Addressing Transfer Pricing Compliance and Structuring New Transactions for a Global Heavy-Duty Automotive Distributor

Introduction

A leading distributor in the heavy-duty automotive spare parts industry, established in the 1990s, began as a small distributor with a legacy of production and industry expertise dating back to the mid-20th century. Over the years, the company has transformed into a manufacturing and procurement giant, now operating from a sprawling factory campus. Today, it is one of the largest players in the automotive sector, supplying spare parts to major global players in the heavy vehicle, truck, and trailer industries. The company has an extensive product range, including springs, cabins, stabilizer parts, brakes, shafts, axles, v-arms, rods, engines, air springs, and trailer accessories, exporting products to over 160 countries worldwide.

To streamline operations and meet new regulatory challenges, the client sought assistance in complying with the newly introduced transfer pricing (TP) framework in the UAE. As the company expanded its footprint in the region, it faced dual challenges: ensuring compliance with UAE TP regulations and restructuring intercompany transactions, particularly within its group subsidiaries. In this context, the UAE subsidiary was characterized as a routine distributor of automotive components, bearing limited risks associated with its operations.

The Challenges

1. Navigating New UAE TP Compliance Requirements
   The UAE recently introduced TP regulations that require the company to substantiate the arm’s length nature of its intercompany transactions. This necessitated benchmarking profitability using industry data and ensuring adherence to OECD guidelines.
2. Structuring a New Transaction Model
   The company proposed a new transaction model involving direct purchases from suppliers and transit trade to group subsidiaries. They sought guidance on:

• • Determining an appropriate margin on sales for these transactions
  • Assessing whether a markup on interest costs was necessary for compliance

Our Approach

1. Establishing Benchmark Margins

• • Industry-Best Data Sources: We utilized globally recognized databases to identify comparable and derive an arm’s length range for Return on Sales (RoS)
  • Benchmarking Analysis: Using the Transactional Net Margin Method (TNMM), we established an arm’s length RoS range, ensuring compliance with UAE TP regulations
  • Documentation: We updated TP documentation, including detailed Function, Asset, and Risk (FAR) analysis, to ensure regulatory alignment
  • Structuring the New Transaction Model
  • Segmental Profitability: Recommended treating the new transactions as a distinct segment with its own Profit and Loss (P&L) statement to provide transparency and enable precise profitability measurement
  • Proposed Margins: Advised achieving segment profitability within the benchmark RoS range, requiring adjustments to cost margins
  • Markup on Interest Costs: Determined that interest and shipping costs could be invoiced at cost without requiring an additional markup, ensuring compliance while maintaining simplicity. Advised accurately allocating direct costs and overheads to the segment to align profitability with the regulatory range

      2. Ongoing Monitoring
           To ensure sustained compliance and optimize performance, we recommended conducting quarterly reviews of the segmental P&L

Results Delivered

1. UAE TP Compliance Achieved
   The benchmarking study provided an arm’s length profitability range, enabling the company to align existing transactions with UAE TP regulations confidently.
2. Structured New Transaction Model
   Developed a scalable and compliant framework for the new transaction, ensuring profitability and regulatory adherence.
3. Enhanced Financial and Operational Control
   Introduced segment-specific P&L tracking, enhancing operational transparency and decision-making. Ensured that interest and shipping costs were handled efficiently without unnecessary complexity.

Conclusion

Our collaborative approach ensured the client met all UAE transfer pricing compliance requirements while laying the groundwork for a sustainable and efficient transaction model. By leveraging robust benchmarking, precise documentation, and strategic structuring, the client achieved transparency, scalability, and profitability.

The implementation of segment-specific tracking tools further empowered the client to proactively manage and optimize their financial performance. By combining compliance with operational insights, we enabled the company to navigate the complexities of intercompany transactions and build a framework for future growth.

This engagement demonstrates the value of integrating regulatory adherence with strategic planning to unlock long-term benefits. For tailored solutions to your transfer pricing challenges, contact us today.