Centralization and Intercompany

Many multinational corporations have realized the efficiencies that can be made through centralizing production, support, sales and distribution. This gives rise to the need to sell into multiple countries, and thus multiple tax jurisdictions, from centralized locations.

Increasingly local tax authorities are seeking to realize a proportion of the sales revenues from such cross border trade in the form of regional taxes. To comply with this multinational corporations invariably need a legal presence in each tax jurisdiction in which they trade.

The footprint of these legal entities can be relatively small. Often these are only maintained to meet local legislation and marketing, rather than actively providing goods or services.

Although this operating structure can provide significant cost savings for the organization, the direct consequence is to increase intercompany activity. This is inevitable if the organization is going to meet legal compliance in each of the tax jurisdictions in which it trades.

Depending on the size of the organization and the nature of the product or services being traded, the increase in intercompany activity can make automation a prime necessity.

Large corporations often move to organize their legal entities into hierarchies to reduce the number of active trading relationships. However this strategy has the impact of further increasing the volume of intercompany activity.

There are a number of approaches to running intercompany operations, such as the traditional buy/sell method, and more recently various forms of commissionaire agreements.

Both of these methods place a high importance on evaluating the intercompany transfer price, which ultimately affects the level of tax liabilities for the organization.

Buy/sell functionality is generally provided by ERP applications, although in many cases they only offer limited transfer pricing options and little flexibility. The more challenging procedures associated with a commissionaire agreements approach is often not well supported.

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