Post on 31-Jan-2018
Transfer PricingFramework and SAP Scenarios
Advisory
20 March 2014
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PwC20 March 2014Transfer Pricing • Framework and SAP Scenarios
Transfer Pricing
Transfer pricing is becoming ever more important aseven numerous mid sized companies have producingand sales entities across several countries.
The legal requirements for determining transfer pricesare as crucial as is the transparency of profitability forall steps of the value chain.
In addition to legal transfer prices, managementtransfer prices are used to set objectives.
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PwC20 March 2014Transfer Pricing • Framework and SAP Scenarios
What we will Cover in this Session
Outline the legal requirements, the related processesand risks and how to deal with them.
Learn in detail how SAP allows to you to track theprofitability for all steps of the value chain for bothlegal and management transfer prices based on anexample for manufactured goods using the cross-company/cross-plant costing solution.
Compare the features of the solution with the materialledger solution.
PwC20 March 2014
Agenda
1 Basic Principles
2 Legal Framework
3 Processes
3.1 Business Models
3.2 Price Determination
4 Functional Analysis
5 Risks
6 SAP Scenarios for Profit and Cost Reporting
6.1 Legal vs Management Aspects of Transfer Pricing
6.2 Scenario for Cross Plant/Cross Company Costing
6.3 Transfer Pricing Using the Material Ledger
6.4 Comparison of Methods
Transfer Pricing • Framework and SAP Scenarios
PwC20 March 2014
Basic PrinciplesSection 1
1Transfer Pricing • Framework and SAP Scenarios
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PwC20 March 2014
What is Transfer Pricing all About?Transactions between Affiliated Companies
Only Cross-border transactions between affiliated companies are relevant fortransfer pricing
Difficulty: Transfer of tax relevant profits
The preponderant part of worldwide transactions does not take place with third partiesbut within the group
Affiliated companies
Company BCompany A
CH AbroadTax relevant profits
IC transactions
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Section 1 – Basic Principles
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PwC20 March 2014
Basic PrinciplesFacts (1/3)
* EU Joint Transfer Pricing Forum)
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Section 1 – Basic Principles
Not all transactions between companies of a group are relevant for transferpricing, only tax relevant cross-border transactions.
For determining transfer prices, local law is decisive. Statements and guidelinesof supra-national organisations (e.g. OECD, EU JTPF*) also play a central role.
The number and complexity of transfer pricing regulations has significantlyincreased during the last years.
Companies have to be characterised based on their function from a transferpricing point of view. In addition to the function, particularly the risks born andthe commodities used are relevant.
The correct application transfer pricing methods is not sufficient in order tosatisfy the needs of the arm’s length principle. The determined transfer price hasto meet the standards of comparison with transactions with third parties.
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PwC20 March 2014
Basic PrinciplesFacts (2/3)
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Section 1 – Basic Principles
A comprehensive transfer pricing concept does not only cover cross-border flowsof merchandise, but also has to take into account services, immaterialcommodities and financing.
An optimised transfer pricing concepts does not lead to the fact that all the localprofits can be attributed to a principal, but only the transferable part. A basicprofit has to remain with the de-central companies.
In order to guarantee the fulfilment of the arm`s length principle, not onlyexternal transactions between third parties have to be taken into account but alsointernal transactions between the tax payer and third parties.
In Switzerland, a transfer pricing documentation only has to be submitted to thetax authorities on demand.
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PwC20 March 2014
Basic PrinciplesFacts (3/3)
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Section 1 – Basic Principles
Depending on the individual case, there is the possibility to negotiate a deal onthe acceptance of transfer prices with one or several tax authorities (AdvancePricing Agreements).
Aggravation of regulatory rules and tax audits due to the economic crisis.
Increasing pressure on transfer prices and more restrictive requirementsregarding the application and proof of the arm’s length principle.
Potential increase of so called “uncertain tax positions” due to the abovedescribed tendencies.
PwC20 March 2014
Legal FrameworkSection 2
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PwC20 March 2014
OECD Guidelines versus Local LawThese 2 Frameworks are Relevant for Transfer Pricing
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Section 2 – Legal Framework
• Country specificregulations
• Rules for thedocumentation offunctional analyses andbenchmarking
• Arm’s length principle• Transfer pricing methods• Disputes• Burden of proof/
Documentation• Special topics: Intangible
assets, group services etc.
