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Digital globalisation and TP challenges for consumer products companies

Shannon Blankenship, Frank Polance, Keith Reams and James Ryan explore the evolution of the consumer products industry and the transfer pricing challenges it creates.

Shopping is not what it used to be. The internet and mobile devices have revolutionised how consumer products manufacturers and retailers operate. Yet many of these companies continue to rely on increasingly outdated transfer pricing systems that often ignore this business change. Ignoring the effects of digital globalisation can result in tax audits in different jurisdictions, resulting in inconsistencies in tax treatment of the same transactions, with sometimes significant unanticipated consequences, including tax assessments, penalties, and even double taxation. However, with foresight and careful planning, companies can effectively deal with transfer pricing around increased digitisation. This article describes some of the international tax and transfer pricing implications of the dramatic changes taking place in the consumer products industry, including the growth of e-commerce in retail, the digitisation of the products and services supply chains, and an increase in the reliance on digital brand management.

E-commerce retail

Web-based and digital technology has vastly changed the way consumers shop and buy products, so much so that most consumer product companies view internet sales as a significant part of their retail distribution sales. Companies that were historically slow to adopt the new paradigm often have been obligated to follow the lead of what were once new online upstart companies, like Amazon. Today, many brick-and-mortar retailers have discovered that online e-tailing can actually be a lower-risk strategy to introduce their products and brands into new market places.

Innovative business systems driven by new technology have made access to information easier than ever. From the consumer's perspective, with a click of a mouse or a swipe of a smartphone or tablet screen, the consumer has access to product descriptions, user and professional reviews, easy price comparisons, and online bargains for more and more products than ever before. Indeed, the appetite for product information before purchase continues to grow and shows no sign of abating. Mobile devices have even invaded the brick-and-mortar retail environment, where many shoppers do online research before making a purchase in the store or even online for home delivery. This so-called showrooming is blurring the lines between traditional retailing and e-tailing.

But perhaps the most ground breaking digitally driven transformation for consumers in the global market has been the change in the point of sale. Instead of needing to flock to the megamall or stand in line at the supermarket, consumers can use the same tablet or smartphone they use to browse and text to buy products from anywhere they have an internet connection, which is increasingly everywhere, even in a car or an airplane. More and more consumers want the immediate gratification of the traditional retail store from their online experience, which online operators are struggling to provide through next day and even same day delivery, necessitating the wholesale revamping of supply chains.

These developments have created many intertwined issues, such as data management, data privacy and international tax concerns for companies, in addition to the transfer pricing challenges examined in this article. With much of online sales, it is not always easy to identify just where an actual sale takes place, or sometimes even who the purchaser is. This creates a whole host of issues for tax and transfer pricing. As consumer product companies expand into new markets through online sales, they must decide at what point and to what extent their operations will create local tax nexus. The term nexus describes the amount and degree of business activity that must be present before a state can tax an entity's income. If a taxpayer has nexus in a particular state, the taxpayer must pay and collect or remit taxes in that state. When business expansion follows a dual channel approach through online sales, as well as brick-and-mortar operations, the issues can be even more complex. For instance, which is the bigger contributor to the overall business, the website or in-store environment – or do both drive sales to each other's channel? The answer to this question affects the share of the business's profits that might be subject to tax where its stores have nexus, as opposed to where its web operations have nexus.

If the business shares the channel to such an extent that it creates tax nexus, the business may be subjecting itself to taxes in many more jurisdictions. Particularly troublesome issues may arise in cases when customers are allowed to return online purchases to affiliated brick-and-mortar stores. For such returns, companies must consider whether the local store is allowed to exchange merchandise and what the correct transfer price is for returned items that are sold back to the e-commerce location. Another issue is whether the local store or warehouse is allowed to fulfil online purchases and what the associated transfer prices should be. Often, it is not readily apparent what adjustments must be made to the business model as business develops and as adaptations for local preferences are made. Thus, transfer pricing planning must be flexible enough to adjust as the business model changes.

The coexistence of online sales and brick-and-mortar operations in a new market outside the consumer product company's residence brings still other potential transfer pricing challenges. One issue is the proper remuneration to the website operating company. For instance, would it be appropriate to allocate expenses only to the local retail operations? How should advertising costs incurred to drive internet searches to the relevant website be treated? These questions raise still others, such as whether the local-country operations will have rights to use marketing intangibles beyond the ordinary course of business. If the local operators have the right to use the trade name only for retail sales, there may not be a need to allocate costs; instead the website operator could be remunerated in a different way. However, if the local company is expected to develop the trade name in its country, it may be expected to bear those costs. Consideration should be given to which entities may drive the decision-making process, which may take on substantive risk, and which will ultimately generate customer revenue. Addressing the transfer pricing issues among these entities requires a thorough analysis of the functions performed and risks assumed by each of the entities, and then determining the economic return associated with those functions and risk. In the new online world, the facts are often far from static, but change frequently as online presence grows. Accordingly, transfer pricing policies must be flexible enough to evolve in lockstep with the business itself.

