Business restructurings opportunities, risks, and transfer pricing 

A business restructure is usually a normal occurrence at some point in the lifespan of a Multinational Enterprise (“MNEs”) group and is undertaken for various business reasons such as, to maximise synergies and economic sales, centralise controls, and management, or increase efficiencies to lower operational cost.

The Organisation for Economic Co-operation and Development (“OECD”) defines a business restructuring as “the cross-border reorganisation of commercial or financial relations between associated enterprises, including the termination or substantial renegotiation of existing arrangements”. In this context, a business restructure typically consists of the following transaction types:

  • The conversion of an enterprise with a relatively higher level of functions and risks into an enterprise with a relatively lower level of functions and risks.

  • The transfer of intangibles or rights in intangibles to a central entity within the group.

  • The concentration of functions in a regional or central entity with a corresponding reduction in scope or scale of functions carried out locally.

  • The allocation of more intangibles or risks to operational entities.

  • The rationalisation, specialisation, or de-specialisation of operations (including the downsizing or closing of operations.

It is, however, important to bear in mind that without realising or even intending, business restructurings automatically trigger Transfer Pricing (“TP”) obligations as they may bring about increased profit potential or profit shift between Group entities attached to them.

It is vital that the TP aspect of a business restructuring is analysed in order to accurately determine the commercial and financial relations, and the conditions attached to those relations that lead to a “transfer of something of value” (i.e., a valuable asset, right, or activity/goodwill) among the members of the MNE group.

The OECD proposes the following methodology to determine the arm’s length conditions of the business restructuring:

  1. Understanding the restructuring itself – examining the economically relevant characteristics of the commercial and financial relations between the associated enterprises and the contractual terms of the business restructuring.

  2. Reallocation of profit potential as a result of a business restructure – where there is a transfer of “something of value” or the termination or substantial renegotiation of an existing arrangement, that transfer, termination, or substantial renegotiation should be compensated as if it were between independent parties in comparable circumstances.

  3. Transfer of something of value – an analysis of whether something of value has been transferred and determining the estimated arm’s length price of such transfer.

  4. Indemnification of the restructured entity for the termination or substantial renegotiation of existing arrangements – the business restructuring needs to take into consideration whether the restructured entity should receive compensation in the form of indemnification as a result of the termination or substantial renegotiation of its existing arrangement. The compensation may be considered in either an up-front payment, a sharing in the restructuring costs, or even lower purchase prices (in the context of the port-restructuring operations or of any other form).

Disclosure of business restructurings in TP documentation 

The OECD requires the following disclosure about business restructuring in TP documentation:

  • All important business restructuring transactions occurring during the year must be detailed in the master file.

  • The local file should detail whether the local entity has been involved or affected by business restructuring occurring during the year or immediately past year and explain the aspects of such transactions affecting the local entity.

  • MNE groups are advised to document their decisions and intentions regarding business restructurings (especially with regards to the decision to transfer or assume significant risks) before the actual transactions occur and to document the evaluation of the consequence on the profit potential of significant risk allocations resulting from the restructure.

If your business has recently undergone any changes (or is expected to in the future), reach out to our team of experts who can help you to ensure your TP obligations are met and business model opportunities optimised.

Associated enterprises

How can we help?

How you structure your business is a critical question as you expand globally.  The right structure will protect your assets, improve your currency position, support your business operations, facilitate future business expansion and changes, and optimise your overall tax rate. Trying to unscramble a sub-optimal structure entered into in haste or without full consideration of relevant facts is complex and expensive, so it’s important to plan upfront.

Structuring an international business is both a science and an art – this is our specialist area of expertise. Regan van Rooy is an international tax and structuring advisory firm focussing on Africa. We have offices in South Africa, Mauritius and Ireland and we can help you with any international tax or structuring query.