EUROPE-WIDE Trends and Developments Contributed by: Munshya Mupela, Semra Altıntaş, Shirley Li and Joyce Lo, TPA Global
indicators of where profits, taxes and personnel are located. A value chain analysis (VCA) is an end-to-end assess - ment of a multinational group’s business activities, providing a holistic view of how functions interact, how value is created and how profit is allocated. It highlights the key value drivers of an MNE’s business and identifies each entity’s contribution to the value creation process. VCA can support transfer pricing by setting arm’s length prices, testing transaction out - comes and determining the contribution of each entity within the value chain. Performing a VCA is similar to solving a Rubik’s Cube: multiple sides must be aligned at once. Value creation within an MNE is embedded across operational and technical processes, requiring comprehensive con - sideration of all relevant drivers. Focusing on a single dimension, like looking at only one transfer pricing transaction, can distort the overall analysis. In the post-BEPS environment, transfer pricing docu - mentation must be consistent with the actual strategy, business model and governance. Each value driver should correspond to the way profits are allocated; otherwise, tax authorities may detect inconsistencies – just as misaligned sides of a Rubik’s Cube reveal leakages from different angles (see fig 2). Interaction of VCA and CbCR Alignment check and consistency test The pie charts in fig 3 show mismatches in four ratios from CbCR data. For example, Netherlands opera - tions make up just 10% of full-time equivalents (FTEs) but generate 43% of operating margin (OM) and 38% of gross margin (GM), while China has 54% of FTEs but only 7% of OM and 10% of GM. If profits were allocated solely by FTEs, these misalignments would require explanation to stakeholders like tax authori - ties. Qualitative and functional analysis VCA’s goal is to identify who performs which func - tions, who assumes which risks, who owns or uses which assets, and where DEMPE activities take place. This technique is mainly structural and qualitative. It answers questions such as:
• Which entity performs core functions? • Which entity contributes most to value creation? • Which jurisdictions have real economic substance? The link with CbCR lies in assessing whether jurisdic - tions that host high-value functions in the VCA also report commensurate profit levels in both private and public CbCR disclosures. If entities performing core strategic, DEMPE, or entrepreneurial functions exhibit low profitability or appear in low tax jurisdictions with - out substantive operations, the disparity highlights structural misalignment and potential BEPS risks. Thus, VCA uses CbCR as a substance check: the functional story must match the profit story. Quantitative allocation VCA quantifies value creation by linking key value drivers to the business processes that support them. It assigns weights to processes such as innovation, procurement, manufacturing, supply chain or sales, and then determines how much value each entity con - tributes. This technique is quantitative. It produces a theoretical profit allocation percentage based on actual value contributions across entities. The connection with CbCR is therefore numerical rath - er than structural. CbCR discloses the actual profit distribution across jurisdictions, enabling a direct comparison between theoretical value creation per - centages and reported outcomes. Significant gaps between these two distributions indicate misallocation of profit relative to economic contribution, prompt - ing heightened audit interest. Accordingly, VCA uses CbCR not only as a risk filter but also as a benchmark to test whether real world profit aligns with quantified value creation. Conclusion In the post-BEPS landscape, the VCA framework complements CbCR by providing the analytical lens needed to interpret jurisdiction-level profit disclo - sures. While CbCR reveals the actual distribution of revenues, profits, employees, and assets across countries, VCA explains whether such outcomes align with the underlying value-creating activities of the group. The interaction of the two therefore serves as a coherence test: profit should follow value crea - tion. Any divergence detected through CbCR can be
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