In a globalized supply chain environment, many multinational enterprises (MNEs) are increasingly setting up centralized procurement hubs in low-tax jurisdictions to streamline sourcing, optimize purchase volumes and achieve cost efficiency. While this model delivers commercial advantages, it also triggers complex transfer pricing issues, particularly around the allocation of functions, assets and risks (FAR) and the associated arm’s length remuneration.
This article explores the transfer pricing implications of centralized procurement models and outlines how businesses can structure them effectively to mitigate tax risks.
A centralized procurement hub (CPH) is a group entity responsible for acquiring goods or services for related parties across multiple jurisdictions. Key responsibilities often include:
Depending on its design, the hub may act as:
While the hub may not take physical possession of the goods, it often plays a key role in price negotiation and contract management.
The OECD Transfer Pricing Guidelines require that profits be aligned with value creation. If procurement hubs merely coordinate purchases but do not undertake meaningful commercial risk, they may not be entitled to earn significant margins. Tax authorities scrutinize whether the hub truly performs economically significant functions and assumes relevant risks. A “paper company” with limited substance may not justify a significant share of the group’s profit.
When sourcing from low-cost jurisdictions, tax authorities may argue that the cost savings should be attributed to the operating entities rather than the procurement hub unless the hub demonstrably adds value.
Selecting the appropriate method—often a Transactional Net Margin Method (TNMM) or a Cost-Plus Method—can be contentious. Applying a resale price method may also be considered if the hub bears inventory risk and performs distribution functions.
Post-BEPS (Base Erosion and Profit Shifting), tax administrations place more emphasis on substance. The OECD guidelines (2017 and 2022 updates) reinforce that mere contractual risk assumption does not justify profits unless the entity also manages those risks.
Tax authorities in countries like India, Australia and Germany have challenged procurement hubs by:
Li & Fung India Pvt Ltd v. CIT (2014)—Sourcing Hub Recharacterization
Decision by the Tribunal and the Delhi High Court
In a landmark Danish case, the court rejected a procurement hub’s cost-plus margin on the grounds that it didn’t bear sufficient risk or perform critical functions. The tax authority reassessed the profits, allocating higher income to the operationally active group entities.
Ampol’s AUD 157 Million Settlement with the Australian Tax Office
Apple’s Irish Structure (EU Commission):
Though not strictly a procurement hub case, it underscored the broader principle that profit must follow value creation.
Risk Mitigation Strategies
Benchmarking
Identify appropriate comparables for limited-risk procurement services (often logistics or commissionaire companies) rather than fully-fledged traders.
TP Documentation
Robust Local File and Master File documentation should highlight the rationale, economic benefit and pricing method of the centralized procurement structure.
The centralized procurement model is strategically beneficial—but it’s a transfer pricing minefield if not designed and documented carefully. The post-BEPS world demands alignment between profits and real economic activity. As the Ampol case shows, even sophisticated groups are not immune from recharacterization and massive tax adjustments.
MNEs must treat procurement hubs as more than just cost-saving tools—these hubs must stand up to transfer pricing scrutiny.
