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The automotive industry must buckle up for evolutionary leap

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Digitalisation is driving the auto industry through an evolutionary leap. Stephan Habisch and Andreas Göttert of Deloitte Germany look at the new digital era tax approach that may upturn existing TP practices.

The development of the automobile has changed society for more than 100 years and the automotive industry continues to have a significant impact on today's economy. The industry now faces a major transformation in light of the digitalisation of the economy.

Current trends and disruptive technologies such as autonomous driving, digital networking, alternative drive technologies and ridesharing may lead to a significant transformation of the market environment and challenge the business models of traditional auto companies.

Further developments in the value chain and in the regional diversification of operations and fields of competence are also resulting in increased demands on automobile companies' transfer pricing systems.

A challenge for companies in the automotive sector is thus to position themselves to become pioneers and technology leaders for the mobility demands of tomorrow.

To gain market share, original equipment manufacturers (OEMs) and parts suppliers may have to make major investments, especially in in-house research and development (R&D).

The traditional vertical production process is increasingly transforming into a process of horizontal integration that involves the development and production of innovative components and complete systems. Production sites might need to be restructured and relocated to prepare for such changes in the market. Digitalisation allows the reduction of local functions, which is why the value added by individual production sites will change significantly.

OECD programme

In light of the changing value chains described above, the OECD recently announced a Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy. This programme would consider a new allocation of taxation rights through revised profit-sharing rules and nexus rules (and anti-base BEPS rules) as a key requirement for tackling the challenges arising from the digital economy and the associated risks and difficulties of taxation.

The Task Force on the Digital Economy (TFDE) has developed a two-pillar approach:

  • Pillar 1 deals with the broader challenges of the digital economy and focuses on the allocation of taxation rights by defining user participation, marketing intangibles and significant economic presence. (OECD: Addressing the tax challenges of the digitalisation of the economy – Policy note 2019.)

  • Pillar 2 addresses the perceived remaining BEPS aspects. This approach looks to ensure that all profits are subject to at least a minimum tax rate. Therefore, the following rules were agreed: the "exploration of an inclusion rule, a switch over rule, an undertaxed payment rule, and a subject to tax rule". (OECD: Programme of Work to Develop a Consensus Solution to the Tax Challenges Arising from the Digitalisation of the Economy, OECD/G20 Inclusive Framework on BEPS, 2019, page 25, paragraph 50.)

This approach demonstrates that the issues related to the digitalisation of the economy are omnipresent.

Impact on TP models

In the context of transfer pricing, these trends lead to a higher degree of uncertainty and significant potential for conflict. Modern technologies increase the integrity of individual functions within a group. This can make it necessary to share profits between individual functional units rather than separately evaluate the contributions made by each unit.

This is particularly relevant, for example, for revenues that result from the analysis of data generated and received by cars, or from the provision of software-related services. In such cases, an organisation must clarify who is responsible for the new digital business field and which business unit may benefit from the use of the data. In this context, the nexus rules to be considered by the Inclusive Framework could be implemented. As described above, additional indicators, such as the importance and proportion of data used from a distributor as opposed to the overall data records, for example, could be taken to demonstrate and distinguish routine selling activities from strategic group interactions derived from the generated data.

The demands placed on the TP system are increasing with regards to operational transfer pricing as well as tax audit defence, including the associated documentation. Due to the growing number of transactions the digital economy implies, a precise definition and segmentation of the added value of each functional unit is required.

One of the side effects of the digitalisation trends is that intellectual property, the key attribute in allocating non-routine profits to a group entity, will be harder to centralise. If IP is more widely spread across the group, this will require changes in traditional TP methods. Highly interconnected group activities could necessitate a two-sided intellectual property valuation method, such as the profit-split method.

Tipping point

The transformation of the automotive industry is in full progress. As a possible approach to the future taxation of digitally generated profits through innovative heterogeneous business models, the OECD is discussing the introduction of a taxable digital permanent establishment with a clear allocation of profits.

The EU sees the definition of a permanent establishment with a significant digital presence as a long-term solution for reforming existing double taxation agreements. Nevertheless, even tried-and-tested taxation principles should not be neglected. The risk of market consolidation measures or the splitting of business models into discussions about relocating functions is greater than ever.

Stephan Habisch



Deloitte Germany

T: +49 151 5800 3874

Stephan Habisch joined Deloitte in 2014 and is a director at Deloitte's German TP practice in Düsseldorf. He has graduated as a certified tax advisor (StB) and has about eight years of professional experience.

Stephan advises multinational enterprises in transfer pricing planning and implementation projects. Through various projects he has developed specific implementation and documentation concepts. This includes the development of technical tools within TP documentation and monitoring processes.

Andreas Göttert


Senior manager

Deloitte Germany

T: +49 151 5807 2616

Andreas Göttert joined the transfer pricing team in Munich as a manager in March 2017.

Andreas advises on the conception, implementation and adjustment of transfer pricing systems, the valuation of tangible and intangible assets and the preparation of (global) TP documentation reports, as well as their defence in internal and external audits.

Prior to joining Deloitte, Andreas spent several years in TP at another of the Big Four. He was also previously employed by an industrial company, where he also worked in the area of transfer pricing.

Andreas has experience in the conceptualisation of three-level TP documentation reports and its management via appropriate policies and work plans; the development of TP adjustment/licence fees in the automotive industry; the conceptual design and implementation of cost contribution agreements (CCA) in several industries; tax audit advice; corporate finance and valuation; and industries including automotive, chemicals, telecommunication and aerospace/defence.

© 2019. For information, contact Deloitte Touche Tohmatsu Limited.

This communication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms or their related entities (collectively, the ‘Deloitte network’) is, by means of this communication, rendering professional advice or services. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte network shall be responsible for any loss whatsoever sustained by any person who relies on this communication.

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