Local regulationsOECD Guidelines
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PwC20 March 2014
The Arm’s Length PrincipleOECD Guidelines
OECD Transfer Pricing Guidelines, paragraph 1.33:
“Application of the arm’s length principle is generally based on a comparisonof the conditions in a controlled transaction with the conditions intransactions between independent enterprises.”
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Section 2 – Legal Framework
Economically relevant characteristics of a comparable situationmust be sufficiently comparable
Target: Application and proof of the arm’s length principle
Comparable means• that there is no discrepancy significantly influencing the
relevant parameters (e.g. price or margin)• that appropriate measures have been taken in order to balance
existing discrepancies
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PwC20 March 2014
The Arm’s Length PrincipleOverview Influence Factors
Land A Land B
Company Y Company Z
Company A Company A1
Transactions• Real assets• Intangible assets• Services• Financing
Price?
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Section 2 – Legal Framework
Market price?
• Characteristics• Functional analysis• Contractual conditions• Economic situation• Business strategies
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PwC20 March 2014
The Arm`s Length PrincipleQuestions to be Answered
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Section 2 – Legal Framework
Transactions between legal units (or operating site) of the group?
What is the volume and the type of the transactions?
Does the actual determination of transfer prices lead to a profit allocationaccording to the arm’s length principles?
Which financial data are relevant to judge the transfer prices?
PwC20 March 2014
ProcessesSection 3
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ProcessesRecurring Processes on a Yearly Basis
Transfer Pricing • Framework and SAP Scenarios
Section 3 – Processes
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ManagementOperating UnitsValue drivers/risks
Definition BusinessModel
BudgetMonitoring/ControllingPrice adaptations
Price Determination
“Core”/local documentationDefence of contracts, etc.
Price Determination
PwC20 March 2014
Business ModelsSection 3.1
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ProcessesBusiness Models (1/2)
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Section 3.1 – Business Models
Scenario 1
Buys as much merchandiseas is needed or as can be soldwith a positive margin
Two parties (third or affiliated) are basically free to determine theirway of collaboration within the limits of legal requirements
Possible exchange of merchandise:
Distributionpartner
Entrepreneur
Scenario 2Importer searches for acommodity, buys lot sizesfrom the provider and bearsthe sales risk himself
Wholesaledealer/importer
Provider
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PwC20 March 2014
ProcessesBusiness Models (2/2)
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Section 3.1 – Business Models
There are as many business models as there are companies and relationshipsbetween companies.
In order to fully understand the business relationship and the value chain, aFunctional Analysis has to be established.
PwC20 March 2014
Price DeterminationSection 3.2
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Overview of Methods Defined by the OECDBased on Turnover, Gross Margin and EBIT
Comparable Uncontrolled Price Method
Resale PriceMethod
Cost Plus Method
Profit SplitMethod
Turnover(COGS)
Gross Margin(OPEX)
EBIT
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Section 3.2 – Price Determination
Comparable Profits Method
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PwC20 March 2014
Comparison with the price of a similar product for a relation between internalpartners (P1) for third parties.
Comparable Uncontrolled Price Method (CUP)Preferential Use in Case Comparison Prices Exist
TP: Transfer priceP1: Internal
comparison priceP2: External
comparison price
But:• Quantity• Market• Point in timemust be comparable!
AA
AB
Client
X
Y
Client
P2: 900P1: 850TP: 800
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Section 3.2 – Price Determination
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PwC20 March 2014
Sufficient third party financial information must be available for comparison.
Resale Price Method RPMApplied for Sales Companies if there is no CUP
AA
AB
Client Client
TP: 800
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Section 3.2 – Price Determination
Client
XXX
YYY
Client
SP: 1000
Purchasing price from a third party
Sales price to a third party
Comparison gross margin of AB(1000–800 = 200) on products from AAwith the gross margin on productscomparable in the widest sense(e.g. same industry)
or
between independent third parties(value 1–value 2) and also functionaland risk profile comparable with AB.
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• Basis: full costs of the company
• Appropriate percentage surcharge on effective costs for the margin
• The transfer price equals the total of full costs plus profit margin
Cost Plus MethodPrimarily Used for Services
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The percentage surcharge must be in line with the Arm‘sLength principle depending on functions, risks and usedresources
Transfer Pricing • Framework and SAP Scenarios
Section 3.2 – Price Determination
Service used in the context of production, R&D and management fees.
