFD ASIA-PACIFIC TAX BULLETIN NOVEMBER/DECEMBER 2013
to preserve profitability or limit losses in a downturn
economy. The OECD has discussed how the arm’s length
principle applies to business restructurings and the extent
to which such a reallocation of profits is consistent with
the arm’s length principle.
As regards risks, the OECD emphasizes on the conduct of
theassociatedenterprisestodeterminewhetherthealloca-
tion of risks in the controlled transaction is at arm’s length.
The OECD TP Guidelines provide relevant factors such as
the relative control of the parties over risk and financial
capacity to assume that risk. In tax-aligned supply chain
planning exercises, it is often seen that while setting up
principal companies and characterizing manufacturing
and distribution functions are easy to undertake in form,
often the substance does not support the intended func-
tional realignment. Therefore, if certain risks as intended
to be borne by the Principal are legally transferred to a
newly set-up Principal company, such a company may not
have the substance or the appetite to bear such risks. The
OECD says that the economic significance of risk and the
capacity to bear and control risks is an important consid-
eration.Therefore,functionalcharacterizationshouldalso
match the ability to control and bear risk.
Another area of supply chain planning which is often an
area of dispute is that of arm’s length compensation for
the realigned cross-border transactions. Here, the OECD
mentions that even if comparable uncontrolled situations
do not exist, this does not mean that the restructuring is
not at arm’s length. This is an important premise as inde-
pendent companies do not usually have the authority to
impose restructuring in a cross-border situation. There-
fore, in such instances, it is important to see whether inde-
pendent parties might be expected to have agreed to the
same conditions in comparable circumstances. Where a
restructuring is commercially rational for the MNE group
as a whole, each group entity participating in such restruc-
turing should get compensated (for the restructuring and
post-restructuring) in line with its functional analysis.
Again, a comparison of the existing functions, assets and
risks with that of the contemplated functions, assets and
risks is important. Similarly, business reasons for the
restructuring, expected benefits including the role of syn-
ergies are important considerations. Perhaps the most
important consideration here is the concept of “options
realisticallyavailable”tothepartieswhichsaythatifparties
were to indeed restructure, in an independent scenario,
they would consider their options and take a decision in
line with prudent business principles. Therefore while
applying the arm’s length principle to business restruc-
turings, the question is whether there is a transfer of some-
thing of value (rights or other assets) or a termination or
substantial renegotiation of existing arrangements and
that transfer, termination or substantial renegotiation
would be compensated between independent parties in
comparable circumstances.
Where an existing contractual relationship is terminated
or substantially renegotiated in the context of a busi-
ness restructuring, the restructured entity might suffer
detriments such as restructuring costs (e.g. write-off of
assets, termination of employment contracts), re-conver-
sion costs (e.g. in order to adapt its existing operations to
other customer needs), and/or a loss of profit potential.
In business restructurings involved in supply chain plan-
ning, such considerations need to be factored in and com-
pensation paid to ensure there is no adverse effect on the
profit potential.
As regards the post-restructuring transactions, the selec-
tion and practical application of an appropriate trans-
fer pricing method must be determined by the compa-
rability analysis, including functional analysis. At this
stage, it should be borne in mind that where a restructur-
ing involves a transfer to a foreign associated enterprise
of risks that were previously assumed by a taxpayer, it is
important to examine whether the transfer of risks only
concerns the future risks that will arise from the post-
restructuring activities or also the risks existing at the time
of the restructuring as a result of pre-conversion (or pre-
restructuring) activities.
3. Creation and Administration of a Supply
Chain Structure
In the backdrop of increased scrutiny on supply chain
planningbytaxauthoritiesaroundtheworld,animportant
observation that the OECD makes is that MNEs are free
to organize their business operations as they see fit and
tax administrations do not have the right to dictate to an
MNE how to design its structure or where to locate its
business operations. However, tax administrations have
the right in determining the tax consequences of the struc-
ture put in place by an MNE. The United Kingdom’s HM
Revenue and Customs in a recently issued briefing, clari-
fied that companies are required to pay corporation tax
in the country where they carry on the economic activ-
ity that generates their profits, not where their customers
are located. This document says, in summary, that supply
chain planning is not tax avoidance because the profit is
taxedinthecountrywherebusinessactivityisundertaken.
