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About the Author

by James Preuninger
Chief Executive Officer
Amber Road

Jim Preuninger is the Chief Executive Officer of Amber Road and serves on the Board of Directors. With over 25 years of software industry experience, Jim has been a part of the evolution of the supply chain management market from a domestic focus to one that now encompasses global operations and spans logistics, compliance and trade finance. Jim founded Amber Road (formerly Management Dynamics) in 1989 and through his visionary leadership has helped define the Global Trade Management (GTM) market. As CEO of Amber Road, Jim oversees strategic development and is responsible for opening new markets and expanding the company’s portfolio of solutions through strategic partnerships and acquisitions. Jim began his career at IBM where he held several positions in sales and marketing. Jim holds a bachelor's degree from Drexel University.

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Supply Chain Comment

By James Preuninger, Chief Executive Officer, Amber Road

May 3, 2012

Understanding the Tax Implications of Related Party Transactions and Transfer Pricing

Supply Chain Managers need to Balance the Goals of Tax-Effective supply chain management with the Organization's Compliance Requirements

Many multinational organizations are embracing tax-effective supply chain management to reduce costs and increase margins. Supply chain managers need to understand the ramifications of their tax-based strategies when it involves the transfer of tangible and intangible goods to their own foreign subsidiaries or parent companies. Reducing taxes is a desirable outcome, but not when it runs afoul of related party transaction regulations.

Preuninger Says:

Solely focusing on reducing taxes may not result in the most efficient supply chain and could potentially result in non-compliance with related party transaction regulations.
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Doing cross-border business with a related party, which includes foreign subsidiaries and parent companies, can be complicated. A related party is any entity that can exercise control or significant influence over the operating policies of another entity. In global trade, it's an individual or business that exercises a 10 percent interest in both the exporter and the ultimate consignee.

A related party transaction occurs during the transfer of resources, services, or obligations between related parties -- regardless of whether a price is charged. The term “transfer price” refers to the price at which one company sells goods or services to a related affiliate in its supply chain. While the transfer price may be negligible, the obligations and reporting requirements that go along with the transaction are not.

Countries have adopted various laws and practices to ensure transferred goods and services are appropriately priced based on market conditions. The goal of this legislation is to ensure that revenue generated within a country, and thereby taxable by that country, is not inappropriately transferred to a related party outside that country to avoid taxes. Therefore, in a related party transaction, taxes are assessed on transferred goods or intangibles regardless of whether money changes hands. In any related party transaction, disclosing the relationship, reporting the transactions and conducting business “at arm’s length” are important ways to mitigate audit risks.

Supply chain managers need to balance the goals of tax-effective supply chain management with the organization’s compliance requirements. Solely focusing on reducing taxes may not result in the most efficient supply chain and could potentially result in non-compliance with related party transaction regulations. A collaborative approach that engages all parties -- supply chain managers, senior executives and tax specialists – will ensure successful results.

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