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PwC20 March 2014
Alternatively used to support findings brought up by a different transfer pricing method.
Comparable Profits MethodIn Case Primary Methods are not Useful or Reliable
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Section 3.2 – Price Determination
AA
AB
Client Client
TP: 800
Client
XXX
YYY
Client
Profit margin ofcomparable companies
Band with e.g.Lower Quartile 3 %Median 6 %Upper Quartile 12 %
Turnover 600’000.–
EBIT 24’000.–
Profit margin 4%
Possible reference figures for the EBIT (depending situation): Turnover, OPEX, assets, equity
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PwC20 March 2014
This method is based on the comparison of divisions within a company.
Transaction Based Profit MethodSimilar to Comparable Profits Method
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Section 3.2 – Price Determination
AA 1
AB 1
Client Client
TP: 800
Client
XXX
YYY
Client
AA 2
AB 2
Client
TP: 500 Profit margin ofcomparable companies
Band with e.g.Lower Quartile 3 %Median 6 %Upper Quartile 12 %
Turnover 600’000.–
EBIT 24’000.–
Profit margin 4%
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PwC20 March 2014
Profit Split MethodProfit is Split Based on Defined Rules
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Section 3.2 – Price Determination
Split of the total profit of the value chain
or
of the residual profit (the profit remaining after attributing the routine profit)
of the companies involved in a transaction.
The profit of the involved group companies that has been achieved due to inter-company prices is compared to the profit that would have been made ifthe total profit was split to each participating individual companybased on the individual contribution of the company, using afunctional and risk analysis.
PwC20 March 2014
Functional AnalysisSection 4
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PwC20 March 2014
Definition of the Functional and Risk AnalysisCriteria for High Quality
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Section 4 – Functional Analysis
An analysis of economically relevant facts for all transactions examined:
Functions
Risks
Assets (material and immaterial)
The functional and risk analysis is the basis in order to determine the “appropriate(at arm’s length) price for a transaction”
A functional and risk analysis of high quality
Contains the description of transactions to be documented and of the involvedparties
Is supported by facts (e.g. interviews), contracts and financial data
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PwC20 March 2014
Contents of a Functional and Risk AnalysisOverview of Relevant Elements
Elements
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Section 4 – Functional Analysis
Risks
Transactions Functions
Companies Activities
ProductsContracts/Conditions
Markets/Competitions
Financial results
Business ProcessesOrganisation/
Persons
Forecast/ BusinessPlans
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PwC20 March 2014
Results of a Functional and Risk AnalysisResults
Results
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Section 4 – Functional Analysis
BusinessUnderstanding
Internal lyComparable Values
Identification of taxpotentials/ risks
Basis for BenchmarkStudies
Basis TransferPricing Doc.
Planning Options
CharacterisingGroup Companies
Transfer PricingMethods
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RisksSection 5
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RisksMinimising by Application of Correct Charges
• Significant risk of correctionby the tax authorities
• Weakened position againsttax authorities
• Penalties
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Section 5 – Risks
Charge without effective transaction
Effective transaction without charge
Effective transaction with charge asusually NOT applied to third parties
Effective transaction with charge asusually applied to third parties withoutdocumentation (burden of proof)
PwC20 March 2014
SAP Scenarios for Profit and CostReporting
Section 6
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PwC20 March 2014
Legal vs Management Aspects ofTransfer Pricing
Section 6.1
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Legal vs Management Aspect of Transfer PricingDifferent Price According to Reporting Targets
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Section 6.1 – Legal vs Management Aspects of Transfer Pricing
Externally oriented view – authoritiesThe aim of legal transfer prices is toallocate profits between legal entities inorder to minimise taxes on a nationaland/or international level.
Legal aspect
Internally oriented view – managementIncentive setting for various entities of anenterprise, legal or non legal, in order toget decisions that maximise the benefit ofthe entire organisation.
Management aspect
Transfer prices determine the allocation of margins, and thus profits, along the valuechain of an enterprise and across production and sales plants and legal entities
The legal aspect is only relevant when selling across legal entities. Themanagement aspect is also relevant when transferring goods within a legalentity, e.g., across production plants.
