What’s in Store?

Business insight for the retail and consumer sector

A high-profile masterclass run by
PricewaterhouseCoopers (PwC) has
provided an invaluable update on
Despite Icelandic volcanic eruption disruptions, a PwC masterclass, led by Sue Rissbrook (Global head of the retail
and consumer transfer pricing network), on transfer pricing issues for the retail and consumer sector attracted
people from a wide and varied group of international businesses, including Diageo, Burberry, Cadbury’s and
Unilever. There were presentations on procurement, documentation, and resolving disputes, as well as a detailed
working session on the challenge of establishing robust comparables. Here are some of the highlights.
Possibilities in procurement a fully local approach, to a centre-led model that takes on
the management and negotiation of some key contracts, to
A number of major organisations have been looking again at a standalone procurement company. The right approach for
a particular business will depend on a number of specific

Transfer pricing
this whole area over the last few months. In some cases it’s
the result of expansion into new markets, in some it’s been
prompted by the continuing recession and the need to keep
costs down, and in others there’s been a one-off window of
factors, including the markets the company operates in,
the scope of its activities, and the location of both risks
and assets. These can all be flexed to achieve financial,

trends in the
opportunity after a big merger or acquisition. There are also
a number of trends affecting retail and consumer businesses
in particular, ranging from the increased risk of supplier
failure during a recession, to changes in consumer behaviour
commercial, or tax efficiencies, and can be based on a wide
range of transfer pricing principles, from cost plus service fee,
to commission.

retail and
(some of which are also being driven by the downturn), to
sustainability, and the increasing emergence of global supply
chains. These developments are leading many international
Where tax is concerned, the key – as always – is that the tax
structure should reflect the actual substance of the business,
and the level of transfer pricing is a key consideration here.
And again – as always – the more radical the model, the more

consumer sector
companies to restructure their procurement and supply
relationships, whether by pursuing low-cost country sourcing
opportunities (with all their attendant political and currency
risks), or building green considerations into their procurement
at an earlier stage.
As Steve Hasson, [Transfer pricing partner] said, “procurement
can make a significant contribution to the bottom line – cutting
purchase costs by as little as 5% can result in a 50% increase
in profit margin. To achieve that same impact by other means
would either require sales to rise by 50%, or drastic cuts in
staff numbers.” A full review of procurement arrangements
should help identify these savings, then capture those savings
through new or revised supplier contracts, and finally make
the savings sustainable through rigorous purchase-to–pay
procedures. A full review can also be the first step towards a
more comprehensive change to the overall procurement model.
There’s a whole range of different options here, ranging from
substantial the operational and tax benefits can be, though this
may be counterbalanced by the practical upheavals required
to achieve them, and what can be a higher degree of risk,
not least in reputational terms, if things go wrong. As Steve
said, “if you’re thinking of changing your procurement model
you need to take into account a number of significant costs,
including IT, potential relocation of staff, and potential tax
leakage. As with so many other similar business issues, you
need sure-footed planning and execution to turn theoretical
benefits into actual gains.”
The value of good documentation
This session was led by Daniel Alter (Transfer pricing senior
manager), who’s one of the key members of the PwC team
working on ‘global co-ordinated documentation’. Getting
decent documentation in place for transfer pricing is clearly

pwc

Transfer pricing trends in the retail and consumer sector (cont’d)
a major and time-consuming undertaking, but one where
getting it right repays the time and money invested in it. As
Daniel said, “A lot more countries are bringing in transfer
pricing regulations, or new rules for documenting them, and
the penalties for non-compliance can be significant. Likewise,
many tax authorities are now working together and comparing
notes, so it’s absolutely vital to get your approach and your
message consistent across the piece.”
Consistency is only one obvious advantage of managing
transfer pricing documentation on a centralised basis; another
significant factor is the clarity it gives on the company’s global
tax risks and opportunities.
Turning to practicalities, the documentation process should
usually start by defining the scope of the project. You
need to look at the relevant local transfer pricing rules and
documentation requirements, and what you have in place
already. You should also look at issues like the type and value
of your related party transactions, your tolerance of risk,
and how responsibility for different aspects of the process
will be allocated. Communication is key here, as is rigorous
management of the timetable, as this is an area where
significant slippage is a common problem. And remember that
you don’t have to have an all-singing all-dancing approach
to every single market: some countries may indeed require
a traditional transfer pricing study, but others could be dealt
with just as effectively with a slide deck analysis, or a brief
executive summary.
Daniel Alter summed it up like this: “The key to a successful
global documentation approach is a combination of committed
resource, detailed project design and planning, and a
methodology based on good communication and flexibility.”
Business insight for the retail and consumer sector
Sector updates
Food
Key trends
• Globalisation: the food retail sector is highly concentrated
in comparison to other retail sectors - the top ten retailers
in Germany, Sweden, France, Belgium, and Switzerland
have a cumulative market share of more than 90%.
• Competition: getting more intense all the time, as retailers
struggle to differentiate themselves from their rivals
• Private labels: now competing significantly in the premium,
mid, and budget price levels
• Customer loyalty: more important than ever, and giving rise
to a plethora of new initiatives, including the move towards
‘entertainmentisation’, which ranges from event shopping,
to in-store samplings, to the marketing of meal solutions
rather than mere ingredients.
Luxury goods
Key trends
• Emerging markets: rapid growth in recent years, especially
in Asia, and especially among the young and well-
educated.
• The recession: 2009 was a perfect storm, which hit the
luxury sector hard and saw up to 20% falls in sales. Both
developed and developing markets are still tough, though
there are signs of a turnaround, especially in emerging
economies.
• Brand: sustaining the promise of the brand, and factoring
in sustainability too.
What’s in Store?
Key transfer pricing questions
• How do you develop and roll out the own brand concept
internationally?
• How do you allocate a cost to central concepts like
merchandising, store layout, and logistics?
• What about the use of common IT infrastructures like
merchandise management systems, data warehousing, or
staff planning?
• If procurement is pooled, how are the benefits allocated
back?
Key transfer pricing questions
• How do you manage transfer pricing issues in regions like
Asia or South America, which are the most challenging in
tax terms, but also the most promising in terms of sales
growth?
• How do you manage the interaction between transfer
pricing, customs duties, royalties, and withholding taxes,
especially in a sector where duty rates are often high, both
in developed and developing markets?
• How can you make local deductions for central costs?
• How do you manage and maintain local profitability, given
the significant and ongoing need to invest in the retail
network?
 What’s in Store?
Business insight for the retail and consumer sector
Transfer pricing trends in the retail and consumer sector (cont’d)

