• Beat Gubelmann, Senior Manager |

The concept of value chain analysis (“VCA”) is commonly used in various Transfer Pricing (“TP”) applications, including planning, APAs, controversy and documentation. This is partially due to the focus of the OECD BEPS project’s Actions 8-10, which emphasize the importance of the alignment between value creation and profit attribution, which in many cases is determined by Transfer Pricing outcomes.


A VCA is the framework used to analyze a company’s global value chain in order to draw tax and TP conclusions, with a focus on identifying value drivers and aligning them with the associated functions, assets and risks (“FAR”). Common applications of VCA in TP are for example the description of the value chain and value creation within an MNE’s Master File, thus providing an overview and qualitative assessment of an MNE’s business model. Although there is no specific reference to the VCA in the OECD TP guidelines, the approach proved to be useful in meeting the guideline’s documentation requirements.

Quantification of a VCA

However, where the VCA really gets to shine is when its qualitative findings are translated into quantitative results - an aspect often neglected in practice. For such translation to be sufficiently reliable, a consistent methodology has to be applied in all steps along the way.

Quantification methodology

Such a methodology goes from identifying the value drivers by weighing them in terms of relative importance for the MNE’s business to allocating them to individual entities via the FAR analysis and responsibility matrices. Various analytical tools, such as value-based interviews, industry and market research or the consultation of industry experts, may serve along the individual steps. However, the key to success in any VCA quantification exercise is a tested and consistent methodology to translate qualitative findings into quantitative results – a purely value-based profitability figure for each entity within the MNE.

Clear visibility on value creation vs profit attribution

Such “to-be” profitability figure can then be compared to the actual “as-is” financial results in order to draw conclusions on the current TP model’s alignment between value creation and profit attribution (for defense and/or documentation purposes) or to define specific actions (for planning purposes), as needed. Hence, the main benefit of a VCA, if applied correctly and systematically, is the creation of a link between the qualitative analysis of FAR and the quantitative outcomes in terms of profitability/financial results – an invaluable asset in any tax-related conversation.

A strong instrument in times of significant uncertainty

Due to the COVID-19 pandemic, many taxpayers face peculiar situations as their supply chains and business models are impacted by external factors to an unprecedented level. This not only raises the question where extraordinary costs or losses should be booked but also whether and how value creation within a business model has changed altogether. In both cases, a quantified VCA offers bottom-up data that provide strong indications for decision-making and documentation.

The need to challenge your perception on value creation

Value creation within a business model can continuously evolve. Certain observations may reveal a misalignment between value creation and profit allocation that may need further consideration:

  • The business underwent significant restructuring (for example, the transfer of IP or functions);
  • Unusually high profits in substance-light entities;
  • Unexpected losses in supposedly limited risk entities; or
  • Significant differences in profit levels of entities with similar functional profiles.

In any of these cases, it is recommended to have a closer look at the outcomes produced by a Transfer Pricing model.

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