What is critical for recognition of such structures is
whether the economic substance of the transaction is in
accordance with its form. Further, it is important to eval-
uate whether independent enterprises in comparable cir-
cumstances would have characterized or structured sim-
ilarly. It is well appreciated that business restructurings
often cause MNEs to implement a global business model
that is hardly found between independent enterprises
(since MNEs can work in an integrated manner and can
implement global supply chains or centralized functions).
In case such restructurings are undertaken without
commercial reality or rationale, it may be construed as
tax avoidance. Internationally, several countries have
expressed their concern over tax evasion and avoidance,
which is evident from the fact that either nations are legis-
lating the doctrine of GAAR in their tax code or strength-
ening their existing code. It enables the tax authorities in a
countrytodenythetaxbenefitsoftransactionsorarrange-
ments which do not have any commercial substance or
consideration other than achieving the tax benefit. Aus-

4. Anis Chakravarty and Shuchi Ray
418 ASIA-PACIFIC TAX BULLETIN NOVEMBER/DECEMBER 2013 © IBFD
tralia was in the forefront of introducing a GAAR as early
as1981.OthercountriessuchasCanada,France,Germany
and New Zealand have also introduced a GAAR. India has
also recently considered introducing a GAAR in its leg-
islation. India’s current transfer pricing regulations also
require one to disclose any transaction relating to business
restructuring in the annual transfer pricing reporting to
the Indian tax authorities.
Recently, the OECD released its first report on BEPS on 12
February 2013. The intention of the report is to highlight
the extent of base erosion and profit shifting and whether
tax legislation has kept up to date with business changes.
This report is an important consideration for companies
planning tax-aligned supply chain restructurings.
The report states that domestic rules and internationally
agreed standards for sharing tax jurisdiction were devel-
oped in the early 20th century. These may need to be
updated as the current business environment is charac-
terized by high intellectual property value and rapid infor-
mation and communication systems. Where supply chain
planning becomes important in the OECD context is its
observation that the shifting of risks, intangibles and func-
tions within a group would rarely take place within third
parties.
The OECD has suggested that improved clarity on trans-
fer pricing rules to address specific areas where the current
rules produce undesirable results is required from a policy
perspective. Specifically, it has laid down action plans to
provide assurance that transfer pricing outcomes are in
line with value creation: intangibles, risks and capital and
other high risk transactions. The OECD has developed
Action Plans No. 8, 9 and 10 with an objective to assure
that transfer pricing outcomes are in line with value cre-
ation: intangibles, risks and capital. As regards disclosures,
through Action Plan No. 12, it proposes to develop rec-
ommendations that would require taxpayers to disclose
theiraggressivetaxplanningarrangements.Further,asper
Action Plan No. 13, the OECD has proposed to develop
rules regarding transfer pricing documentation that will
require the MNEs to provide all relevant governments
with needed information on their global allocation of the
income,economicactivityandtaxespaidamongcountries
according to a common template. In other proposals, the
emphasis is to include more effective anti-avoidance mea-
sures in domestic law or international guidance.
4. Conclusion
Tax-aligned supply chain planning is an important
tool to create synergies, minimize operational
costs, improve cash flows and create shareholder
value within an MNE. However, such planning in
the current business environment has been viewed
suspiciously by tax authorities assuming that it is a
means of tax avoidance.
Though supply chain planning poses challenges
before authorities in terms of profit shifts and
the right jurisdiction for taxing, utilizing transfer
pricing as a tool can not only minimize such
challenges, but also help in achieving a variety
of business objectives. It is important that global
guidance, country legislation and laws are strictly
adhered to, adequately supported by robust
documentation in implementing opportunities.
With base erosion, profit shifting and business
restructuring coming into focus, considerable
thought needs to be given to implementation and
substance alignment. Tax aligned supply chain
management supported by commercial rationale,
documentation and robust demonstration of facts
and reasons should help the MNEs in implementing
such structures.