UK: Minimise Tax And Maximise Opportunity
Paving The Way for Business Initiative

The charges and difficulties of restructuring can deter many companies from legitimately taking advantage of the opportunities presented by moving part of their operations to a lower tax regime. Sadly, this often also makes it far more difficult for manufacturers to adopt new and potentially profitable business approaches. Our transfer pricing practice is currently advising a major international producer of metal products on the tax implications of a highly unusual and innovative change in the way it sources raw materials.

This industry is highly vulnerable to both changes in the cost of raw materials and fluctuations in exchange rates. Senior managers have therefore decided to insulate individual plants across Europe from factors which may affect their performance but over which they can have no control. In effect, it is establishing a central resource that will procure metal and sell it to the plants at a standard price for the quality and grade, and bear all the non-industrial process risks of the operation. It will leave the plants free to manage their own performance based on their core manufacturing expertise. The new operation will be solely owned by the group and will operate from Switzerland to supply plants in four other European countries.

The new jurisdiction has been chosen with our advice and – once established – will produce an improved tax result over their current operation. Although, however, the group has made a strong commercial commitment to the new system, it is aware that it carries significant transfer pricing issues. The restructuring will involve moving functions from plants in the UK, France, Italy and Germany into Switzerland. We are working closely with tax authorities in all these countries to ensure clarity and sign-off at every stage. This includes the complex issue of arriving at a fair market value for transactions between connected parties, making sure that it is fully documented in accordance with OECD guidelines, supported by a detailed economic model and capable of sustaining revenue scrutiny across multiple jurisdictions. It demands a thorough knowledge of the tax regimes of each country.

Bringing all non-manufacturing processes under central control will allow the group to concentrate its skills in procurement and currency management to minimise business risk. Even so, it is a new and therefore untried approach and we have worked extensively with the company to model all possible outcomes and reduce exposure. Our team is made up of specialists in all the relevant disciplines. Although the overriding need is for expertise in transfer pricing (Euromoney has recently named Deloitte as the world’s top transfer pricing network for the second consecutive time), our wide experience in managing supply chain management projects from a tax perspective is playing a crucial role. The project is still at an early stage with a phased roll out to the plants planned for completion in March 2005.

"The restructuring will involve moving functions from plants in the UK, France, Italy and Germany into Switzerland. We are working closely with tax authorities in all these countries to ensure clarity and sign-off at every stage... ...it demands a thorough knowledge of the tax regimes of each country."

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