FMCG In India the courts are now showing an increased willingness

Key trends
• The recession: generally milder for this sector, given
that most FMCG goods are low-margin, high-volume
essentials. That said, commodities markets have been
volatile and are likely to continue that way
• Health and sustainability: these were becoming key issues
before the recession and will probably re-emerge.
• Speed to market: getting more important all the time,
because the first to market secures higher margins
and prices. Many US businesses are rationalising their
European operations for precisely this reason.
Key transfer pricing questions
• How do you manage transfer pricing models and intra-
group transfer pricing arrangements after a major
acquisition?
• Do you manage transfer pricing documentation locally,
regionally or globally?
• How do you deal with multiple audits across a number of
different tax jurisdictions, especially in more challenging
markets like India and China?
• What’s the best way to make sure customs and transfer
pricing documents work equally well for both authorities,
including issues like retrospective pricing?
to apply OECD Guidelines, and 2009 saw the introduction of
safe harbours and the establishment of Dispute Resolution
panels to tackle a growing mountain of transfer pricing cases.
The local tax authorities in China are increasingly asking for
documentation of related party transactions – and updating
their national databases. There are currently around 50 bilateral
APAs and 10 unilateral APAs under discussion; 12 have been
concluded, including Japan, the US, Korea, Singapore, and
Denmark.
Diane summed up the international situation by stressing the
importance of getting the right level of management involved
locally: “You need to make sure they’re fully involved in
the process, not only where there are language issues, but
also because they can help you navigate the niceties of the
relevant operating and tax regime. As in so much else, never
underestimate the value of local knowledge.”

Dealing with disputes
The masterclass ended with a round-up of the current state of
play on transfer pricing disputes in some key markets, with a
discussion led by Diane Hay, now Special Advisor to PwC on
international tax. As she said, the typical international company
is now facing a growing range and volume of tax risks across
the world, as more countries see transfer pricing as a way
of raising revenue, and more start to collaborate together
to conduct multiple tax audits, especially within the EU. A
higher number of disputes are going into Mutual Agreement
Procedures (or MAPs) – according to the OECD these cases
increased by 50% in 2006/7 - but as the government resources
available to deal with them is not growing at a similar rate,
they’re taking longer to resolve. There’s also evidence of a
growing interest in Advance Pricing Arrangements (or APAs),
by both tax authorities and businesses. As Diane says, “in the
face of such a complex international picture, companies need
to be pragmatic: your transfer pricing defences need to be
cost-effective defences – you can’t gold-plate everything.”
Key points from the round-up included the UK authorities’
growing emphasis on Alternative Dispute Resolution (ADR)
procedures like arbitration and mediation, with HMRC now
running some pilot cases. In the US, the IRS has suffered a
number of significant recent setbacks in some key litigation
cases, and it’s likely they’ll be enhancing both their litigation
capability and their approach to transfer pricing audits.
There’s evidence of more transfer pricing audits in Spain, and
more aggressive positions being taken during them. Resolving
MAP claims is still taking a very long time. However, the
Spanish APA programme is getting more effective and working
well. Tougher new documentation rules now in place in France, For further information please contact:
which is also conducting an increasing number of transfer
pricing audits. MAP cases are growing, and the UK’s largest Sue Rissbrook
number of outstanding international disputes is with France. Global Head of Retail and Consumer Transfer Pricing
Tel: +44 (0)121 265 5294
Turning to the ‘BRIC’ economies. Brazil is not yet an OECD
Email: sue.rissbrook@uk.pwc.com
member, and has a very limited number of full tax treaties
that give businesses operating their access to MAP. Neither
the US, UK or Germany are covered, for example. In general,
© 2010 PricewaterhouseCoopers LLP. All rights reserved.
the position is complex, and local knowledge essential.
“PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP (a limited
The authorities in Russia have proposed a new law that will liability partnership in the United Kingdom) or, as the context requires, the
introduce APAs for the largest companies. These will probably PricewaterhouseCoopers global network or other member firms of the
be for three years, and then renewable for two years. network, each of which is a separate and independent legal entity. hb6106