## **Learning Outcomes**

After reading this article, you will be able to explain how global value chains challenge conventional performance measurement, describe the impact of international taxation and transfer pricing, identify performance evaluation issues for multinational entities, and apply suitable metrics and approaches to assess divisional and group performance across countries. You will also understand the risks and management considerations presented by differing national tax rates and regulations.

## **ACCA Advanced Performance Management (APM) Syllabus**

For ACCA Advanced Performance Management (APM), you are required to understand how international operations influence performance measurement and management in global value chains. This includes the effect of differing tax regimes, transfer pricing policies, and the evaluation of divisional and group performance. Focus your revision on:

- The need for performance measures tailored to multinational and divisional structures
- The role and implications of transfer pricing in multinational companies
- How varying tax rates across countries impact reported performance
- Performance management complications arising from global value chains
- Risks of dysfunctional or unintended results due to international regulations and tax differences

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which of the following is a direct consequence of setting a transfer price below market rates for cross-border internal sales?
   a) Enhanced group profit in all cases  
   b) Possible shifting of profits to low-tax jurisdictions  
   c) Elimination of all tax liabilities  
   d) No impact on divisional performance indicators

2. True or false? Aligning transfer prices with local tax rates always leads to maximized group performance.

3. List two main risks when evaluating the financial performance of divisions operating under different international tax regimes.

4. Briefly explain why transfer pricing policies are important in global value chain performance management.

## **Introduction**

Many organisations now operate global value chains, with divisions or subsidiaries engaged in different stages of product or service delivery, often across multiple countries. This international context introduces complex challenges for performance measurement, especially around transfer pricing, taxation, and fair divisional comparison. For ACCA Advanced Performance Management (APM), you must be able to evaluate performance where international regulations, tax rates, and management objectives are not consistent or transparent.

> **Key Term: global value chain**
> An interconnected set of activities spread across multiple countries where a product or service is created, modified, and delivered, often involving several linked organisational units.
>
> **Key Term: transfer pricing**
> The setting of prices for goods, services, or intangibles transferred internally between divisions or subsidiaries, often across international borders, within the same group.

## **Performance Measurement Challenges in Global Value Chains**

Measuring performance in multinational environments goes beyond standard profit indicators. Differences in accounting rules, currency, culture, legislation, and especially tax rates can distort reported results and lead to suboptimal or even unethical management behaviour.

### Global Divisions and Performance Comparison

Assessment of divisional performance (such as ROI, RI, EVA™) is often complicated by:

- Fluctuating exchange rates impacting reported profits and investment values
- Varying tax rates and rules affecting after-tax performance
- Different cost structures or resource availabilities
- Inconsistent local regulations around accounting, tax, and reporting

Performance metrics must be interpreted with care, recognizing these variations.

> **Key Term: performance metric**
> A quantitative measure (such as ROI, margin, or EVA) used to evaluate how efficiently or effectively a division or company achieves its objectives.

### Transfer Pricing and Taxation

Transfer pricing policies can dramatically influence divisional profits and group-wide tax liabilities:

- Divisions selling goods/services internally may set transfer prices above or below market value
- Companies sometimes set internal transfer prices low to shift profit from high-tax to low-tax countries, reducing the overall tax bill
- Tax authorities require 'arm’s length' pricing, but application and enforcement vary
- Changing transfer prices can encourage or discourage divisional managers, and may result in dysfunctional behaviour

### **Worked Example 1.1**

A multinational group has two divisions. Division X (in Country A, 40% tax rate) produces goods sold to Division Y (in Country B, 15% tax rate). The internal transfer price is set at \$80/unit, while the open market price is \$100/unit. Division X produces and sells 2,000 units to Division Y. All goods are eventually sold externally for \$120/unit by Division Y, with no further costs incurred.

**Question:** What are the effects on group taxable profit and individual division performance if the transfer price is set at \$80 instead of \$100?

> **Answer:**
> By setting a transfer price below market, more profit appears in Division Y (the low-tax country), and less in Division X (the high-tax country). Group-wide tax paid reduces — saving the group money. However, Division X's reported profit and ROI decline, possibly demotivating its management. Tax authorities may challenge artificially low transfer prices as non-arm’s length.

### Complications of Local Taxation

- Some countries limit profit-shifting by requiring documentation and justification for transfer prices
- Disagreements between tax authorities may result in double taxation or penalties
- Payment restrictions (e.g., blocked remittances) or currency controls further hinder free allocation of profits

> **Key Term: arm’s length principle**
> The requirement that transfer prices between related companies reflect the price that would be charged between unrelated parties in the open market.

## **Managing International Performance Risks**

Designing effective performance measurement systems for global value chains requires:

- Consistent, group-wide definitions of performance metrics adjusted for local differences
- Education of divisional managers about the impact of transfer pricing and tax on their results
- Careful balance between global optimization (minimizing tax, maximizing total performance) and local accountability (fairly rewarding and evaluating divisions)
- Awareness of the risk of dysfunctional decisions—such as divisions refusing profitable internal trades or manipulating results to hit targets.

### **Worked Example 1.2**

A company sets a divisional manager bonus based on pre-tax profit, ignoring the effects of local tax rates. Division Z (in a high-tax country) invests in efficiency improvements. However, after-tax, the group gets little benefit compared to a similar investment in a low-tax division. Division Z's manager is discouraged, and future investments are abandoned.

**Question:** What would be a better approach to incentive and performance measurement in this scenario?

> **Answer:**
> Incentives should consider after-tax benefits to the group as a whole, not just pre-tax divisional performance. Adjusting for tax, or using measures like EVA, aligns management behaviour with overall group objectives.

### **Exam Warning**

Misinterpreting group performance due to transfer pricing or tax adjustments is a frequent pitfall in APM exam scenarios. Always clarify whether you are being asked for group-wide results or divisional results, and adjust metrics accordingly.

## **Summary**

Measuring performance across global value chains must take into account differing tax environments, transfer pricing strategies, and local regulations. Failure to do so can lead to unfair divisional comparisons, distorted group profit, tax inefficiency, and management conflicts. The arm’s length principle and clear, transparent performance metrics are core to ensuring group objectives remain aligned.

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define global value chain, transfer pricing, and the arm’s length principle in the multinational context
- Explain how varying tax regimes complicate divisional and group performance assessment
- Identify the risks and management actions needed to avoid dysfunctional results from inconsistent performance measurement
- Apply suitable metrics and adjustments when comparing or incentivizing divisions across countries
- Recognize the arm’s length principle and regulatory considerations for international transfer pricing

## **Key Terms and Concepts**

- global value chain
- transfer pricing
- performance metric
- arm’s length principle

International context and taxation - Performance measurement for global value chains