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In order to support decision making in an efficient way:
Cost transparency needs to be given on all steps of the value chain within anenterprise
The structure of the costs (material, personal, overhead, freight, etc.) and theinternal profit must be available for reporting for all production/delivery plantsand legal entities
Example decision making: Set lower internal transfer prices in order to fully usethe capacity of a production plant of a group when the buying entity also has theright to purchase the same product/service from a third party
Management Aspects of Transfer PricingDecision Support from a Business Point of View
33Transfer Pricing • Framework and SAP Scenarios
Section 6.1 – Legal vs Management Aspects of Transfer Pricing
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Handling of Transfer Prices in SAPPossible SAP Scenarios
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Section 6.1 – Legal vs Management Aspects of Transfer Pricing
SAP offers the possibility to handle and report both legal- and management-oriented transferprices and related margins
The legal view and the management view are available in Product Costing (CO-PC) andProfitability Analysis (CO-PA)
In the FI leading ledger, only the legal view is available.
All company codes and plants must be assigned to the same controlling area!
There are two technical options to handle transfer prices to show the margin across allentities of a group:
Supports management and legal view from a• group perspective
and• a local perspective
Supports the legal view from a• group perspective
and• a local perspective
Cross-company code/cross-plantcosting (without using the materialledger)
Valuation in the material ledger
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Scenario for Cross Plant/CrossCompany Costing
Section 6.2
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The cross-plant costing/cross-company code without using the material ledger will beshown in the following scenario using legal transfer price only:
A material is produced in plant CH01 of a legal entity, and transferred to plantCH02 of a different legal entity where it is used to manufacture another materialthat will be sold to a third legal entity within the same group
Intercompany profit will be generated in both transfer steps
Scenario for Cross-Plant/Cross-Company CostingRequired Settings in SAP
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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PwC20 March 2014
The cross-plant costing/cross-company code without using the material ledger willbe shown in the following scenario using legal transfer price only:
A material is produced in plant CH01 of a legal entity, and transferred to plantCH02 of a different legal entity where it is used to manufacture another materialthat will be sold to a third legal entity within the same group
Intercompany profit will be generated in both transfer steps
Scenario for Cross-Plant/Cross-Company CostingThe Scenario will be Shown Based on an Example
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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PwC20 March 2014
Scenario for Cross-Plant/Cross-Company CostingGraphical Overview of the Scenario
= intercompany sale with profit
ProducingLegal Entity 1
ProducingLegal Entity 2
SellingLegal Entity 1
Plant CH01 Plant CH02 Plant CH03
Material 7 Material 7
Material 11 Material 11
Production ofmaterial 7
Production of material11, using material 7
Sells material 11 to3rd party
= sale to 3rd party
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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Scenario for Cross-Plant/Cross-Company CostingStep 1 Transfer Between Producing Legal Entities
Legal entity 1 sells for 1.100,- to legal entity 2. Freight costs of 100.– paid by legal entity 2.
Legal entity 2 uses 1 PC of material 7 to build 1 PC of material 11. Labour costs of 200 .–, overhead of 350 .–
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Producing Legal Entity 1
Plant CH01
500.–Material
Labour
Overhead
1.000.–
300.–
200.–
Material 7
Producing Legal Entity 2
Material
Labour
Overhead
Freight
Material 11
Material 1.200.–
Labour
Overhead
200.–
350.–
1.750.–
Material
Labour
Overhead
Freight
IC-Profit
500.–
500.–
550.–
100.–
100.–
Assembly
Freight = 100.–IC-Profit = 100.–
Plant CH02
Material 7
IC-Profit
Cost elementview
Costcomponentview
Revenue 1.100.–COGS 1.000.–
IC-Profit 100.–
Revenue 1.925.–COGS 1.750.–
IC-Profit 175.–
500.–
300.–
100.–
100.–
200.–
1.200.–
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Scenario for Cross-Plant/Cross-Company CostingBase Material 7, Sending Plant CH01, Cost Element View
41Transfer Pricing • Framework and SAP Scenarios
Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Transaction CK11N:
Cost elementview
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Scenario for Cross-Plant/Cross-Company CostingBase Material 7, Sending Plant CH01, Cost Component View
42Transfer Pricing • Framework and SAP Scenarios
Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Transaction CK11N:
Cost componentview
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Scenario for Cross-Plant/Cross-Company CostingMaterial 7 in Receiving Plant CH02, Cost Element View
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Cost elementview
Cost estimate transferred from plant CH01 – Cost element view including additive costsfor freight and profit – Transaction CK11N:
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Scenario for Cross-Plant/Cross-Company CostingMaterial 7 in Receiving Plant CH02, Cost Component View
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Cost estimate transferred from plant CH01 – Cost component view including additivecosts for freight and profit – Transaction CK11N:
