As demand for its cosmetic product lines increased, the company decided to expand sales and distribution into Europe, South and Central America, and China. But the company's dispersed manufacturing and sales operations soon brought tax issues to the forefront. For companies doing business abroad, tax implications can include the timing of US income tax, value added tax (VAT), and transfer pricing, among others.
For European sales, the manufacturer had established a complicated distribution network involving as many as 40 companies. Working with local advisors who lacked international experience, the manufacturer ultimately chose methods of distribution that proved highly inefficient from a tax perspective.
Moreover, the company's initial strategy to sell its products directly into China created a similarly inefficient tax structure. And in addition to tax issues, the company's method of establishing itself in multiple countries had complicated the financing of its various operations.
The company reached out to PwC for assistance in untangling its operations and simplifying its unwieldy tax structure.
An experienced international PwC team analyzed the company's flow of transactions and identified sources of undue complexity. "The existing transaction flow wasn't very tax efficient," explained PwC Private Company Services partner, Alexander Pan. "With different pieces in the US, China, and Europe, it was hard to manage."
To optimize tax efficiency, PwC helped the company establish new operational and legal structures in multiple locations. Much of the streamlining revolved around a newly established, centralized hub in Hong Kong—a single location from which raw materials could be ordered and manufacturing subcontracted from mainland China, while finished goods could be distributed to all of the company's markets: China, the US, and over a dozen European countries.
In addition to helping guide a new program of tax efficiencies, PwC also helped the manufacturer seek and secure local financing for its newly established and revamped operations outside the US. PwC also supported the company's local tax compliance and audit needs for the Hong Kong and China operations.
Impact on client’s business
Having gained new tax efficiencies and arranged necessary overseas financing, the company was better positioned to expand its global and domestic operations. This led not only to growth in the manufacturer's traditional product areas, but also a movement into new, higher-end licensed fashion product lines. Along the way, PwC has guided the company in structuring operations to comply with regulatory environments and optimize tax efficiency across the enterprise.
"The fact that we're a global firm helped us deliver the value our client needed: better tax results and the elimination of unnecessary tax exposure," said Pan.