Value chain analysis
Value chain analysis (VCA) is the buzzword in transfer pricing. More and more, tax authorities demand companies to provide a VCA. Consultancy firms eagerly embrace the VCA and sell the VCA to anxious companies. Holistic approaches, pie charts, RACI tables… beautiful lengthy reports that cost a lot of money. But what is a VCA really, how can a VCA truly help companies?
The value chain is closely linked to the supply chain. But is more than that.
The value chain is the overall complete overview of all the activities of a company.
Every function, every business, every activity is part of the value chain. The VCA can therefore be described as the supply chain plus analysis.
When we conduct a VCA, we start the process by making a snapshot of the total company, the as-is situation. Interviewing key people is important. You obviously start by reviewing all the existing documentation (financial statements, tax returns, policies, transfer pricing documentation, CbCR and so forth). But gathering information is one thing: applying common sense to that information is something else altogether. And that is key: matching theory with practice. During this review a lot of things come up that should be addressed (primarily risks). Companies should look at the VCA as a tool to assess how the company deals with transfer pricing. Is everything up-to-date? During this process, it frequently becomes clear that the transfer pricing documentation is not what it should be. This is because local consultants often prepare documentation without looking at the whole picture. During this part of the process we immediately start to prepare for the most pressing, urgent risks. The nice-to-haves we park for later.
The next step is to come up with recommendations on how to optimise the value chain. That means revisiting the existing tax-business model, as our first step was identifying where value was created. As such, we can use the outcome of this process to propose a revised tax-business model to optimise that value creation. By sitting down with management, we can discuss whether the proposed model or the proposed changes to the model fit the company. After all, a consultant can come up with all sorts of ideas, but those ideas might not necessarily be a good fit for the company. Company culture, for example, can be a major influence on whether the implementation of certain optimisation processes are doable. Seeing possible stumbling blocks like these require consultants with practical experience, preferably a lot and from an in-house perspective, as they know what does and what doesn't work within a company
The result of performing a VCA is often that companies want to change their current transfer pricing documentation set-up. Taking responsibility and applying a more centralised transfer pricing documentation approach (by means of an in-house or co-sourcing solution, for example) is often the right way going forward.
In short, the VCA is a very valuable investment for a company to make.
It is so much more than a thick report filled with theoretical content. It is, instead, a dynamic document that the company can use to address risks, explore opportunities and move to the next level.