Cost componentview
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Scenario for Cross-Plant/Cross-Company CostingMaterial 11 in Plant CH02, Cost Element View
45Transfer Pricing • Framework and SAP Scenarios
Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Assembled using material 7 – Transaction CK11N:
Cost elementview
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Scenario for Cross-Plant/Cross-Company CostingMaterial 11 in Plant CH02, Cost Component View
46Transfer Pricing • Framework and SAP Scenarios
Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Assembled using material 7 – Transaction CK11N:
Cost componentview
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The cost estimate of material 7 is transferred from Plant CH01 to Plant CH02
• In order to do this, the special procurement key in the material master ofmaterial 7 in the receiving plant needs to indicate that the cost estimate shouldbe transferred from plant CH01
Plant CH01 and plant CH02 belong to different legal entities
The freight and profit will be added to the transferred cost estimate as additive costelements
• In order to have this automated, the dependencies and rules of the freightcalculation need to be defined in customer-specific tables, and an add-onprogram needs to be created reading these tables and updating the additive costs
Scenario for Cross-Plant/Cross-Company CostingProcurement Key, Freight and Profit
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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The cost component view and the cost element view are identical for material 7.They are related to a costing variant.
In plant CH02, material 7 is used to manufacture material 11
Stock valuePlant CH01: Material 7 1.000.–Plant CH02: Material 7 1.200.– Material 11 1.750 .–
Scenario for Cross-Plant/Cross-Company CostingCosting Views and Stock Values
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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Producing Legal Entity 2
Scenario for Cross-Plant/Cross-Company CostingStep 2: Transfer Between Plants of Different Legal Entities, withProfit
Legal entity 2 uses 1 PC of material 7 to build 1 PC of material 11. Labour costs of 200,-, overhead of 350,-
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Material 11
Material 1.200.–
Labour
Overhead
200.–
1.750.–
Material
Labour
Overhead
Freight
IC-Profit
500.–
500.–
550.–
100.–
100.–
Plant CH02
Cost elementview
Costcomponentview
Selling Legal Entity
Material 11
Material 1.750.–
Freight
IC-Profit
50.–
175.–
1.975.–
Material
Labour
Overhead
Freight
IC-Profit
500.–
500.–
550.–
275.–
150.–
Plant CH03
Revenue 2.200.–COGS 1.750.–
Cost elementview
Costcomponentview
Revenue 1.925.–COGS 1.750.–
IC-Profit 175.–
Freight = 50.–IC-Profit = 175.–
350.–
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Scenario for Cross-Plant/Cross-Company CostingMaterial 11 in Plant CH03, Cost Estimate Transferred from PlantCH02, Cost Element View
50Transfer Pricing • Framework and SAP Scenarios
Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Cost elementview
Including additive costs for freight and profit -Transaction CK11N:
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Scenario for Cross-Plant/Cross-Company CostingMaterial 11 in Plant CH03, Cost Estimate Transferred from PlantCH02, Cost Component View
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Cost componentview
Including additive costs for freight and profit – Transaction CK11N:
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The cost estimate of material 11 is transferred fromPlant CH02 to plant CH03
• In order to do this, the special procurement key in the material master ofmaterial 11 in the receiving plant needs to indicate that the cost estimate shouldbe transferred from plant CH02
Plant CH02 and plant CH03 belong to different legal entities
The freight and profit will be added to the transferred cost estimate as an additivecost elements
• In order to have this automated, the dependencies and rules of the freightcalculation need to be defined in customer-specific tables, and an add-onprogram needs to be created reading these tables and updating the additive costs
Scenario for Cross-Plant/Cross-Company CostingProcurement Key, Freight and Profit
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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In this case, the cost component view and the cost element view for material 11 aredifferent, as the cost element view treats all components of material 7 as materialcosts
They are related to a costing variant
Stock valuePlant CH01: Material 11 1.750.–Plant CH03: Material 11 1.975.–
Scenario for Cross-Plant/Cross-Company CostingCosting Views and Stock Values
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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Scenario for Cross-Plant/Cross-Company CostingMixed Costing
Example: 100 PC of 11 costed, based on 50:50 PC procurement ratio from plant X and Y
Material 11Plant X
Plant Y Material 11
Standard cost = 80.–
Standard cost = 70.–
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
If there are procurement alternatives for a material, such as multiple vendors ordeliveries from multiple production plants, a mixed cost estimate can be created
For this purpose, the mixing ratio has to be defined
The cost estimate based on this information will be transferred to the standard price ofthe product in the material master
Plant Z
Standard cost = 75.–
(80.– x 50 PC) + (70.– x 50 PC)
100
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Scenario for Cross-Plant/Cross-Company CostingMargin Reporting
Valuefields
Cost. Comp.view
Material 11 in Plant CH03Material 11 in Plant CH02
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
From a group view, the overall COGS are 1.650.− in plant CH02 / 1.700.− in plant CH03.
