Part 1 - AL-Tax

Chapter 7unit of the multinational group. The ‘entrepreneur’ seeks to coordinate uncertaintyin such a way that damaging occurrences are averted. An insurance coverage onuncertain damage would sap the company’s profit. Hence, internal coordinationof uncertainty is preferred over external insurance coverage. The entrepreneur isthis unit within the group’s value chain who can be characterized with transactionalattributes such as uncertainty (instead of risk), low frequency (instead ofhigh), specific asset deployment (instead of nonspecific), and low measurabilityof effort spent by individuals (instead of easy measurability).From a business decision-making perspective, the term ‘entrepreneur’ is closelyrelated to the terms ‘investment competence’ and ‘accountability’. Investment competencemeans that this business unit within the multinational group is authorizedto make investment decisions. This decision-making freedom might be budgeted toa certain level. However, what is different between a ‘profit center’ and an ‘investmentcenter’ with investment competence is the authorization of the latter to makesuch decisions. If the chosen investment strategy fails, it is this unit (and its managers)who will be accountable. This unit’s capital is then deployed to meet liabilityclaims. Hence, such a unit performs as a residual claimant, i.e. it receives the residualafter having remunerated other factor deployments and other liability claims.7.4 Classification of companiesWith the economics of function and risk analysis in hand, we now shift attentionto conducting an economically sound arm’s length analysis. The new GermanAdministrative Principles offer an interesting concept which is worth introducing.In Paragraph 3.4.10.2, it is stated that the type of arm’s length analysisdepends upon the company type with respect to the function and risk profile.Hence, the analysis of the company type precedes the arm’s length analysis. Forthe analysis of company type, we use the term function and risk analysis ‘in thebroader sense’, which is to establish in principle the pattern of functions performed,risks borne, and assets deployed. In contrast, the function and risk analysis‘in the narrow sense’ provides an information profile on the adequate size ofprofit components which are to be allocated to business units (e.g. cost center,profit center, investment center) along the value chains of the multinationalgroup (cf. Paragraph 3.4.11.5; also see Brem and Tucha, 2005). This latter typeof function and risk analysis is closely related to valuation aspects where thetransfer price, or the profit margin of such a transaction, is to be assessed by itsmonetary size.159