As Value Chain Analysis is now a mandatory part of the annual TP documentation exercise of MNEs, it can also serve as a
pre-emptive tool to assess and mitigate (potential) risk areas. This enables the MNEs to move from ‘‘staying out of trouble’’ to being ‘‘fully in control.’’
Value Chain Analysis (‘‘VCA’’) has its origin dating back to 1985, when Michael Porter first introduced it in his book titled ‘‘Competitive Advantage.’’ In simplest of terms, VCA refers to the entire performance process of a company, which begins with the research and development and ends with the delivery to the end consumer. Value chain of a company takes into account all support and core activities carried out by related or unrelated parties in making the company function. See below a simplistic model of a value chain.
The traditional view of the value chain was developed by Michael Porter
From its conception as an area of interest for economists, VCA has gained the interest and attention of many. This is especially true in light of the latest regulations governing Base Erosion and Profit Shifting (‘‘BEPS’’). The latter is providing additional regulations in the area of related party transactions within multinational enterprises (‘‘MNEs’’), which accounts for the majority share of global trade. It is whilst interpreting the arm’s length nature of related party transactions and ensuring that they are aligned with the MNE’s operating, strategic and governance models, that the concept of VCA becomes a boardroom agenda item.
In this informative article the following issues are discussed and explained:
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