The case at hand describes a group that supplies specific electronic components to original equipment manufacturers (OEMs). Our client wanted to introduce a new transfer pricing system to fix operational cash-flow problems.

The client has a straightforward supply chain: They purchase products from third parties and resell them globally from two main warehouses. This set-up requires few intercompany transactions. However, the value chain is much more complex, where multiple entities are highly integrated, contribute to marketing and technical intangibles, and jointly assume economic risks. The client was seeking a comprehensive transfer pricing system that could compensate the entities for their value contributions and facilitate the financing of business operations through their cashflows.

NERA created a new transfer pricing system and helped the client with its implementation between entities.

Value Chain Analysis

NERA performed a value chain analysis and identified five distinct value drivers: R&D, quality management, application engineering, marketing, and sales. The client has 10 operating entities that contribute to the value drivers in varying degrees. NERA calculated the profit attributable to each entity in two steps:

1. Conducted expert surveys with the client’s key employees to find fair and reasonable allocation keys between the value drivers.
2. Completed an economic contribution analysis of each entity to the value drivers, utilizing a mix of headcounts, capitalized expenses, and ongoing expenses.

Transfer Pricing Implementation

NERA created a global profit split calculation tool that calculates arm’s length profit shares for each entity that:

a) identifies the profit for each region;

b) allocates the profit share for each value driver;

c) measures the contributions of the entities to each value driver; and

d) calculates arm’s length profits for each company.

The arm’s length profit shares are realized using few and easily manageable transfer prices consisting of commission rates, product prices, and license fees.

Documentation and Audit Defense

NERA provided a comprehensive solution for the client. We designed a global profit split system and helped implement the transfer prices in their ERP system. For ease of access, we created a template that automatically calculates transfer prices and can be used for outcome testing throughout the year. Additionally, we authored the global transfer pricing policy and appropriate documentation.

The transfer pricing system was reviewed and accepted without any challenges and with minimal discussions in audits in Germany, Austria, the US, and Singapore.

The original transfer pricing system existed for over 10 years, and we effectively adapted it to new business developments like new functions, product lines, and additional entities. The client now has full control of their global cash-flows and operating results.