Value Chain Analysis
Value chain analysis (VCA) is the buzzword in transfer pricing. Tax Authorities more and more 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 costs 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 with reviewing all the existing documentation (financial statements, tax returns, policies, TP documentation, CbCR and so forth). But information in documentation is one thing; making a sanity check is another thing. 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 many times it becomes obvious that the TP documentation is not what it should be. The reason for that is often that local consultants prepare this documentation not having the overall helicopter view. During this part of the process we immediately prepare the most pressing urgent risks. The nice-to-haves we park.
Next step is to come up with recommendations to optimize the value chain. This in fact is revisiting the existing tax-business model. This makes sense because during the first part of the process we have identified where the value actually is created. Based on this outcome, a revised optimized tax-business model will be proposed. Sitting with management, we discuss if the proposed model or proposed changes fits the company. A consultant can come up with all sorts of ideas, but it is important to feel and sense if certain changes are a good fit for the company. Company culture, for example, could make the implementation of certain changes undoable. It is clear that the consultant should have a lot of practical experience, preferably a lot of years of in-house experience. Because that type of consultant would really know what works and what does not work in a company.
We often see that as a result of the VCA, companies want to change the current TP documentation set-up. Taking more ownership and applying a centralized (in-house or co-sourcing solution) TP documentation approach often is the right way going forward.
In short, the VCA is a very valuable investment for a company to make.
It is much more than a thick report with a lot of theoretical content. It should be dynamic living document that the company can use to address risks, explore opportunities and move to the next level.