Digitisation of supply chain

Consumer product companies are constantly looking for ways to drive more efficiency out of their supply chains to remain competitive and/or gain competitive advantage. Common modern supply chain optimisation strategies, such as the development of offshore manufacturing, captive sourcing companies and streamlined logistics have already been implemented by most large-scale consumer product companies. Typically, this may involve establishing a sourcing entity located close to the sources of supply, frequently in Asia. A sourcing entity's functions can range from simple ordering and logistics to design and management of the manufacturing operations.

To enhance consumer experience by anticipating trends and making relevant offerings, the most forward-looking consumer product companies have been putting in place increasingly sophisticated data-driven supply chain and customer relationship systems. Precise data regarding demand for products at a store-by-store level are also being used to rethink overall logistics. For example, common practice historically was to have suppliers, typically in Asia, fill a shipping container with goods for shipment to a local distribution centre to be unpacked along with goods from thousands of other containers. The goods would then be repacked to match demand at regional distribution centres, where they would then be repacked for delivery to the stores in a particular region. With precise store-by-store demand level data now increasingly available, goods from many suppliers destined for a particular regional distribution centre – or even goods destined for a single store – can be aggregated at the initial point of export and packed into a single container.

A key to using data effectively is making the knowledge developed from the raw data available to the various points in the supply chain where it can be used most efficiently. For example, many consumer product companies are pushing design activities closer to the source of the products, again typically in Asia. At best, it can take a few days to get samples or prototypes to the designers, typically located in home-country markets for review or approval. Centralising more design activities close to the source of supply can thus cut transit times out of the product design cycle. In addition, co-locating the design function with sourcing activities can take advantage of the sourcing staff's market intelligence on what other players in the market are thinking, as well as the knowledge of manufacturing processes and capabilities that can be incorporated into the product under development. Of course, companies must find ways to reap these advantages without losing the intimate knowledge of local consumers' desires that local employees often have.

Consumer products companies have also been improving their supply chains by pushing knowledge across the chain globally. Many US and European manufacturers, for instance, have developed significant know-how in lean manufacturing processes. In the past, the need for such know-how among Asian manufacturers was less pressing when the region offered significant labour cost advantages. Recently, however, labour cost advantages have been eroding and consumer product companies have accordingly been implementing lean manufacturing processes developed elsewhere in their Asia-based operations. Questions naturally arise as to whether companies may have transferred valuable intangible property in the process.

Efficiencies often are created by aligning knowledge obtained from data gathered as a result of digital globalisation to the point in the supply chain that can most effectively use that knowledge to reduce costs, increase quality, or secure a steady supply of product. This process usually involves four basic steps: (1) understanding what data are available; (2) gathering the relevant data; (3) turning raw data into useful knowledge through analysis; and (4) employing that knowledge to improve the operation of the supply chain. Each of these steps might be carried out by related entities located in different tax jurisdictions. This can make the allocation of income among the different contributors to the knowledge creation process a challenge for international tax and transfer pricing purposes. Careful analysis is required to solve the resulting transfer pricing questions.

The first question to ask is whether the creation and use of the knowledge resulted in some distinctive value to the consumer product company, or whether it only allowed the company to remain competitive. Even if the innovation was only a competitive imperative and did not increase the global group's overall earnings, questions may remain about the appropriate allocation of costs and benefits. The issues can be particularly complex in the digital space. For example, in a situation when one company gathers and owns the data it collects, while another related company analyses the data. The value generated from use and analysis of data must be split between the two entities. When entities in multiple tax jurisdictions contributed to the creation of the distinctive value of the supply chain innovation, "one-sided" transfer pricing analyses such as the comparable profits method or transactional net margin method, which treat one of the entities as entitled to a routine return, may be less appropriate, and more complex methods, such as some form of profit split, may be called for.

Tax authorities' interest in these questions appears to be increasing, as evidenced by the Organisation of Economic Cooperation and Development's base erosion and profit shifting initiative. Tax authorities recognise that consumer product companies are implementing the systems to create the benefits and manage the costs related to digital globalisation that naturally cross international boundaries and appear less and less content to view the elements of the supply chain simply as routine operations.

Digital brand management

On the brand management side, technological advancements provide companies new avenues to support brands, while at the same time increasing the risk of potential mismanagement of brands. This change results in both opportunity and risk that intercompany pricing policies may not reflect adequately. Companies may be inadvertently creating another intangible, or they could be altering how their present intangibles are created. As digital marketing becomes increasingly important to brand value, companies should proactively consider the transfer pricing implications and the possibility of business-aligned tax planning.

