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Summary Business restructuring - SCHEME
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Business restructuring - SCHEME
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-The three pillars of the MNC (ie (i) R&D; (ii) manufacturing; (iii)distribution) will likely be subject to the restructuring
Maximise synergies** and economies of scale, improve Business restructuring -BRs often involve the centralisation of (i) intangibles, (ii) risks,
efficiency of the supply chain, taking advantage of the COMMERCIAL
RATIONALE
(iii) functions. For example:
development of technologies, preserve profitability and/or Definition: ‘the cross-border redeployment by a MNC of functions, assets and/or EXAMPLES
a) Intangibles transferred to IP company
limit losses risks’ (‘including the termination or substantial renegotiation of existing b) Functions concentrated in a central/entrepreneur entity
arrangements’) The opposite can also happen. For example:
a) Fully-fledged manufacturer contract/toll manufacturer
STEP 1 STEP 3 STEP 4
Accurate delineation of the transactions comprising the BRs must be priced Compensation will have to be
b) Fully-fledged distributor limited-risk/commissionaire
business restructuring: functions, assets and risks before at Arm’s length paid whenever the BR lead to a:
and after the BR
STEP 1: identify commercial/financial relations Remuneration of post-
between the companies involved in the business Transfer of Termination or restructuring transactions
restructuring (reference to STEP 1-2 other scheme) something of value substantial renegotiation The ALP applies to post-
STEP 2: accurately delineate the transactions that of existing arrangements
‘Something of value’ -> covers all situations where Remember restructuring transactions. This
comprise the business restructuring to determine
consideration would be paid between independent parties Legal ownership < DEMPE Consider whether compensation means that in order to assess the
whether any value has been transferred (reference to
regardless of the form of the underlying asset -Hence, the change of must be paid for appropriate compensation for
STEP 3 other scheme -> (1)(2) comparability factors)
- IMPORTANT: the sole transfer of functions and/or risks legal ownership of the termination/substantial transactions between related
STEP 2 does not, as such, give rise to the payment of intangible DOESNT entitle renegotiation of arrangements. companies after the BR is
Recognition of the accurately delineated transaction that compensation (no compensation for decrease in expected to the residual profits per performed, a regular TP analysis
This is done by:
comprise the BR profits) se. The DEMPE functions must be conducted (reference to
(i) Identifying the possible
After Step 1, determine whether independent parties must also be performed! existence of an indemnification other scheme!!)
Tangible assets Intangible assets - STEP 1: factual analysis
would and could perform the BR. Here, consider the Example clause in a contract
BR often involve the transfer -BR can also involve the - STEP 2: benchmarking
commercial rationality of a BR as a whole. If an IP company is established, the (ii) Assess whether the
of assets (ie equipment) transfer of intangibles or transfer of the OLD intangible to terms of the contract and the
rights in intangibles. IPco will have to be compensated
(this may trigger capital gains tax). indemnification clause are at
If IPco performs DEMPE for old arm’s length
intangible but no transfer of legal (iii) Determine whether
MNE group synergies** ownership then no capital gains
To identify whether something of value was transferred indemnification rights are
tax and IPco will get most of
perform 2 functional analysis of the BR transactions: residual profits. Also, IPco can required under the applicable
Definition: ‘MNE group members benefit from the 1) One reflecting the situation pre-restructuring develop NEW intangibles and get legislation or case law
interactions amongst themselves that would not generally 2) One reflecting the situation post-restructuring all residual profits for those!
(iv) Consider whether at
be available to similarly situated independent enterprises’
arm’s length an independent
company would be willing to
They arise from: ‘deliberate concerted group actions’
indemnify the one that suffers
DIFFERENT from ‘incidental benefits’ -> these
from the termination or re-
derive solely by virtue of group affiliation (NO
Apply TP pricing method negotiation of the agreement
deliberate and concerted action here)
If (i) something of value was transferred or
These can arise from combined purchasing power, (ii) indemnification must be paid, the
combined and integrate computer and communication appropriate TP method must be applied
systems, integrated management, elimination of (reference to other scheme – STEP 2!)
duplication, increased borrowing capacity ecc
They can be both: (i) negative and (ii) positive
Whenever synergies arise from deliberate and concerted
group actions, determine:
(i) The nature of the advantage or disadvantage;
(ii) The amount of the benefit/detriment provided;
(iii) How to divide the benefit/detriment among
members of the MNE group
When synergies exist, these should be
shared in proportion of the members’
contribution to the creation of the synergy
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