Page 172 - DMGT547_INTERNATIONAL_MARKETING

Unit 9: Terms of Payment and Delivery

Notes

Case Study Identifying Intercompany Transactions and Scoping
an Engagement

etwork Inc. is a U.S. company that, together with its worldwide subsidiaries, is
engaged in the design, development, manufacture, and sale of networking
Nhardware and software products; and provides related support and services.
Network Inc. files a consolidated U.S. tax return with its U.S. subsidiaries including
Network Technology, Inc. (“Network TI”). Network International, BV (“Network BV”) is
a wholly owned subsidiary of Network TI, incorporated in The Netherlands.
Network TI, a U.S. corporation, owns all the worldwide intellectual property. Network
Inc. and Network BV (collectively the “Network Manufacturers”) manufacture and sell
Network products, and provide related support and services using intellectual property
licensed from Network TI. Network Inc. has an intercompany arrangement for Network
BV to distribute Network Inc.’s products in the Dutch markets, and for Network BV to sell
to Network Inc. printed circuit board assemblies (“PCBAs” or “boards”) for incorporation
into Network Inc. products. Network Inc. and Network BV have an intercompany
arrangement for Network Inc. to distribute Network BV’s products in North American
markets.

The remaining members of the Network group (that is the “Network Sales & Service
Entities”) are responsible for distributing or marketing Network products throughout the
rest of the world and for providing services to the Network Manufacturers. These services
include marketing support services to Network Inc. and technical support to local customers
on behalf of Network Inc. and Network BV. These entities are wholly-owned foreign
subsidiaries of Network Inc.

Network Inc. also provides the following services to Network BV, in connection with
Network BV’s manufacturing and distribution activities:

marketing support and other marketing services;
general sales support services;
procurement services relating to the manufacture of goods; and

treasury, tax, and such other general and administrative services as may be mutually
agreed.
Network Inc just hired a new Tax Director. The Tax Director has just found out that there
are multiple tax audits in process or that will commence shortly and is aware that transfer
pricing is leading tax issue in today’s environment. She is asking for your help to understand
what she should do to ensure the company has adequately documented its transfer pricing
positions and also to consider how to price the transactions on a go forward basis.

1. Work within your table groups to identify all of the intercompany transactions
from the information provided above and sketch out a transaction flow diagram.
This exercise should take approximately 30 minutes.
2. Prepare at least five key scoping questions that you will need to ask the Tax Director
in order to document the company’s transfer pricing on a global basis. This exercise
should take approximately 30 minutes.
Contd...

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