The attribution of Location Savings in a transfer pricing context

When multinational companies (“MNEs”) choose a location to set up activities, they have to consider many factors, including among others local market circumstances, level of production expenditure, available infrastructure and the political/tax climate. We continue to see a trend of relocations of low-risk, manufacturing activities to China, Brazil or India (i.e. the more prominent emerging markets, where labour / manufacturing costs are generally lower than in the Netherlands) as well as Germany, observing generally lower investments expenditure compared to The Netherlands.

20 Mar. '18 Yoran Noij

The issue of location savings, or location-specific advantages (“LSAs”) is a key topic within the field of transfer pricing, and generally deals with the question where MNEs should allocate the additional profits (if any) resulting from LSAs. It is no surprise that the emerging countries (in particular China and India) are big advocates of the concept of LSAs, as additional profits attributable to LSAs means more taxation for the jurisdiction in which those business operations actually take place. However, it should be noted that LSAs are not only relevant in relation to emerging markets, as it is an issue that should be taken into account in a wider transfer pricing context, as illustrated above with example of Germany.

In this blog, we have chosen to elaborate on our experiences in respect to LSAs and the different ways to factor them into the transfer pricing analysis, such to increase the chance of acceptance of the various Tax Authorities involved, and likewise reduce partial double taxation as well as time and resource consuming MAP-procedures.

Yoran Noij

Yoran is an associate and member of the Dutch Association of Tax Advisers (NOB)

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