From a legal entity point of view, the COGS are 1.750.− in plant CH02 / 1.975 .− in plant CH03.
Material 500.–
Labour
Overhead
500.–
550.–
Material
Labour
Overhead
Freight
IC-Profit
500.–
500.–
550.–
100.–
100.–
Material 500.–Material
Labour
Overhead
Freight
IC-Profit
500.–
500.–
550.–
275.–
150.–
The components of the cost component split can be assigned to different value fields in CO-PA
Thus, reporting from the perspective of the plant/company code is possible as well as from agroup view
Valuefields
Cost. Comp.view
Freight
IC-Profit
COGS
100.–
100.–
1.750.–
Labour
Overhead
500.–
550.–
Freight
IC-Profit
COGS
150.–
275.–
1975.–
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In addition to the basic costing variant allowing cross-plant/cross-company code transfers, anadditional costing variant can be created on the level of a plant or legal entity, showing only thetotal cost of the material purchased within the group*
Scenario for Cross-Plant/Cross-Company CostingAuthorisation for Different Views
Local costingvariant
Group costingvariant
Material 11 in Plant CH03Material 11 in Plant CH02
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
Via access control, group controllers can, e.g., see both costing variants; local controllers canonly see the additional costing variant
* Freight costs could be shown separately if desired.
Material 1.200.–
Labour
Overhead
200.–
350.–
Material
Labour
Overhead
Freight
IC-Profit
500.–
500.–
550.–
100.–
100.–
Local costingvariant
Group costingvariant
Material 1.975.–Material
Labour
Overhead
Freight
IC-Profit
500.–
500.–
550.–
275.–
150.–
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Cost component views (cost element views same as in group costing)
Scenario for Cross-Plant/Cross-Company CostingGroup View and Local View
57Transfer Pricing • Framework and SAP Scenarios
Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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The cost component view enables the reporting of intercompany margins for all steps of thevalue chain, i.e., for every plant and every legal entity within the group
• In the example, the profit for the legal view is shown
• It is also possible to show IC profit based on management- determined transfer prices inaddition to the legal view
• This can be done by using an additional cost component for management IC profit
• In the reporting for CO-PA, the cost components can be selected to calculate margins froma local point of view as well as from a group view, based on legal or management margins
In case the single plant or single legal entity should not have the transparency on theintercompany margin and the detailed cost structure of the sending plant, an additionalcosting variant can be created, showing only the total purchasing value in cost estimates
In case of a more complex account determination setup, an alternative cost component splitmight be needed, using the primary cost component split.
Scenario for Cross-Plant/Cross-Company CostingOverview of Functionalities
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Section 6.2 – Scenario for Cross Plant/Cross Company Costing
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Transfer Pricing Using the MaterialLedger
Section 6.3
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Using the material ledger, transfer prices can be calculated using either the legalvaluation view or the group valuation view, based on either standard costs oractual costs
Both scenarios are based on a cross-company code stock transfer, using valuatedstock in transit and require the activation of business function LOG_MM_SIT
Transfer Pricing Using the Material LedgerStandard Costs and Actual Costs
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Section 6.3 – Transfer Pricing Using the Material Ledger
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Overview of the approach using the legal and the group valuation
Transfer Pricing Using the Material LedgerLegal Valuation and Group Valuation
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Section 6.3 – Transfer Pricing Using the Material Ledger
• Difference between the valuation priceof the sender and the procurement price(purchase order price) is shown asintercompany profit in the costcomponent view of the actual costcomponent split
• No additional group validation needed.
