Switzerland: Planning for Transfer Pricing: Brand management center for consumer articles
18 September 2014
Posted by: Author: Dr. Alexander Voegele
Authors: Dr. Alexander Voegele and
Philip de Homont (NERA Economic Consulting)
This case study shows how the relocation of old,well-established
brands in times of BEPS can be mastered by a careful dissection of
intellectual property (IP) into various usage rights. Further articles
in this series will deal with Transfer Pricing Planning and Transfer Pricing
Defense cases, as well as exploring in more depth some of the technical issues
raised in this first case study.
An European multinational company had over time acquired several
very old consumer goods companies, which were well established in their
respective markets. The acquired companies shared one industry, but had their
respective headquarters, R&D and marketing centers, manufacturing and other
functions in several European and North American countries. The brands of the
various companies were very well known, and some were even regarded as part of
the national heritage in their respective native countries.
However, the profitability of several subgroups had been low,
partially due to the very competitive retail market environment in some
developed countries and the adverse macroeconomic environment. Worse, the companies
were very decentralized, to the point where the different companies sometimes
engaged in very fierce competition with each other.
The headquarter reacted by introducing principal structures to
some of its subgroups, but decided to leave the most profitable subgroups out
of any restructurings initially. Yet, the new principal structures did not
increase the profitability sufficiently. Rather, the principal structure
created additional problems: the "routine" distribution and
manufacturing companies earned all the profit, while the principals mostly
incurred losses. The tax effect was rather negative since some of the principal
companies further accumulated loss carry forwards.
Therefore, the group headquarters decided on a larger restructuring.
The product portfolio would be streamlined, the R&D of all groups would be
centralized, and the brands, manufacturing, and distributors would be managed
centrally. The company was very risk-averse and conservative and wanted to
avoid getting drawn into BEPS discussions.
We checked several locations for the central management. The
expected cost savings, the tax rates, and the possibility of moving important
staff and their families to those locations were examined. Based on the living
conditions of significant persons, the company finally chose a location in the
western part of Switzerland. The office rental was expensive, but the total
costs of relocation were reasonable and a tax ruling was available.1
When transferring brands to low-tax countries, most countries,
including the US, Canada, France and Germany, tax the value of the migrating
IP. Some countries also tax the value of a more broadly defined "business
opportunity." When very well known brands are transferred to a low-tax
jurisdiction, the probability that the deal will come under close scrutiny by
tax authorities is very high.
In this sensitive context, we had to choose what exact IP
should be transferred and what an independent purchaser or licensee would pay
Since a few brands could be regarded as some kind of national
heritage, it was considered unwise to transfer the legal title of such a brand
to Switzerland. Instead, we transferred certain usage rights to Switzerland,
and established a system of sublicenses for various regions, certain product
lines and different purposes.
To keep the cash-flow effect of additional taxation manageable
for the company, we mainly transferred usage rights with short economic useful
lifetimes.The value of these particular usage rights can be relatively
low, as an independent company would pay less for an asset with a low remaining
lifetime. These usage rights had to be defined and separated very carefully.
The crucial question was how the IP should be valued. In
general, so-called "Comparable License Fees" from external databases
would very rarely reflect the actual value of the unique IP in question. A
notable exception might be in very generic IP, such as certain (typically
low-value) author rights, film rights, stock images, software, etc.
One possible method
would have been to measure the premium that these brands command in retail
shops. The brands mostly do achieve high price premiums in comparison to
unbranded products, and often the branded products sell in much higher
quantities. However, this brand premium often does not translate into high
profits for the brand owner. Instead, the retail companies mostly manage to
claim a large part of the premium for themselves.
Therefore, the brand
value of consumer articles could only be determined by the profits actually
achieved with this IP by the new headquarters, adjusted by the effects of
relative bargaining power of the licensee versus licensor.
First, we determined the license fees by calculating the annual
income from the different usage rights, deducted the respective costs,
Afterwards, we had to calculate the value of the transferred
usage right. We used the existing budgets and forecasts for investments,
sales, costs, etc. Then we calculated the gestation lag and
depreciation for the respective usage rights. We also used expert surveys for
the determination of missing information, in particular for the forecasts. For
the value of the existing usage rights from the US, we also used the US income
approach, as discussed in the cost-sharing regulations.
Lastly, we carried out
an expert survey for the determination of the bargaining power of licensees
versus licensors. In this way we reached an arm's length license fee for each
individual usage right. Finally we got the value of the transferred IP. We discussed
the case with the major tax authorities, and obtained consent for this
procedure, but we did not call for APAs. We are confident that this system will
survive the new rules for BEPS and will be accepted in future field tax audits.
The system is increasing
sales, reduces cost, and is also very tax-efficient.
1 We obtained the tax
rulings in Switzerland prior to the recent changes to margins appropriate
for limited risk distributors. However, even with the new rules, the decision
would have still been for Switzerland.
This article first appeared on nera.com.