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Rethinking value chains in a digitalised world: Insights for the IP&C industry

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Claudia Lauten and Janis Sussick of Deloitte Germany assess how the accelerating digitalisation changes business models of multinational enterprises in the industrial products and construction industry.

In his 2011 essay for the Wall Street Journal, Marc Andreesen, co-founder of Netscape, argued that “software is eating the world. He made this statement in the context of Silicon Valley companies increasingly building financially sustainable business models after having seen long periods of uncertainty as to whether they would be able to generate profits or whether they were simply subject to another stock market bubble. With his statement, Andreesen tried to convey the idea that companies with strong software capabilities would eventually be in a position to take over large parts of the traditional economy.

Many instances of disruptive changes have since confirmed his prediction. Examples include companies such as Airbnb taking over large shares of the hospitality market without owning hotels, Uber becoming a dominant player in the market for commercial ride hailing in many countries without owning a fleet of cars or Apple taking over a large share of the market for wristwatches solely based on a stronger software focus compared to traditional watchmakers.

In all of these examples, traditional incumbent market leaders were prepared for the threat that software- and service-focused companies could pose to their business models. They relied on well-established business expertise, on market entry barriers created by prior investments and regulations and they assumed to have an unrivaled understanding of their markets.

Despite being most visible for the general public, such disruptions are not limited to consumer-facing business models. Many observers predicted early on that software- and service-focused business models (notably including ‘software-as-a-service’ models) would also increasingly replace traditional business models in many other sectors of the economy, including the industrial products and construction (IP&C) sector.

Considering this trend and looking at the above-mentioned disruption in industries, multinational enterprises in the IP&C industry need to constantly review and adapt their own business models in order to actively drive the inevitable innovation and disruption instead of being driven out of business by others. Many IP&C multinationals have understood the urgency of business model changes and are actively rethinking their products and processes.

Such changes often come with structural changes to value chains, to the allocation of value drivers within a multinational group and to existing strategies related to intangible assets. All these can have a significant impact on established tax and transfer pricing (TP) set-ups and thus, cause a need for tax managers to act. This will be illustrated in the following sections.

Digitalised business models in the IP&C industry

Consider the following case study which illustrates digitalisation of business models in the IP&C industry.

Traditional business model

An exemplary IP&C group is engaged in the development and production of industrial equipment needed for assembly lines. Customers are companies that run partially automated assembly lines, e.g. in the automotive sector.

The IP&C group has developed its equipment products over many years and has made significant research and development (R&D) investments in order to reach state-of-the-art product reliability and precision. R&D investments were historically allocated between hardware and software R&D. Software development mainly focused on the programming of embedded software and user interfaces.

All R&D was conducted by engineers in the corporate headquarters where also all key management decisions were taken. In this capacity, the headquarters acted as a central entrepreneur in the group’s TP model. Contract manufacturing sites across the world manufactured the group’s products. Sales were conducted by routine distribution entities in the target markets. In addition to selling, the distributors also offered consulting, installation and after-sales services to customers (including maintenance checks in pre-agreed time intervals).

Customers typically incurred significant capital expenditures as part of the acquisition of the equipment. After the purchase, customers operated the equipment in their own responsibility and their own management and faced the potential production downtime risks if the equipment failed due to wear and tear.

Impact of digitalisation

When strategically reviewing how digitalisation trends affect this business model, the IP&C group’s top management determined that software capabilities and data-driven value-added services can be key competitive advantages in the market going forward. Furthermore the IP&C group identified that equipment-as-a-service (Eaas) offerings would be increasingly demanded by customers in an attempt to reduce their capital expenditures and downtime risks.

New (digitalised) business model

To meet future customer requirements, the IP&C group transformed its business model as follows:

  • Development of an entirely new operating system: This new system runs on all products of the group and has cloud connectivity features allowing data analytics and enables after-sales application and service sales. It also allows customers to integrate third party equipment data into their cloud platform and third party service providers to offer their own add-on products and services to customers (platform model). To enable this new level of software development, the IP&C group engaged in significant new hiring activities and created new software engineering/development sites in locations outside of its traditional HQ engineering centres.

  • Direct sales model: The IP&C group decided to conclude sales contracts (including EaaS agreements) directly between the group’s entrepreneurial entity and its customers. This allows more direct customer access as well as customer data analytics. The former distribution entities are responsible for sales and marketing support as well as consulting, installation and local after-sales services which are now managed via the group’s cloud platform.

