BCC (Business Control Centre concept)
The starting point of the implementation of the Business Control Centre (hereafter BCC) structure is the allocation of profits consistent with world-wide operating strategies thereby allowing an optimisation of the group tax structure. More and more businesses attempt to centralise regional or world-wide management responsibilities and other core functions in headquarters or shared service centres located in tax friendly jurisdictions and at the same time introduce centralised supply chain management thereby streamlining manufacturing and distribution processes performed throughout the region or globally.
Switzerland is a key location not only to Swiss based multinationals but also to foreign multinationals for establishing such centralised headquarters and shared service organisations or in short BCCs. A BCC in Switzerland typically assumes the role of a co-ordination and principal trading centre between group manufacturers on one hand and sales and distribution entities on the other hand. Apart from this co-ordinating and trading function the BCC centralises many business responsibilities and risks (e.g. bad debt risks, currency risks, warranty risks, stock risks, R&D risks). By assuming responsibility for group or regional management and for the administration and/or ownership of intellectual property rights, other group functions may be performed on a contract basis. The manufacturing plants operate as toll or contract manufacturers on behalf of the BCC. Similarly, R&D or other service centres can perform their activities on a contract basis on behalf of the BCC.
The marketing and sales function of the distribution entities are streamlined by implementing stripped buy-sell distribution or commissionaire arrangements. As a result of the implementation of a BCC structure intra-group transactions are focused to one single group company, i.e. the BCC. This facilitates much controlling in an organised and efficient manner the operational business flows from and to the various entities, as opposed to a scattered network of an uncoordinated flow of goods and services among numerous entities of a group. Above all, the BCC structure produces beneficial tax effects, as a major part of the overall group margin is centralised in the BCC, which is favourably located in a low tax jurisdiction such as Switzerland. The profits attributable to a Swiss BCC would generally be subject to income tax in Switzerland at rates of less than 12% to 15%.
The basic structure of the BCC concept is depicted in the following chart:
BCC CONCEPT:
Administrative & Cost Resale Market
Support services plus minus price
-
-
-
Contract - - - - - -Swiss-------------Distributor-----------Customer
R & D BCC
-
-
Contract -
Manufacturer
In the absence of uncontrolled comparable prices, the transfer pricing methods to be used are the cost plus method between the contract manufacturers, contract R&D centres and any outsourced contract administration and support services. The transfer price for the goods sold by the BCC to the stripped buy-sell distributors is best determined on the basis of the resale price method.
This setup allows the contract suppliers and the distributors a reasonably small but guaranteed margin. The bulk of the economic and business risks lie with the BCC. As a result the BCC will earn significant margins in periods of overall strong performance but as it is also the economic risk taker the BCC will suffer most at times of depressed overall margins.
The crucial point as always is the determination of the acceptable transfer prices for the individual transactions, i.e. the cost plus mark-up and the resale price mark-down for the contract suppliers and distributors respectively. This must be determined on a proper analysis of the functions and risks assumed by the parties and the ownership of the intangible assets. In practice the functions and risks can be mapped on a risk/return matrix as follows:
RISK/RETURN MATRIX:
Probability
20% 60% 60%
-Market Price (30)
HIGH Volume/Product &
Customer Portfolio (30)
---------------------------------------------------------
20% 20% 60%
-Non-perform (15)
MEDIUM (Supply, Quality, Scarp)
-Currency (5)
---------------------------------------------------------
20% 20% 20%
-R&D (15)
SMALL (Time, funct. Costs)
-Credit (5)
---------------------------------------------------------- Impact on cons. OR
SMALL MEDIUM LARGE
This matrix is a visual presentation of the result stemming from an evaluation of all the business risks affecting an operating business. The importance of the various business risks is analysed in terms of probability of occurrence (high, medium or small) and their impact on the operating result in case of occurrence (i.e. how deep is the impact on the operating result and how long is the recovery period). Having assessed the business risks it needs to be determined which entity in the value chain (contract supplier, BCC or distributor) assumes the risk. The result of this allocation can be used to determine the actual transfer price level which leaves the various entities with a margin that is in line with their relative contribution to the value added chain. This approach ideally supplements a more traditional benchmarking analysis of required returns for the various functions.
CONCLUSION
Given its relatively mild tax climate Switzerland is an ideal location to structure profits into. By doing so care should be given to the fact that any group related transactions giving rise to profits in Switzerland may be particularly scrutinised by foreign tax authorities. For this reason it is important to adequately structure Swiss business affairs and prepare the required transfer pricing documentation in advance. The overall result of many multinational groups can be improved by implementing transfer pricing related planning structures such as the Swiss BCC structure presented above. Further tax effective structures frequently used by international businesses operating from Switzerland include service fee charge out systems for shared service centers, management or headquarters companies, and patent or trademark licensing structures for patent holding companies.
Zurich, December 5, 1998 PricewaterhouseCoopers Armin Marti Partner International Tax and Transfer Pricing
The content of this article is intended to provide a general guideline to the subject matter. Specialist advice should be sought about your specific circumstances.
