Luxury and cosmetics: key industry insights

EY - Luxury and cosmetics: key industry insights
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Luxury has been a better growth story over the past decade compared to other consumer products (CP) subsectors. However, its sustainable profitable growth faces several short-term challenges.

Following our in-depth look at the Luxury & Cosmetic industry in 2014, we are pleased to present a series of key industry insights that highlight vital areas of impacts now and in future. We analyze how companies can best address these key challenges.

Transfer pricing in luxury: multiple challenges in a fast-changing tax environment

All multinational enterprises (MNEs) face transfer pricing issues, and the ongoing work at the Organisation for Economic Co-operation and Development (OECD) in relation to base erosion and profit shifting (BEPS) has only highlighted the importance of managing transfer pricing risks. This is no different for MNEs operating in the luxury industry, except that the very nature of the business renders the players more visible and the (misguided) belief that value-chain profits are perpetually high often attracts undue attention from local tax authorities.

In addition, luxury firms face transfer pricing questions that are hard to explain to local tax authorities, and hard for the authorities to quantify: perceptions differ regarding how to value brand uniqueness and awareness, advertising and marketing campaigns, and local distribution and retail networks.

Furthermore, business strategies are impacted by the digital revolution, and luxury players are now aware of the potential for value creation coming from digital marketing, e-commerce and online customer service, which again raise difficult transfer pricing issues.

From a tax and transfer pricing perspective, there has arguably never been a time in recent history when rules, regulations and practices changed so much so fast. In this environment, luxury firms need to manage the expectations of all their stakeholders. The BEPS project, which as stated is managed by the OECD, is driven from a political point of view by the G20 countries, that outline their commitment for far-reaching changes of their taxation rules based on the recommendations formulated by the OECD.

This report focuses on three key factors expected to impact luxury owing to the impact of BEPS:

  • Greater transparency required from taxpayers through the “country-by country reporting” tool
  • Move towards an increased focus on functions, in particular for the use or transfer of intangibles
  • Specific focus on “the digitalizing of the economy” (as opposed to “the digital economy”)

 

 

Read the full report.