Looking at the value chain of a retail company, collecting and processing data has already been a crucial part of primary activities for some time. Data on the global inventory, for instance, is collected real time to adjust the inbound logistics and manufacturing activities. Collecting and processing data from consumers, however, is becoming increasingly important, because of the possibilities such as targeted advertising, identifying market trends, influencing customer behaviour and price differentiation (i.e. setting different prices for the same product for different (groups of) customers).
A retail company using the omnichannel strategy typically collects data from customer interactions on a real time basis. This happens both actively and passively. Active interaction refers to inter alia profile creation, shopping, saving items in the check-out basket and providing product reviews on the website or mobile app. Passive interaction refers to inter alia the customer’s clickstream, browser history, geographic location and information on linked social media accounts. This information is used by retailers to tailor their advertising to the behaviour of an individual customer to influence that customer’s decision making, even in real time when the customer is browsing online or in-store.
This demonstrates that customer data can be an “intangible” within the meaning of the OCED transfer pricing guidelines, as “the word “intangible” is intended to address something which is not a physical asset or a financial asset, which is capable of being owned or controlled for use in commercial activities, and whose use or transfer would be compensated had it occurred in a transaction between independent parties in comparable circumstances”.1
Since customer data is a key value driver for the retailer, the entitlement to this intangible should be determined for transfer pricing purposes, because multiple parties within the retailer’s group will contribute to this intangible in one way or another. In accordance with the OECD transfer pricing guidelines, the entitlement should be determined on the basis of each party’s functions performed, risks assumed and assets used in the development, enhancement, maintenance, protection and exploitation (DEMPE) of the intangible.
The data can be collected using the retailer’s website and mobile app, but also via feedback systems that are located in brand stores. Subsequently, the data is aggregated and analysed by hand, or algorithms designed to analyse the data. Then the usage of the data is determined: targeted advertising and price differentiation are possible uses of the analysed customer data. During this entire process, the customer data must be stored and protected in accordance with applicable international data protection regulations.
If the retailer is organised as a classic principal-limited risk distributor (LRD) model, the major DEMPE functions, risks and assets are allocable to the principal, whilst the LRD’s functions, risks and assets are limited. Consequently, the LRDs should typically earn a limited remuneration based on the Transactional Net Margin Method (TNMM), with the principal realising all residual profits.
However, there are jurisdictions (such as France and Germany) that are of the opinion that more value should be attributable to the LRD, because the customer in the LRD´s jurisdiction provides the value to the intangible.