Value of an entity in the digital economy: Considerations for distribution companies

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Many multinational groups involved in distribution activities are faced with several transfer pricing (TP) issues in a context of digital transition. Global supply chains are increasingly digitalized due to a more affordable IT infrastructure, easier access to IT service providers and market-specific information collected directly by data providers, as well as ” by following market trends / needs.

More digitized processes potentially lead to the creation of new valuable intangibles and IPs that can disrupt the traditional value chain. Distribution companies (especially retailers) are facing increased use of apps, digital storefronts and artificial intelligence (AI) that are expected to increase the overall profitability of the business.

These digital solutions have had an exponential impact on the global economy since the COVID-19 crisis and, therefore, represent unique intangibles with a new competitive landscape for multinational groups (e.g. the implementation of an AI system for inventory management should enable and improve efficiency in supplier relationships, logistics and shipping processes).

In this context, the question is which group entity represents the economic owner of these new intangible assets and to what extent such changes would impact the PT policies applied prior to the contemplated disruption?

Many multinational groups active in the distribution industry were typically organized with multiple distributors located in key local markets, performing routine functions such as logistics, sales and marketing, managing customer relationships and providing services to customers. customers, in many cases with reasonably independent structures. , validated by comparable distribution and the transactional net margin method (TNMM).

As ‘mainstream’ business models shift more and more from offline to online / omnichannel dimensions, traditional sales functions take on less importance compared to other functions, such as collection and retrieval. data processing. For example, the data collected via websites results in a list of user behaviors that help players understand the market, determine consumer preferences and therefore bring value with new intangibles (digital solutions, knowledge -do and recognized IP).

Through data analysis, a digitized model still has the potential to differentiate prices using data on product supply and consumer demand, where consumer demand for a given product can be assessed by analyzing the user purchasing behaviors. While a digital business can differentiate prices on an individual level, traditional businesses can only differentiate prices very roughly, for example based on customer importance by offering specific discounts for different customer groups.

In this context, innovation in risk allocation may consist in delineating the decision-making functions of a multinational group related to the pricing / positioning of products in the jurisdiction where the IT intelligence, collection and distribution are located. ‘data analysis, potentially lowering the functional profile of traditional distribution entities.

Customer relationship

In addition, the role played by distributors in previously implemented models was essential to create and maintain the group’s traditional marketing intangibles and IPs by performing customer relationship activities. In digitized businesses, these physical presence roles may be reduced as traditional marketing functions will be less needed.

The customer relations activities of traditional distributors would consist of supporting staff on site, for example, to modify orders or any complaints. Such support can be provided electronically by a digitized company in the form of online chat sessions through a digital platform owned and operated by the parent company.

Regardless, the discussion arises in cases where the business and commercial relationship is strong and created by the local distributor. That said, it is important to quantify the effects of technological innovations incorporated into the business model as they could represent a significant reduction in costs and expenses or strengthen the entity’s position vis-à-vis the market by increasing sales or creating relationships. with new clients.

It is important to keep in mind that the digitization of the economy started several years ago and the implementation of new systems as well as e-commerce have gradually evolved and impacted the way multinational groups manage their business and, in some cases, those implementations could be understood as part of previous business models.

In Italy as in Mexico, the tax authorities are strongly involved in understanding the challenges that the digitization of the economy could impact in the TP model for entities such as distributors, given their economic relevance in the Mexican economy, as a capital-importer country.

Even if it is not clear how the integration of the digital economy will be done in each of the group’s subsidiaries, and the precision of the TP methods, it is a fact that companies must be aware of mapping the chain of value of the group, and take into account any intangible assets that local entities can create or maintain, and at the same time integrate into the equation the progressive involvement of the digital economy in the distribution industry.

With tax bases threatened by the rapid expansion of digital economic activity, the Italian government recently enacted the Digital Services Tax (DST) for the sole purpose of taxing large multinationals on payments related to digital business models. This type of unilateral action makes the global tax environment more fragmented and uncertain, which increases the need for multilateral agreements based on new tax principles (such as the OECD’s first pillar project).

New landscape

When analyzing companies moving towards digitalization, particular attention should be paid to the new landscape and the transition that groups must face in order to redefine their functions, their assets and their risks, and the entities responsible for them, and to understand the interaction that the new structure will have with the well-established departments and the inevitable creation of new intangibles and intellectual property linked to the digitization of the economy.

It will therefore be essential to understand the facts and circumstances through an appropriate conceptual and factual functional analysis, focusing on the activities performed, the risks assumed and the assets used by the new digital roles.

Multinational groups should assess whether the technology implementation significantly changes the business and PT model to determine whether actual PT methodologies and policies need to be reviewed and updated taking into account the value creation factor.

For clarification and additional information, please contact the authors below.

Carlos Pérez Gomez

Partner, HLB MAAT Asesores (HLB Mexico)

Eugenio Tarabini

Senior Director, SP&P (HLB Italy)

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