Value Chain Analysis

June 15, 2021

Sector: Manufacturing & Automotive

Value Chain Analysis

By Nipun Arora, Kreston Ardent CAtrust PAC, Singapore

Post BEPS (Base Erosion and Profit Shifting), Transfer Pricing Documentation requires analysis of the global value chain and identification of value drivers. Para 1.51 of the 2017 OECD Guidelines states that it is important to understand how value is generated by the group as a whole and the contribution that the related parties make to that value creation.

In line with the BEPS objective, the Singapore IRAS also endorses the principle that profits should be taxed where the real economic activities generating the profits are performed and where value is created.

Value chain analysis involves a thorough understanding of the functions, risks, and assets of the group as a whole and evaluating how they are in alignment with the value drivers. This analysis would assist in the attribution of profits to the respective group entities.

Case Study

  • SGPL is a company incorporated in Singapore and is in the business of manufacturing industrial equipment. The manufacturing facility of SGPL can only cater to a limited category of industrial equipment.
  • The customers of SGPL are majorly from the Middle East Region. SGPL negotiates with its customers on a principal-to-principal basis and finalises the contract terms.
  • PTX, a company incorporated in Indonesia, is the wholly-owned subsidiary of SGPL and is also in the business of manufacturing industrial equipment. The manufacturing facility of PTX can cater to a wide category of industrial equipment.
  • The customers of PTX are majorly local companies i.e., companies in Indonesia. PTX negotiates with its customers (in Indonesia) on a principal-to-principal basis and finalises the contract terms.
  • SGPL subcontracts the majority of projects, that is acquires, to PTX. The procurement of input materials is undertaken by SGPL and assembly is undertaken by PTX.
  • SGPL also undertakes procurement of input materials for its manufacturing and also for the independent contracts of PTX with its customers.
  • The brand name is owned by SGPL and PTX has been granted the right to use the brand name in its territory.

Evaluation of functions, risks, and assets

Some pertinent questions to consider:

  • Has SGPL guaranteed any part of the capacity of PTX? Can any part of the idle capacity of PTX attributed to SGPL and the corresponding remuneration?
  • Would SGPL be required to compensate PTX for idle capacity where the capacity has not been utilised by SGPL during a particular year, for example, downturn due to covid?
  • Do SGPL and PTX undertake inventory functions, such as the warehousing of raw materials procured, or is it a just-in-time purchase?
  • Concerning procurement function, does SGPL act as a support services provider/ commission agent/ buy-sell entity? Key aspects to be considered in this regard – location savings, supply chain intangibles, logistics.
  • Which entity undertakes the functions related to intangibles i.e., development, enhancement, maintenance, protection, exploitation?


Tax authorities around the world are evaluating transfer pricing outcomes based on value creation analysis. Realignment of taxing rights with the economic substance is the key message from the BEPS actions. Therefore, the taxpayers must prepare robust documentation along with underlying evidence to substantiate the substance alongside form.