Funktional & Risk Analysis Flashcards
Why do a functional & risk analysis
- basis on which to select an appropriate tp method
- single most important point of reference when doing comparability analysis
- synonym with value chain analysis
- -> will illustrate how functions and risks are distributed between group’s companies
- -> Which key value drivers & how entities contribute to these functions
single most important guiding principle to apply arm’s length principle
Notions of functions by each entity determines its compensation/profit potential
Important questions for f&r analysis
- what functions are crucial for delivering USP (core functions vs support functions)
- Which entities perform core functions, incl high value adding functions related to unique and valuable intangibles
- which entities contribute support (routine) services that contribute merely low value-added
- Is it feasible to qualify the value added contributions of specific functions?
Why is there a increased emphasize on riks?
many aggressive tax avoidance schemes against which BEPS was targeted were based on assigning risks (and corresponding prpfits) to entities with insufficient economic substance , ex. entities lacking capacity (knowhow, discretionary authority or capitalization to make business decisions appropriate to the relevant risk)
–> important to ensure the tax viability of he functional & risk analysis
What are the Functions (used out of case study Prime page 16)
- Research and Production
- Procurement
- Quality Assurance
- Logistics and Warehousing
- Sales and Marketing
- After-Sales
- Management and Administration
What are the Risks
- Research and Development Risk
- Product Liability and Quality Risk
- Market Risk
- Customer Credit Risk
What does Research and Production include
=Function How important for USP -Technologies -Product/Service Innovation -> who/which entity if any carries out the Research and Production ? -> High value-adding function
What does Procurement include
=Function
How important for USP
-responsibility for procurement of major strategic and operational procurement functions
-> who/which entity if any carries out ? -done only by HQ or subsidiaries themselves?
->Medium value-adding function
What does Quality Assurance include
=Function How important for USP, if even done -Certification procedures -installations -Testing and monitoring of compliance -> who/which entity if any carries out ? - any local testing institutions where additional efforts needed locally by subsidiaries ->Middle value-adding function
What does Logistics and Warehousing include
=Function
How important for USP/competitiveness (same-day delivery etc)
-Importance of daily supply capacity
-Importance of storage capacity
-Storage cost management ex by modern logistics center etc
-> who/which entity if any carries out ? Or third party?
-> Middle/High value-adding function
What does Sales and Marketing include
=Function
How important for USP
-Important/high value for retail companies
-Pricing Policies (how much from HQ vs subsidiary leeway in negotiations on local market)
-Essential sales functions (branding, sales channels etc) managed/decided by whom?
-> High value-adding function for retail, less for companies where marketing not so critical for competitiveness
What does After-Sales include
=Function
How important for USP
-Service-level agreements
-Depending on business model/industry
-First vs second level support local to HQ
-> who/which entity if any carries out ?
-> Medium value-adding function
What does Management and Administration include
=Function
- Who manages the subsidiary - local staff vs managed mainly from HQ (local accounting, customer clearance, communication with authorities, external consultants etc)
- How much support on general administration & IT by HQ
- > Generally low value-adding function
What does Research and Development Risk include
- Risk that the research activities may not generate any result eg. no marketable product
- Substantial risk for companies with high investment in this due to dependency on research and development as factor for competitiveness (pharma, biotech, tech companies etc)
- All risks carried our by one entity or shared risk?
what does Product Liability and Quality Risk include
- Risk that manufactured or distributed product fail to perform at accepted or advertised standard
- Entities holding after-sales activities responsible for the functionality of their product/service
- Manufacturing entity evt. re-compensate subsidiaries (resp. involved entities) for malfunctions related to manufacturing
