TAX AND REGULATO RY SERVI CES

Tax Efficient Supply Chain Management

Rohan Phatarphekar
KPMG India - Partner and National Head, Global Transfer Pricing Services

TAX

Agenda
What is TESCM TESCM structuring TESCM Key tax issues Recent developments Golden rules

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

What is TESCM
Tax Efficient Supply Chain Management (TESCM) Integration of tax considerations into business process changes realignment of functions, assets and risks (FAR) allocation of taxable income among various entities in the MNE based on FAR optimization of operational efficiency optimization of global effective tax rate

The integration of tax efficiencies through the realignment of functions, assets and risks

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Key Triggers
Local business models giving way to regional and global supply chain structures Growing centralization of multinational decisions at a regional or international level Reviewing sourcing, manufacturing or distribution strategies High effective tax rate relative to competitors Losses in certain group entities while high profits in others Acquisition, post-merger integration and/or plans of new market entry
2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

TESCM planning consideration

Procurement - should raw materials or finished goods be acquired from third parties in low cost countries? Production - should the company make use of consignment v. buysell contract manufacturing? Services should common back-office and support services be centralised, regionalised or localised? How the cost of common services be allocated and charged out across the group? Sales & Marketing how much risk should be borne by distributors? Intangibles how should intellectual property (IP) be managed in terms of development, deployment and compensation?

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

TESCM structuring

Principal Company Structure - Global Operating Co. - Global Trading Co. - IP Holding Co.

Manufacturing Supply Chain - Contract Manufacturer - Full Manufacturer - Toll Manufacturer

Sales Supply Chain - Full Risk Distributor - Limited Risk Distributor - Commissionaire Model

- Cost sharing arrangement - Intra-group services - Onshore / Offshore Service contract structuring
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2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Global Operating Co. - Principles

Aggregation of entrepreneurial risk at Global Operation Co. Review of the allocation of the Groups Value-added functions Income earning assets Commercial risks with a view to rationalize tax costs Overall profits Remuneration for normal functions / risks Residual profits reflecting entrepreneurial remuneration Global Operating Co. - Located in favorable jurisdiction - Centralization of management / risk - Entitled to entrepreneurial profits Operating entities - Perform routine functions - Bear subordinate risks - Receive stable and relatively low return

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

IP Planning - Intangibles

Commercial intangibles Product designs Manufacturing process Software code Know-how

Marketing intangibles Trademarks Trade names Brands Customer lists

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

Intangibles Review intangibles in current structure

Determine where intangibles are currently owned and developed Consider business strategy Is ownership of intangibles aligned with business strategy

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

TESCM illustration Example of an end-to-end tax efficient supply chain

Corporate Headquarter Research Centers Shared Services

Services

Sales & Marketing

(limited risk distribution]

Management Services.

R&D services

Services

Sale 1 (flash title)

Sale 2

Suppliers

Purchase of materials

HQ & Global Operating Co.

Intangibles Trading risks

Customers

Delivery of materials

Manufacturing services

Distribution and logistics services

Delivery of goods

Manufacturing
(consignment)

Delivery of goods

Distribution Centers

Key to flows:

Legal title

Physical flow

Services
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2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

TESCM - Key tax issues to be considered

Exit / Migration related issues Starting point for tax authorities Drop in profits may lead to scrutiny by tax authorities Some Jurisdictions have introduced/proposing to introduce Exit tax Permanent Establishment (PE) exposure Appropriate structuring of arrangement (including movement of key personnel) to shield from PE exposure Potential PE risk under Toller / Commissionaire structures in some countries Transfer Pricing Documentation for realignment of FAR to justify change in level of profits at various entity level Valuation of intangibles

The premise of TESCM is that tax planning and operational planning should be integrated
2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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TESCM - Key tax issues (conti.)

Indirect tax / VAT Not optimizing indirect taxes may reduce or negate corporate tax benefits Withholding tax Payments to Principal for services rendered may result in withholding tax in the recipients jurisdiction Tax incentives / use of tax losses Operational Systems issues Shifting of functions may have an impact on efficiency, ability to serve customers, etc.

Tax should not lead to sub-optimal operating models

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Global Developments
OECD Business Advisory Group to issue a discussion draft on business restructuring by end of 2008 Germany has introduced Exit Tax w.e.f January 2008

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Golden Rules
Must introduce substantive business change Aligned investment structuring and tax efficient supply chain management creates value One size does not fit all Implementation, documentation and maintenance

Companies have successfully re-engineered their value chain resulting in permanent cost reductions and associated savings

2008 KPMG India Private Limited, an Indian private limited company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved.

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Presenters contact details Presenter Rohan Phatarphekar Partner and National Head Global Transfer Pricing Services KPMG India +91 22 39836082 rohankp@kpmg.com rohankp@kpmg.com www.kpmg.com
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2005 KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent firms operating under the KPMG name. KPMG International provides no services to clients. Each member firm of KPMG International is a legally distinct and separate entity and each describes itself as such. All rights reserved. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative.

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