Transfer pricing opportunities for consumer businesses

RSM transfer pricing professionals highlight recent developments and planning opportunities for the consumer businesses, and the possible impact of proposals by the Biden administration and the Organisation for Economic Co-operation and Development (OECD) going forward. Listen to the conversation here:

Or, read the transcript below, edited for clarity:

Emma Sweeny (ES): Hello, I'm with Tansy Jefferies, a principal with RSM US. She’s based in south Florida and leads the Southeast transfer pricing practice as well as the consumer products practice in Florida. Today we're going to talk a bit about the consumer products industry. Tansy, what are some of the key trends facing this industry, and what role does transfer pricing play for companies considering the impact of these trends on their business?

Tansy Jefferies (TJ): Thanks, Emma. Consumer businesses are really broad. It includes everything from retail to food and beverage, restaurants, fashion, beauty, and home products, and each of those sectors is going to have unique challenges and opportunities. But there are some common trends we're seeing throughout the industry—and all potentially come with transfer pricing considerations for companies that have a global footprint.

The first challenge is the labor market and difficulty finding talent. This may lead a company to consider where it has appropriate talent or where it locates key functions. For example, if you're struggling to find qualified individuals to carry out your product research and development or your customer service function, you may think about building out these functions in another jurisdiction where there's better access to that talent—and this can come with transfer pricing implications. It's important to ensure that the new entity housing that function is appropriately remunerated.

The second challenge we are seeing is around supply chain disruption. This could lead multinational businesses to revisit their supply chain to find opportunities to streamline and create efficiencies to mitigate the impact of some of these challenges. Any change to your supply chain can also lead to a need to revisit and adjust your transfer pricing policies. At the same time, it's important not to overlook the fact that supply chain changes can come with indirect tax implications. When you are thinking about the supply chain, the interaction of transfer pricing with customs and duties, VAT, or other indirect taxes really should be carefully considered.

The third challenge we see relates to changing consumer preferences—that shift away from traditional brick-and-mortar retail and an increased focus on online sales, which of course leads to a focus on digital transformation. The pandemic has certainly accelerated the shift, and what we're now seeing is the ever-increasing value and importance of data, prompting questions like:

• How and where do you collect that data?
  
• How do you process that data?
• How do you use that data to predict and adapt to consumer behaviors and preferences and inform your business strategy?

This can create a lot of interesting transfer pricing questions, as data becomes a key value driver in the business. We need to think about how and where we remunerate this value in the business—and what does it mean for us from a transfer pricing standpoint? That doesn't always come with a clear-cut answer. In fact, this is something the entire tax profession is grappling with right now. It is having to come up with a solution that acknowledges the fact that our current tax system just doesn't really work anymore for the digital economy.

ES: You've raised a lot of great points. Another question we are often asked relates to global tax developments. Can you elaborate a bit more on what we're seeing both in the United States and abroad?

TJ: Sure. The OECD has been working toward formulating a solution to the taxation of the digital economy for several years now; but actually, significant strides have been made over the last several months. We are getting closer to a consensus on an appropriate approach, but there's still a long way to go and a lot of work to be done before we really have clarity on what this is going to mean for multinational businesses.

We are moving toward a new system where market jurisdictions will have a new right to tax profits associated with sales that are made in their markets regardless of a company's physical presence. We are also moving toward a global minimum tax rate, aimed at preventing base erosion through the use of tax havens and low-tax jurisdictions. It's also intended to curb the race to the bottom. We've been moving toward lower and lower global tax rates, given the heightened competition to attract global business.

Alongside the work that's happening at the OECD, we also have proposals for U.S. tax reform that are moving in the same general direction from an international perspective. These proposals also include mechanisms that effectively ensure certain minimum levels of taxation for U.S. multinationals, along with modifications to international tax rules that are, again, aimed at curbing that base erosion.

ES: It's clear our current economic environment is presenting a lot of different challenges—and furthermore, the changing regulatory environment is going to bring additional levels of complexity. Multinational consumer products companies are going to have to learn to navigate. On the flip side, what kind of opportunities are we seeing in the industry? How can transfer pricing play a part in facilitating these opportunities and opening doors?

TJ: You are right. I’ve focused a lot on various challenges we're seeing as we come out of this period of economic uncertainty. But of course, that also comes with great opportunity. We are definitely seeing positive indicators across the consumer products industry. One is increased merger and acquisition activity, with deal counts exceeding pre-pandemic levels—not only that but also a shift in what that M&A activity looks like. There's a greater focus on add-on acquisitions that are going to provide additional market share or, potentially, entry into new segments of the market, in contrast to larger, debt-heavy mergers more common before the pandemic.

Keep in mind that transfer pricing is typically one of the key areas to come under the microscope in any due diligence exercise. As consumer businesses consider exit opportunities and prepare for a potential sale, transfer pricing should be high on that checklist. Similarly, post-acquisition there are opportunities to streamline transfer pricing across the newly expanded global group—in terms of policy review and alignment as well as integration and streamlining of the pricing process into your overall financial processes and systems.

ES: This has been an eye-opening discussion. I certainly echo the point about opportunities that transfer pricing can present to companies of various sizes. Thank you for your time today, Tansy, and I look forward to having you back in the future.