  • Data-driven services: In addition to classical maintenance agreements with pre-defined service intervals, the IP&C group now offers predictive maintenance based on a virtual simulation of the equipment’s real-life performance that is enabled by data analytics and artificial intelligence (‘digital twin’).

  • Under the new business model, customers have the option to either buy the equipment or subscribe to an EaaS agreement. Under an EaaS agreement, customers can flexibly use the group’s products in line with their own changing business requirements and make payments on a pay-per-use basis. Under both sales models, customers can get access to a cloud-based platform operated by the IP&C group. On this platform, customers can use data analytics features to optimise their equipment use, obtain additional services from the IP&C group and other service providers and obtain additional software applications.

The case study illustrates some of the far-reaching consequences of digitalising a business model in the IP&C industry. One or multiple of these changes can currently be observed within many IP&C groups and each can have a variety of implications for the group’s TP positions. It is therefore of key importance for the tax department to understand the strategic and commercial backgrounds of such changes and to proactively adjust tax and TP mechanisms to reflect the changing economic realities of the group.

Implications for TP set-ups

Many multinationals in the IP&C industry have traditionally used a relatively streamlined business model consisting of routine contract manufacturing, routine distribution and routine contract R&D structures. These functions were typically remunerated with low but stable margins and the residual profit or loss remained at one or multiple entrepreneurial entities.

The presented case study illustrates the TP challenges that can arise due to a digitalisation of an IP&C group’s value chain, including the following aspects:

  • Software (or software-enabled services) will increasingly be the key differentiator in the market and partially replace the former importance of hardware intellectual property (IP). Since advanced software development often occurs where talent is available (these can be locations different to traditional hardware engineering sites), IP could be created at other entities in the group leading to new IP ownership structures. Software developers can use new forms of work (remote working, mobile working, virtual teams) to a much greater extent than traditional hardware engineers and thereby further increase the complexity in determining the location of IP creation.

  • The value contribution enabled by collecting customer data, analytics functions and AI applications needs to be analysed in detail in order to assess their value contribution to the group’s success.

  • Changes in sales models (e.g. shifts from routine distribution models to a direct sales model) require adjustments to the TP set-up, systems and remuneration mechanisms. Changed levels of working capital at the distribution entity (due to shifts to a direct sales model) as well as the entrepreneur (due to partial use of an EaaS model) need to be adequately reflected.

  • Revenues and profits generated via a digital platform need to be allocated to one or multiple entities of the group in line with their respective value creations. Changing regulations (e.g. temporarily existing digital sales taxes as well as new internationally aligned taxation frameworks, such as the OECD’s pillar one and pillar two) need to be closely monitored and compliance needs to be ensured at all times.

  • Cross-border relocations of assets, functions or risks can create exit tax implications in the affected jurisdictions.

These aspects, despite only showing a small fraction of the potential TP topics, exemplify the complexity that arises from the move to a digitalised value chain. Tax managers need to rethink the organisation of their department in order to ensure that they are aware of any relevant changes, have a solid understanding of the business models and have appropriate processes, mechanisms and tools in place to flexibly adjust all relevant parameters of their TP set-up.

Change management – recommendations for tax managers

To successfully navigate this rapidly changing environment and to avoid a TP set-up which lags behind the changes in the business model, tax managers should consider ensuring the following five elements are properly established in their department’s organisation, guidelines and processes:

Establish the right skill set

Tax managers not only need to understand their group‘s overarching digital strategies and transformation plans themselves, they also need to recruit and train staff in the tax departments in order to have an organisation that can ensure ongoing compliance but at the same time support business changes with meaningful tax insights without making tax an obstacle to the needed digitalisation.

Recruiting and training priorities for tax staff should be reviewed in order to identify tech-savvy staff in order to enable the required changes, ensure an understanding for changing business requirements and tax compliance at the same time.

Frequent business model review

Once the required skills have been established, tax managers should consider how to ensure that value chains, functional and risk profiles and existing tax and TP policies are subject to a regular review by qualified persons/teams who have a solid understanding of the companies’ digitalisation agenda. Robust processes should be in place governing the frequency and quality of such reviews. Careful consideration should be applied when determining risk-based prioritisation to individual review items and to the communication of the review results and recommendations.

As a basis for such activities, tax departments need to ensure a constant flow of information on potential business model changes from the top management into the tax departments. Establishing a clear set of criteria for information that is required for the tax department’s work is key to not miss any developments.

