Defending the New Model Buying Office

The next few years will bring the fight between government tax authorities and customers’ wholly owned buying offices to a new and higher level.  Government’s policy can be summed up as follows:  If you are a major garment importer and your buying office commission exceeds 4%-7%, you are over-charging to avoid taxes and we want our money back.

Government is taking steps to win:

  • The IRS has retained garment industry specialists to advise them;
  • The IRS is no longer rushing to compromise.

On the other side of the coin, in recent years, the role of the buying office has undergone radical change. Where once buying offices carried out a small number of discrete tasks, the responsibilities of the new model buying offices have expanded exponentially.

At the very moment when government is pushing importers to reduce buying office commissions, the new model buying office has an even stronger case to increase those commissions.

Government’s problem begins with the fundamental assumptions at the core of their argument:

  1. Every customer requires the same services from their agents or buying offices;
  2. Every agent and buying office provides the same services;
  3. All agents and buying offices perform equally well.

These assumptions have long dictated government’s strategy

Typically, the IRS provides data of independent agent commissions.  On the one hand they show that a number small independent agents will work on commissions of 4%-7%.  On the other hand, they will also show the giant independent agents such as Schmata & Wong works on a 6%-7% commission.  Since they assume that all customers require the same service; and every agent provides the same services; and everybody performs equally well; 4%-7% is by definition the fair commission, to which all buying offices must conform.

The IRS argument appears plausible provided it is limited to general considerations, which is why in the past the IRS has employed economists, accountants and other generalist professionals as their experts.  However, the moment we move from the general to the specific the argument falls apart.  No garmento will accept that all customers want identical services, or that all agents provide the same services.  Most importantly with the exception of those working in La-La Land, no professional will accept that everyone, anywhere provides the same level of service for anything.

Moving from the general to the specific creates a new paradigm.  The customer that wants less, pays less. The customer that wants more should be prepared to pay more provided:

  1. The agent or buying office provides the required more
  2.  The quality of the service is at a reasonable level.

At the same time, why should anyone accept that Schmata & Wong is the apotheosis of good service or fair value?  In our industry big does not always mean better.  There are large agents that while offering low rates of commission will at the same time add 20% to the FOB price. An agent can charge whatever they want, but by hiding their added profit in the FOB, they are forcing the their clients to pay an added 16% import duty on the agent’s hidden profit.   If you are a customer importing FOB $1 million, that hidden profit costs you an unnecessary $16,000 per year.  If you are importing FOB $1 billion, you are paying out an added $16,000,000 per year.

If the IRS wants to hold up Schmata & Wong as a paragon of fair commission, they will need more than their belief that by definition big is forever better.

Going forward discussions of fair commission will be company specific.

  • We want this
  • Our buying office provides this
  • They do a good very good job

They are therefore entitled to charge a higher commission.

Here comes the problem

If you are customer and want to show that your buying office is entitled to a higher commission because of added services, you must not only quantify the costs of those services as well as the benefits of those services, but also show that the numbers indeed add-up. You will need a detailed audit.

I have been doing this work for many years, and have written more than a few books on the subject.

I have helped to ensure that buying offices set their commissions fairly, to ensure that they make no more – or less – than unrelated agencies providing the same or similar services. I also help companies evaluate whether the prices they are being charged by agents are fair, taking into account the actual services rendered.  I have helped importers set up successful buying offices.  I have also helped importers close down unsuccessful buying offices.

As one of the world’s leading specialists in this area let me say this.

You will need an audit certified by a recognized and respected authority,

who is known to have a deep knowledge of the global garment industry

both on the customer and supplier sides

 

that same authority must also be know to have reputation solid enough

to ensure that the IRS cannot reject their finding out-of hand

Share
This entry was posted in Transfer Pricing. Bookmark the permalink.

2 Responses to Defending the New Model Buying Office

  1. Keerthi Abe says:

    An ultra modern Buying Office bent on sustainable buying in Sri Lanka measures the labour SMV(SAM) and Fabric consumption to the last two decimals. They educate the buying teams on Lean manufacturing practices too.

    • admin says:

      Dear Keerthi:

      I have no doubt that what you say is correct and has been correct for some years
      However, the new model buying office provides far more services. It is not about FOB
      Best
      DAVID

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>