Value Chain Analysis (VCA)

A Value Chain Analysis is a transfer pricing tool used to determine where value is created within the group, which entities perform strategic functions, which assets — including intangibles — generate profit, how economic risks are allocated, and whether the distribution of income within the group aligns with the arm’s length principle.
The OECD describes VCA as a foundation for analysing transactions involving IP, strategic services, operational hubs, financing arrangements and restructurings. A well-constructed VCA strengthens the quality of Local File, Master File and TP reporting.

As part of the service, we prepare:

‍1. Mapping the group structure and identifying key entities: we begin by mapping operational and strategic entities, reviewing the flows of goods, services, capital, intangibles and data, and assessing the operating model (e.g. limited-risk distributor, contract manufacturer, principal entity, R&D hub). This allows us to identify the units that create the highest value for the group.

‍2. Functional, asset and risk analysis (FAR) across the value chain: for each entity we analyse operational, managerial and strategic functions, tangible and intangible assets, and the economic risks they assume. We assess how these factors drive profit generation. The result is a FAR Matrix that later supports TP documentation and group policies.

‍3. Identification of key intangibles and DEMPE analysis: we identify the intangible assets that have the greatest impact on group profitability and perform a DEMPE assessment (Development, Enhancement, Maintenance, Protection, Exploitation). This includes determining which entities effectively control and manage IP and linking IP ownership and management with financial outcomes and appropriate remuneration.

‍4. Analysis of financial flows and income allocation: we examine intra-group flows related to services, licences, distribution, production and financing. We analyse how income is allocated among entities and whether the allocation corresponds to the underlying functions and risks. This helps identify cases of over- or under-remuneration within the group.

‍5. Evaluation and structuring of the operating model: based on the group’s structure, we assess the suitability of models such as principal/entrepreneur, competence-center models, centralised services and shared costs, supply-chain settlement models (procurement hubs, inventory owners), or distribution structures (full-risk vs limited-risk). We then propose an operating and TP model that is compliant with OECD and local regulations.

‍6. Recommendations on the remuneration of individual entities: using the VCA results, we determine which units should receive routine returns, which contribute to and capture residual profit, when the profit split method is appropriate, and whether the current model is consistent with benchmarking outcomes and financial performance.

‍7. Preparation of the Value Chain Analysis report: we deliver a report that includes the value chain map, FAR and DEMPE analyses, descriptions of key processes and functions, analysis of financial and operational flows, assessment of arm’s length compliance, and recommendations for adjusting the operating model. Typical length: 25–50 pages + diagrams and process maps.

‍Client outcome: a Value Chain Analysis:reveals where and why value is created within the group, supports the proper allocation of profits and margins in intra-group transactions, strengthens Local File, Master File, TPR and CbCR compliance, identifies risk areas in group settlements, assists strategic decision-making (e.g. reorganisations, shifting functions, restructurings), provides the foundation for profit split and DEMPE-based methodologies, improves transparency and management of the group’s global value chain.