Location Savings: The Profit Shift from Moving Functions

Definition

Location savings is the profit a group captures by relocating a function (or an intangible) to a lower-cost jurisdiction — the restructuring move’s profit shift: the function (the R&D, the services, the manufacturing, the headquarters function) moved from the higher-cost jurisdiction (the wage, regulatory and operating cost structure) to the lower-cost one, the cost of performing the function reduced, the [return] (/docs/glossary/routine-return) on the function increased — the profit the relocation generates. It is the [OECD Guidelines] (/docs/regulations/oecd) restructuring chapter’s standing scrutiny target, and the arm’s length question it raises is the price of the move: the entity losing the function is compensated for the function’s value it gave up (the functional value — and the intangible value where the IP moves: the [exit charge] (/docs/glossary/exit-charge) where the [CSA] (/docs/glossary/cost-sharing-arrangement) interest, the transfer price where the intangible is transferred), and the entity gaining the function pays the arm’s length price for the function it acquires. The OECD position: the location savings are legitimate (the group’s right to optimise its operations — the efficiency the relocation captures), but the relocation must be priced at the arm’s length — the function’s value (the functional value, the DEMPE the function carries) compensated to the relocating entity, the intangible’s value (where the IP moves) priced to the receiving entity. The [restructuring guide] (/docs/transactions/restructuring-tp) works the location savings as its standing profit-shift component — the [exit charge] (/docs/glossary/exit-charge) the IP interaction, the [location savings] the relocation interaction, the [thin capitalisation] (/docs/glossary/thin-capitalisation) the debt interaction — the restructuring trinity the guide’s structure.

Location savings, in one computation:
  1. The relocation (the function moved — the higher-cost to the lower-cost jurisdiction)
  2. The cost reduction (the function’s cost reduced — the wage, regulatory, operating difference)
  3. The price of the move (the arm’s length price — the function’s value, the intangible’s value where the IP moves)
  4. The net savings (the cost reduction minus the price paid — the profit the relocation captures)

The element	The content
The relocation	The function (the R&D, the services, the manufacturing, the headquarters function) moved from the higher-cost to the lower-cost jurisdiction (the restructuring event)
The cost reduction	The function’s cost reduced (the wage, regulatory and operating cost structure) — the return on the function increased
The price of the move	The arm’s length price — the function’s value (the functional value, the DEMPE it carries); the intangible’s value where the IP moves (the exit charge the CSA interest, the transfer price the intangible)
The net savings	The cost reduction minus the price paid — the profit the relocation captures, the OECD scrutiny target

The working read (the restructuring guide): the location savings is the restructuring move’s profit shift — the function relocated, the cost reduced, the return increased, the profit generated. The OECD’s position is the two-part one: the relocation is legitimate (the group’s right to optimise — the efficiency the move captures, the business rationale documented), but the price is the arm’s length one (the function’s value compensated to the entity that loses it, the intangible’s value priced where the IP moves — the [functional analysis] (/docs/fundamentals/functional-analysis) and the [DEMPE] (/docs/glossary/dempe) analysis the value’s determination, the intangibles guide the valuation methods). The scrutiny target is the unpriced or underpriced relocation (the function moved, the value not compensated — the profit shift the arm’s length violation the TPO or the authority examines), and the documentation (the restructuring rationale — the business reason for the move; the price analysis — the function’s value, the DEMPE determination, the arm’s length support; the compensation — the arm’s length analysis) is the [defensibility] (/docs/benchmarking/defending-accept-reject). The DEMPE interaction: the function relocated carries its DEMPE — the function’s DEMPE is the value the relocation’s price rests on (the Development/Enhancement the function performs, the Maintenance/Protection/ Exploitation it supports — the functional value’s determination, the arm’s length price’s foundation).

Example

A group relocates its customer-support function (the services function — the FAR the support operations) from the US entity (higher-cost jurisdiction — the wage structure, the regulatory cost) to the Indian entity (lower-cost jurisdiction). The relocation generates the location savings:

The element	The treatment
The relocation	The customer-support function moved — US to India (the restructuring event; the business rationale documented — the cost optimisation, the efficiency the move captures)
The cost reduction	The function’s cost reduced (the wage difference, the operating cost structure) — the return on the function increased
The price of the move	The arm’s length price of the function — the functional value (the DEMPE the support operations carry: the going-concern value of the customer relationships, the process knowledge, the trained team) — the US entity compensated for the function it gave up; the Indian entity pays the arm’s length price for the function it acquires
The net savings	The cost reduction minus the price paid — the profit the relocation captures (the OECD scrutiny target — the price, not the move, examined)

The documentation (the restructuring rationale — the business reason for the move; the price analysis — the functional value, the DEMPE determination, the arm’s length support; the compensation — the arm’s length analysis) is the defensibility — the location savings the restructuring the documentation on the record, in the Local File for the year of the move.

See also

• Group Restructuring TP
• Exit Charge
• DEMPE
• Intangibles TP Guide

FAQ

Are location savings legitimate — the OECD position? Yes — the OECD position is that the relocation is legitimate (the group’s right to optimise its operations — the efficiency the relocation captures, the cost reduction the move generates), but the relocation must be priced at the arm’s length: the function’s value (the functional value the compensation for the value given up by the relocating entity), the intangible’s value where the IP moves (the [exit charge] (/docs/glossary/exit-charge), the transfer price). The scrutiny target is the unpriced or underpriced relocation (the function moved, the value not compensated — the profit shift the arm’s length violation the TPO / the authority scrutinises) — the documentation (the rationale, the price analysis, the compensation support) is the [defensibility] (/docs/benchmarking/defending-accept-reject), and the [restructuring guide] (/docs/transactions/restructuring-tp) carries the two-part position (the legitimacy of the move, the arm’s length of the price).

What is the price of the relocation — the function’s value? The arm’s length price of the function relocated: the functional value (the DEMPE the function carries — the Development, Enhancement, Maintenance, Protection and Exploitation the function performs/supports, the DEMPE analysis the value’s determination) and, where the IP moves, the intangible’s value (the [exit charge] (/docs/glossary/exit-charge) the CSA interest, the transfer price the intangible transferred, the valuation the defensibility point). The price is the compensation the relocating entity receives (the function’s value, the value given up compensated) and the price the receiving entity pays (the function’s value, the value acquired priced) — the arm’s length price the restructuring the documentation on the record, the [intangibles guide] (/docs/transactions/intangibles-tp) the valuation methods (the income, market and cost approaches).

How do location savings differ from the exit charge? The transaction and the component: the exit charge is the arm’s length price of the IP interest the exiting CSA participant’s contribution and cost share entitle it to (the CSA exit — the interest priced, the valuation the defensibility); the location savings is the profit the function’s relocation to the lower-cost jurisdiction captures (the cost reduction the return increase, the price of the move the function’s value — the net of the cost reduction and the price paid). The interaction: the exit often accompanies the relocation (the CSA participant leaving, the development function relocated) — the [restructuring guide] (/docs/transactions/restructuring-tp) works both (the exit charge the IP interest priced, the location savings the relocation interaction analysed — the restructuring trinity the guide’s structure), and the documentation carries both analyses on the record.