It is important to consider what digital marketing is and how it is changing the way consumer products companies manage their brands. Direct digital access to consumers can present an attractive opportunity for companies to interact with consumers, cement their brand advocates and strengthen their revenue streams with innovative, effective information systems. The January 2014 Deloitte article in The CIO Journal, 2014 Consumer Products Industry Outlook, states that:

"[D]igital capabilities can help companies better identify consumer preferences and trends, optimize their product assortment, deliver personalized marketing messages, refine pricing and promotional strategies, and connect with target consumers."

What has resulted from this digital bombardment of gizmos and interconnectivity is a profoundly more personal brand experience for many consumers. Social media has opened the door to two-way communication between brand holders and their customers. A November 2013 study of retailers found on, "Gaps in the digital net: How retailers can close the risk holes," indicates that:

"[M]ost companies have not only developed sophisticated sites with e-commerce capabilities, they have also set up Facebook pages to connect with customers, and offer mobile apps that provide a range of services. Many modern retailers are capitalizing on this information exchange by putting the social media provided demographic data together with previous behaviours to create individualized customer experiences."

Participation within the social media sphere allows consumers to share experiences, strengthen support and advocate for their products and services. The mining of data collected as part of the consumer's use of a company's website can also allow the company to micro-target their consumers, and through tailored emails and other digital media, send information regarding promotions and/or new product offerings.

While digital marketing has presented great opportunities for brands, it has also increased the risks to companies for potential brand mismanagement because the transparent, peer-to-peer nature of the medium makes controlling brand messages difficult. It's not unusual for one disgruntled customer to spread a brand-damaging message to millions of people with a simple click of a mouse or tap on a smartphone touch screen. Companies now face the risk of potential incidents that if mismanaged could lead to a loss of reputation and even brand destruction. The speed of communication can mean that even initially successful digital campaigns can turn negative rapidly. Even well-intended online promotions can be met with overwhelming responses that can crash sites and turn fans into adversaries. The collection and storing of sensitive data can also attract hackers and other criminals. Such events inevitably have an adverse impact on brand reputation. These risks have only increased the need for strong management of digital marketing.

The main international tax and transfer pricing challenge is that most tax structures and policies were put in place before the explosion in digital marketing. Historically, marketing intangibles were generally attributed to a combination of the corporate headquarters that provided global brand management and the in-country marketing team that adjusted the brand message for local tastes and invested in the local market. However, with the increase in digital marketing, a third contributor is arising: the social media monitor and digital marketer, and it's important to consider how to treat its activities. For instance, are those activities generating non-routine intangibles? Should the associated risks and costs be centralised, and if so, how and where and who, within the group, is responsible for digital brand mismanagement?

Successful brand/marketing campaigns that capture user-generated content and that encourage consumers to advocate for the products they like is not the end of the story. Frequently, initiatives that are effective in the digital space get rolled out on a global scale, but sometimes with sporadic geographic efficiency, making it even more difficult for companies to pinpoint which initiatives are effective at encouraging consumers to buy and sell, and which are lost in the background noise online. Companies should consider taking a fresh look at their transfer pricing structures to see if a realignment is necessary to be consistent with the realities of the new digital landscape. Of course, any planned operational changes require careful consideration of all the tax ramifications, in addition to reviewing the transfer pricing issues.


As consumer product industry participants continue to upgrade and improve their use of data, the internet and mobile applications, and rework their sales channels, supply chains and brand management, tax departments must consider the effect these changes will have on existing international tax and transfer pricing structures and policies. Careful planning in this area is becoming more important, given the speed of change and the potential scale of the impact digital globalisation can have.

Shannon E. Blankenship




Deloitte Tax LLP

555 17th St., Ste. 3600

Denver, CO 80202

Tel: +1 303 312

Shannon Blankenship is an economist and a principal in the Denver Transfer Pricing Group. She has 14 years of transfer pricing experience, working in both Denver and Washington D.C.

Shannon has assisted companies across all industries in the development and/or defence of their domestic and global pricing arrangements. Her experience crosses the breadth of transfer pricing from global documentation, headquarter cost allocation studies, intangible valuation and advance pricing agreements, to planning studies. A key focus of hers has been large transfer pricing planning projects involving business reorganisations. She's been the main transfer pricing resource on 14 major supply chain restructuring projects. Shannon also specialises in assisting clients to understand, manage, and perform their global transfer pricing documentation striving to streamline the process.

Shannon co-authored "Transfer pricing and selected tax issues for renewable energy," International Tax Review Energy Guide (3rd Edition).

