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FAQs: How to perform a segmented P&L analysis


After our successful interactive transfer pricing webinar : How to perform a segmented P&L analysis, this blog post answers the questions asked by our attendees that we couldn‘t get to during the session.

What if I only have the 3rd party vs intercompany revenues but am not able to go into further details?

Then you have to make use of logical allocation keys and schedules to split the other P&L items as explained in this webinar

Do financial analyses/recons get challenged often by Revenue Authorities?

Yes, financial analyses and recons are often challenged by Revenue Authorities. Their main focus area is to understand if transfer prices have been correctly implemented and to validate that margins on the intercompany (IC)activity is at arm‘s length.

Is there a list of keys or ratios that I should use to allocate? How do I know which key or ratio to use?

First, try to identify to what extent costs are labeled so that these can be easily allocated to certain intercompany (IC) activities. In case all activity of an affiliate is IC, then no allocation is necessary, as all relate to the IC activity. If not, try to use keys that logically allocate costs. E.g., sales expenses typically do not relate to IC contract manufacturing activity and vice versa. The most common keys are revenues (IC revenues vs. 3rd party revenues), but also (directly attributable) costs can be used as keys.

Does it make sense to use the inter company sales as input for the allocation key, as it is also the output of the analysis: you're calculating the right IC sales price?

Yes, this makes sense. The purpose of the allocation/segmentation is to determine if the (EBIT) margin achieved with the transfer prices set is at arm‘s length and not to determine the transfer price itself.

Under OECD, one can use either local GAAP data or IFRS data. Which tax accounting regulation is better to use, local GAAP or IFRS?

Local GAAP is a better regulation to use as these are the accounting regulations of the country. The local income tax return is based on local GAAP and therefore the only relevant basis for tax authorities. IFRS is the financial language for the multinational as a group.

When are EBITDA or EBT better to use than EBIT?

EBIT is the typical result of a benchmark analysis. It is safest to use the EBIT % output of a benchmark as the reference for the EBT % because this will eliminate/neutralize unwanted effects of interest costs and FX results. A tax inspector looks at a taxable result perspective. Another important factor is to consider is the profit level indicator.

In transaction A (contract manufacturer of eCars), mark-up on total cost would include license payments being made to US Licensor or in other words would the cost base for applying the relevant mark-up on include the license payments made to US licensor?

No, the compensation for the contract manufacturing activity would be based on total costs (excluding royalty) because the analysis meant to calculate the royalty (as residual) and not to include it.

Would it be correct to adjust the transactions to the lower quartile?

If the outcome of your net margin analysis is that you are below the Lower IQ range, your adjustment should be to the lower IQ range. If you are within the range no adjustment is needed. If you are above the range, you can adjust to the Upper IQ range. To avoid discussions taxpayers often adjust to the median regardless.

So according to this method you also do allocation and not only preparing the segmented P/L, right? Often you will already have performed your allocation in advance. Biggest challenge will be that often allocations are done in Group GAAP, and then you need to perform the segmented P/L in local GAAP - do you have a solution to manage this efficiently?

Normally you have done your price setting in advance at the time of setting the TP policy (which is certainly not done every year), not a segmented P&L analysis. The segmented P&L analysis is done yearly at local file level after the financial year has ended to assess whether the transfer prices resulted in the arm‘s length outcome. The efficient process is as I outlined in this webinar and by using our segmented P&L module in our TPdoc software.

Is it possible to perform the P&L segmentation within the TPdoc tool?

Yes, this TPdoc feature will be released in the upcoming months.

How are FX gains/losses considered in the TB segmentation and PLI calculation?

These should be eliminated unless these are immaterial.

Missed the live webinar on How to perform a segmented P&L analysis? Watch it now on-demand.