Page 20 - Strategic Tax Planning for Global Commerce & Investment

Cross Border Tax Planning Strategies

tax jurisdictions and capital deployed in high-tax jurisdictions,
which are often exacerbated by inefficient transfer pricing
policies.

2. Functional Profit Drivers

Functional profit drivers relate to the critical business functions
of the company and where those functions take place.
Functional profits accrue from the physical functions such as
manufacturing, distribution, marketing, sales, services and
research and development. The location where such functions
are performed and the level of tax risk borne can have a
significant impact on where the profits arise, and thus the ETR
of the company. Establishing and maintaining core functions
and the related risk in a high-tax jurisdiction is a negative tax
driver. Conversely, establishing core business functions in low-
tax jurisdictions or shifting such functions to low-tax
jurisdictions has the opposite effect. Alternatively, shifting the
risk associated with such functions to low-tax jurisdictions can
result in the migration of income to such locations and in turn a
reduction in ETR. Provided the shift in income is supported by
operational substance and arm’s length transfer pricing
principles, such shift in risk could result in a permanent
reduction in ETR.

The tax drivers with the most adverse impact on the ETR are
full risk high-tax manufacturing locations, full risk high-tax
marketing and distribution locations, intangible profits in high-
taxed locations, poor use of tax-favored locations, tax
incentives or special regimes and inadequate use of internal
leveraging. In other words, significant functions and risk and
therefore the associated profit reside in high-taxed jurisdictions
resulting in relatively high ETR.

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