Shannon holds an M.B.A. from the University of Colorado, graduating as the valedictorian. She also earned a B.A. in economics summa cum laude from the University of Colorado.

Frank Polance




Deloitte Tax LLP

111 S. Wacker Dr.

Chicago, IL 60606

Tel: +1 312 486

Frank Polance is a director in the Chicago office Transfer Pricing practice. Frank works with a number of Deloitte Tax's largest US and non-US multinational companies to develop and implement transfer pricing projects. He has more than 30 years of experience in international tax planning to assist clients with managing their global tax rates. Frank was recognised by International Tax Review as one of "The US's Leading Transfer Pricing Advisers."

Frank has developed international tax restructurings incorporating transfer pricing plans in order to transfer intangible assets, implement tax efficient supply chain, utilise losses and establish shared service structures. He has conducted many transfer pricing planning and documentation projects for consumer and retail clients.

Frank frequently lectures on transfer pricing and international tax planning. He is a member of the Bar of the State of Illinois and a certified public accountant.


Juris Doctor, The John Marshall Law School

Bachelor of Science, Accountancy, DePaul University

Professional Accreditation and Certification

Member of the Illinois State Bar

Certified Public Accountant

Member of the American Institute of Certified Public Accountants

Keith Reams




Deloitte Tax LLP

980 9th Street Ste. 1800

Sacramento, CA 95814

Tel: +1 415 783

Keith Reams is the US and global leader for clients and markets for Deloitte's Global Transfer Pricing Services practice. He has advised clients around the globe on intercompany pricing transactions with respect to income tax regulations in Argentina, Australia, Belgium, Brazil, Canada, Chile, China, Colombia, Czech Republic, Denmark, France, Germany, India, Ireland, Israel, Italy, Japan, Korea, Luxembourg, Malaysia, Mexico, the Netherlands, Norway, Peru, Poland, Singapore, South Africa, Spain, Switzerland, Taiwan, Thailand, the UK, and the US. He has assisted numerous multinational companies with international valuation and economic consulting services involving merger and acquisition activity, international tax planning, and restructuring and reorganisation of international operations. Reams is on the global tax management team for Deloitte's Technology, Media, and Telecommunications practice and is a leader in the area of transfer pricing for newly emerging industries, such as electronic commerce and cloud computing, where he has extensive experience around the world in helping clients extend their business models into new territories.

Keith has testified as a qualified expert in numerous valuation and transfer pricing disputes, including the cases of Nestle Holdings Inc. v. Commissioner, DHL Corp. v. Commissioner, and United Parcel Service of America, Inc. v. Commissioner. In addition, he is one of only three economists in the US approved by the New York State Department of Taxation and Finance to provide transfer pricing expertise and testimony in cases involving cross-border transactions within commonly controlled affiliated groups. He has also helped many clients to successfully resolve valuation and transfer pricing disputes before they reach trial.

Keith completed course requirements for a Ph.D. in international finance from New York University. He holds a Master of Arts in economics from California State University Sacramento and a Bachelor of Science in chemical engineering from Stanford University.

James T. Ryan



Tax director

Deloitte Tax LLP

1633 Broadway

New York, NY 10019

Tel: +1 212 436

James T. Ryan is a firm director with Deloitte's Tax LLP's US Transfer Pricing practice. James has worked in the New York office since joining the firm in 1986, and for more than 27 years, has served many of the firm's largest clients, both in the United States and abroad. He has vast experience in both domestic and cross-border transfer pricing matters, including handling transfer pricing disputes, as well as transfer pricing planning and documentation issues. Throughout the course of his career, he has conducted many transfer pricing planning studies in a variety of industries for both inbound and outbound taxpayers. James has also completed several unilateral and bilateral advance pricing agreements.

His industry experience includes work for general trading companies, electronic components, media, consumer products, apparel, fashion and fragrances, pharmaceuticals, securities, chemicals, aerospace, telecommunications, automotive, freight forwarding, finished goods, information technology, investment advisory services, private equity investment services, scientific instruments and rail car manufacturing.

James is a regular speaker at seminars. His list of publications in professional journals include "IRS Issues Final Transfer Pricing Penalty Regulations," Tax Notes International, March 4 1996 (coauthor), "The New Proposed Section 482 Regulations – A Path to Confusion, Uncertainty, and Endless Controversy," BNAI's Tax Planning International – Transfer Pricing, December 2003 (coauthor) (reprinted in Tax Analysts Tax Notes, May 3 2004), and "Temporary Services Regs: One Step Forward, Two Steps back?" Tax Notes, October 2 2006 (coauthor).


Juris Doctorate, Hofstra University Law School

Bachelor of Business Administration, Accounting, Siena College

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