Legal valuation
• Separate valuation and currency profilein addition to the legal valuation,showing the inter-company profit
• Electronic Data Interchange (EDI)scenario between the sender and receivercompany code for sending invoices
Group valuation
The calculation is based on the actual price of the sender using Business Add-In (BadI)Control of Cross-Company Code Transfers (CKML_CROSS_COMPANY), the usage of theactual price can be suppressed and the standard price can be used instead.
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Transfer Pricing Using the Material LedgerPrerequisites for Using the Material Ledger
Legalvaluation
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Section 6.3 – Transfer Pricing Using the Material Ledger
Activate actual costing with actual cost componentsplit
A new cost component needs to be created for the costcomponent structure in use to store the delta profitfor group costing
Groupvaluation
Electronic Data Interchange (EDI) scenario betweenthe sender and receiver company code for sendinginvoices
Separate valuation and currency profile
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Transfer Pricing Using the Material LedgerFeatures of the Material Ledger
Legalvaluation
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Section 6.3 – Transfer Pricing Using the Material Ledger
Take into account freight costs for intercompanyprofit
Actual cost component split passed to receiving legalentity
Groupvaluation
Roll-up of multi-level valuation differences from thesender to the receiver
Reporting of variances according to responsibility ofeach legal entity
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Business Add-In (BadI) Control of Cross-Company Code Transfers(CKML_CROSS_COMPANY) offers several enhancement options to adapt the SAPstandard functionality
The most important features relevant for intercompany profit calculation andreporting:
• Cost component split can also be transferred in the legal view
• Intercompany profit is based on standard costs of the sender instead of actualcosts
• Define intercompany profit calculation based on a customer-specific algorithm
Transfer Pricing Using the Material LedgerEnhancements of the Material Ledger
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Section 6.3 – Transfer Pricing Using the Material Ledger
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The material ledger also offers the possibility of a third valuation view, the profitcenter view
In the profit center valuation view, cross-company code transfer processes are notmapped multilevel
This means for cross-company code profit centers that no price differences arerolled up and no cost component split is passed on
Moreover, with cross-profit center transactions, no intercompany profit everappears in the profit center valuation view
Transfer Pricing Using the Material LedgerProfit Center View
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Section 6.3 – Transfer Pricing Using the Material Ledger
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Material ledger offers the option to show intercompany profits both from a legaland a management perspective
However, for each of the views, a separate valuation view and costing variant arenecessary
The configuration is more complex than the cost component- based solution,which can deal with both views using a single costing variant
The material ledger should be the preferred solution when actual costs are relevantand when the company code currency and the controlling area currency are notsufficient
Transfer Pricing Using the Material LedgerSummary
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Section 6.3 – Transfer Pricing Using the Material Ledger
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Comparison of MethodsSection 6.4
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Comparison of MethodsCross-Plant/Cross-Company Costing versus Material Ledger
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Section 6.3 – Transfer Pricing Using the Material Ledger
Cross-company/cross-plant costing
• Enhancement needed forIC profit and freight
• No third currency, onlycompany code andcontrolling area currency
• Lower implementationeffort
• Easy config and handling
• Full transparency onmargins legal andmanagement oriented
• Plant and legal entity
• Actual costs possible as well as standard costs
• BAdI for adaptations available
• Variance roll-up possible
• Freight costs are not integrated, enhancement
• Config and handling of high complexity
• Profit only when transferring between legal entities, notbetween plants of the same legal entity
• No management oriented view
• Only legal oriented
Material ledgerLegal view
Material ledgerGroup view
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The choice of the appropriate method to calculate and report transfer prices –using the material ledger legal and/or group view or not using the material ledger– depends on how the responsibility is divided within a group and which decisionauthorization is granted to the plants and/or legal entities
Furthermore, it depends on whether standard costs should be used to determinethe intercompany/inter-plant profit, or actual costs, which currencies are relevantand only if legal or internal transfer prices should be used
Hence, a decision on the detailed setup for an enterprise depends on legalrequirements as well as on the business requirements of the group and the singleentities
Comparison of MethodsDecision on Choice of Method
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Section 6.4 – Comparison of Methods
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Questions?
Questions and Contact
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Section 6.4 – Comparison of Methods
How to contact me:
Robert Kremlacsekrobert.kremlacsek@ch.pwc.com