Provide guidance

Tax managers should consider designing TP guidelines with clear and concise rules for all key intercompany transactions that frequently occur in the group. Implementing internal control procedures that ensure compliance with national and international regulatory frameworks is also highly recommended. However, in an environment with changing business models, guidelines need to be flexible enough to allow quick adjustments if needed. Such flexibility can be related to parameters within the existing TP set-up but should also allow changes to the set-up itself if needed.

In particular with regard to IP ownership in the group, features of dynamic IP strategies should be reflected in the policies, allowing the definition of new IP ownership locations and remuneration flows once certain pre-defined criteria are met. This can be of particular relevance if various parts of the organisation contribute to IP generation in digitalised value chain and traditional centralised IP strategies no longer adequately reflect the business.

Key stakeholders from finance and controlling departments should be made aware of such flexible elements in a TP policy so that they are aware of the potential scenarios when determining budgets.

Have a tax technology roadmap

A tax technology strategy should be set with clear preferences regarding IT infrastructure and tools that can facilitate the implementation of guidelines, processes and TP set-ups. It will be increasingly difficult to manage all of the above-addressed challenges in a rapidly changing environment without the use of modern IT solutions which at least partially automate workflows, calculations and documentation work.

When digitalising the overall business model, management often asks all business functions, including tax, to contribute to the digitalisation path. This does not only cover supporting the business changes with adequate tax-technical input but also the digitalisation of internal processes within the tax department.

Monitor tax and TP outcomes

Tax managers should take time to step back from the often complex and challenging details and verify that tax and TP outcomes continue to plausibly reflect business realities from a big picture perspective. As part of this, any aspects should be identified that might need adjustment or that need to be well-documented in order to help top management as well as outside stakeholders (such as tax auditors) understand the underlying mechanisms.

Tax audit scrutiny might especially be applied in those jurisdictions that are affected by shifts in value creation and decreasing profit allocations. These jurisdictions should be identified and adequate technical analyses and documentation should be prepared.


As the digitalisation will not decelerate in the foreseeable future, continuous change is expected to be the new normal in the IP&C industry. This creates significant challenges for tax departments.

Integrated digitalised value chains make it increasingly difficult to concisely attribute profit to value creation because functions such as IP creation, production and distribution as well as the allocation of risks and capital with a group can be significantly affected by business model changes.

Tax managers therefore need to rethink the required skill-set, processes and guidelines within their tax departments in order to adequately support business model changes while at the same time ensuring continued compliance. Having their own technology roadmap and tools in place will help tax departments navigate complex environments and allocate sufficient resources at strategically important aspects. Monitoring outcomes and anticipating challenges from internal and external stakeholders will help managing the process and reduce tax risks.

Click here to read Deloitte's TP Change Management in Industries guide

Claudia Lauten



Deloitte Germany

T: +49 211 8772 5626


Claudia Lauten is a partner in the TP team in Düsseldorf, Germany and has over 20 years of experience in advising clients on TP matters.

Claudia started her career in a boutique tax consultancy firm in 1995, joined a Big4 company in 2000 and soon afterwards started focussing on the area of TP. She made partner in 2007 and has been a member of the global leadership team on tax controversy for many years. In 2019, she joined Deloitte, where her various roles include the global TP lead as well as the German Tax & Legal lead for the IP&C industry.

For her clients, Claudia designs and coordinates global TP restructurings as well as documentation projects and she manages TP controversy and dispute resolution processes (including tax audits, MAPs, APAs and litigation proceedings). In addition, she has significant experience in the middle market/family-owned business segment (inbound and outbound).

Claudia has a master’s degree in business administration and is a certified German tax advisor.

Janis Sussick


Senior manager

Deloitte Germany

T: +49 89 29036 8339


Janis is a senior manager in Deloitte Germany’s Munich TP team.

Janis supports his clients with regard to all aspects of planning, operationalising, documenting and defending intercompany transfer prices. One particular focus of his work is the coordination of global TP documentation projects for large multinational enterprises in the Industrial Products and Construction industry. He also actively engages in the development of documentation technologies and optimisation of operational TP processes. Furthermore, he is experienced in the valuation of intangibles for TP purposes.

Janis’ work includes the annual preparation of global TP documentation reports for multiple leading IP&C multinationals, the fully fledged TP advisory for a Fortune-500 engineering company (including tax audit assistance, restructuring assistance and documentation projects) as well as multiple IP valuation projects and restructuring analyses as part of M&A deals. Janis holds a master’s degree in finance and economics from the London School of Sconomics. He is a CFA charterholder and certified German tax advisor.

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