Business restructuring in Singapore

Centralised models for restructuring operations

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While the types of centralised models being considered today vary considerably, we expect the strong interest in centre-led principal models to continue in the future.

The principal model

Full principal models, in which IP and major business functions, assets and risks are centralised in a tax-efficient structure, for the Asia region are and have been implemented extensively. However, we more often see incremental changes in the business, moving towards a principal structure over time.

The principal model is not applicable to all companies in all situations or locations.

The centre-led principal (CLP) model

A CLP provides an alternative to the principal model that does not involve transactions in goods across borders, but instead involves the centralisation of control functions, risk management and risk-bearing capacity in a CLP entity. The CLP provides services to local entities in this regard, and earns value-based services fees for the functions undertaken.

In comparison to a principal model, implementing a centre-led principal model offers tangible benefits and a viable and alternative way to implement a tax effective regional supply chain.

The value-added services fee under Chapter IX of the OECD Guidelines on Value–added Services

The value-added services fee is typically calculated by a three-step process:

  • Differentiate the value-added functions versus the routine management functions controlled by the CLP
  • Link the value-added functions performed to the risks borne
  • Value the risks that are controlled by the functions labelled as value-added via benchmarking

Value-added services examples Risks controlled Benchmark/valuation approach
Demand planning and inventory management in manufacturing Inventory obsolescence TNMM search for manufacturers. Fee likely to be a Cost Plus type return adjusted for a working capital for contract manufacturer
Procurement for raw materials Supplier risk, purchasing risk Commission fee type return which is proportional to the value of suppliers or % of spend
Supply chain management Inventory holding costs, logistics risk TNMM search for 4PL companies
Likely to be a commission fee or % of spend
Manufacturing best practices Production cost risk TNMM search for manufacturing oversight companies
Likely to be a modified Cost Plus for CLP

Generally, under the OECD Guidelines, the cost plus method is generally regarded as most useful where the controlled transaction under consideration involves the provision of services.

However, in many cases, there is insufficient data available to apply this method. Consequently, the value based service fee to the CLP will be often converted into a cost plus-type return. In essence, the cost plus calculation is modified.

Transfer pricing and the value-added services fee under US Treasury Regulations Section 1.482-9

US Treasury Regulation Section 1.482-9 contains two specified transfer pricing methods that could apply to non-routine services: the Gross Services Margin Method (GSMM) and the Profit Split Method (PSM). The GSMM is essentially a commission, determined by reference to uncontrolled transactions, whereas the PSM is a value-based method in which the transfer price is determined according to a split of the benefits derived from a centrally provided function.

Non-routine services can be priced using an unspecified method, and if a high value service is a routine service this can be priced using specified methods including the comparable uncontrolled transaction (CUT) method or business process analysis.

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