Transfer Pricing: Government v Buying offices and their Parent companies

My new book Birnbaum’s Global Guide to Agents and Buying Offices is due out in the next two weeks.  The subject is described in the title. The following is taken from the back cover:

20 years ago, every middleman —every agent and every buying office —provided the same basic services.  Today the list of required services has expanded geometrically and skill-set needed to provide those services have expanded exponentially.  The days when the middleman needed only merchandisers and QC are long gone. 

Today, the difference between a first class and a mediocre middleman is the difference between success and bankruptcy.

 

Are you an agent or a buying office?

This book will tell you whether you are in front, on the cutting edge or at the back, about to fall off.

 

Are you a brand importer or retailer?

This book will tell you what is on the cutting edge, and what you may be missing.

 

Every customer asks the same basic question: What is a fair commission?

 

The answer depends on three factors:

Who are you?

What do you need?

How good is your middleman?

The short answer is:

In some cases 5% is too high. In other cases 33% is a bargain

While the book was originally intended for garment-sourcing professionals, it is now clear that the book will also be of special interest to those involved in transfer pricing. By redefining fair commission, the book will help companies with buying offices avoid the need to do battle annually with the tax department.

The industry has changed.

The buying office was originally developed as a wholly owned service center to ensure that the importer’s goods met importer’s requirements:.  At that time importer requirements were limited to the 3Gs: good FOB price, good quality, good delivery. The original goal was:  Keep up the buying office standards — keep down the buying office costs.

Today that same importer demands many more services from his agent and/or buying office

At the same time the suppliers have been forced to become far more sophisticated.  Where once good 3Gs guaranteed customers, today good 3Gs guarantees only a place at the end of a long line of suppliers each able to provide the same 3Gs

The global garment export industry has moved from product making to service supplying.

Those middlemen — agents and buying offices — that have moved up to meet the change are entitled to higher commission rates, while those who are still living in the old 3Gs world should expect their commission rates to be reduced.

At the same time the value of the buying office to its importer owner has changed.

We now have two very different buying-office models:

  • The active buying office, which exists to provide services to its owner.
  • The buying office in being, which exists in the main to provide profit.

Where once importers looked at their buying offices as necessary but somewhat costly operations, some now look at their buying offices as machines to transmogrify taxable profit into tax-free profit.

Even after allowing for a fair and reasonable commission, these buying-office cum money-making-machines often account for between 15%-20% of total net profit: not bad for a division where profit is derived solely from its existence.

The buying office in being has had a good 20-year run, winning when they could, compromising—to their own advantage—when they could not.

For the past 20 years, I have been a player in the transfer pricing game.  My original role was, and still is, as an industry expert.

In the early stages of transfer pricing disputes each side appoints experts who enter a virtual room where the government appointed experts ask questions that are answered by the importer’s experts.  No fighting – no arguing – collegiate.  Up to very recently the tax authorities employed accountants, economists and transfer-pricing specialists.  The importer side also employed accountants, economists and transfer-pricing specialists; but the ones I have worked for also employed a garmento.  The garmento side invariably won.

More recently, I have begun to realize that my role in garment related transfer-pricing disputes has expanded.  It seems that even when I am not present in the experts virtual room, my work is very much there.  Both governments and their tax authorities and the importer make extensive use of my articles and books to bolster their arguments.  From time to time I meet lawyers, accountants, and transfer-pricing professionals who pull out one or another ragged much used copy of one of my books filled with tabs and proceed to quote me to me.

I have become an expert’s expert.

As an expert’s expert I have something to tell you

Government and particularly their tax department is not happy:

They are tired of losing.

They are tired of importers using buying offices in being as stashes for tax-free profit.

They want their money back.

And there is a very good chance that in the near future, they will get their wish.

Government and their tax authorities are finally getting smarter. They too are employing garmentos.

Once they bring in knowledgeable professionals, the old importer arguments will fall apart.

The introduction of garment professionals will bring radical change. In our garmento world unsupported theoretical argument counts for nothing, Our industry is all about performance and delivery.

In this regard, the buying office is responsible for a number of processes.  The greater the number of processes = the more work required = the higher their commission rate.

Take an obvious process:  Garment inspection

There are two ways of analyzing garment inspection

The accepted way:

Total number of inspectors

Total number of orders

Total number of factories

The garmento way:

Arbitrarily select 20 orders.  Carry out the audit for each of the 20 orders.

Check the records

Determine factory lead time (from ready to cut to ready to ship

Cutting reports

Inspection reports

Number of in-process inspections

Shipping date

Inspection certificate

Visit the factories involved

How many sewing lines were committed to the order

Were goods surreptitiously subcontracted, and if so where and what inspection was carried out?

Number of rejects.

Number of garments shipped.

A qualified professional must carry out an audit to determine whether garment inspection took place and to what degree that garment inspection met industry standards.

What is true of garment inspection is equally true of all work allegedly carried out by the agent or buying office.

 

The future of transfer pricing is simple:  If the buying office actually performs the work and that work meets a reasonable standard, they are then and only then entitled to receive a commission for that work.

 

If you are a customer that owns a buying office, or a buying office manger, ask yourself, Will my buying office pass this audit?

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2 Responses to Transfer Pricing: Government v Buying offices and their Parent companies

  1. David:

    Are you available to consult on a potential trasnfer prcing dispute involving a Hong Kong based captive buying agent ? The agent has real substance and performs high value added functions, including product development. Currnet disputes in the US and EU.

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