Term project
Term Project Alternative Group: Safeway Controlled entities: Safeway Inc. (US) and Canada Safeway Controlled transaction: The provision of services by Safeway Inc. to Canada Safeway. Assume that these services consist of routine “back office” management and administrative services such as assistance with tax matters, management of real estate properties, provision of staffing and recruiting services, coordination of legal affairs, etc. Services Transfer Price Functional analysis: Safeway, Inc. performs several administrative services for the Safeway group. Safeway Inc. does not perform any other manufacturing or distribution functions. Canada Safeway operates grocery stores in Canada. Canada Safeway does not provide services to any other internal or external companies. Safeway, Inc. incurs minimal risks in the provision of services to Canada Safeway. As a service provide, Safeway, Inc. operates in a competitive market. As a grocery store operator, Canada Safeway operates in a monopolistically competitive market. Method: Use the Comparable Profits Method (CPM). The services provided by Safeway, Inc. do not fall under the “white list.” Tested party: Safeway, Inc. Profit level indicator: Use the Net Cost Plus/Total Cost Plus Ratio, which is equal to Operating Profit/(Operating Expenses + Cost of Goods Sold). Part 4 Alternative. Answer this question: Why is this profit level indicator better than the Operating Margin=Operating earnings/Revenue? Hint: Could Operating Margin be biased? Part 5 Alternative Search for comparable companies: Use Compustat to search for the following SIC codes:

• 7361 – Employment Agencies; • 7363 – Help Supply Services; • 8721 – Accounting, Auditing, and Bookkeeping Services; • 8741 – Management Services; • 8742 – Management Consulting Services; and, • 8748 – Business Consulting Services, Not Elsewhere Classified.

Safeway, Inc. (US) Canada Safeway (Canada)

Follow these steps: 1. Login to https://wrds-www.wharton.upenn.edu using: Username: tpricing Password: bostoncollegetp2020 2. Search data for 2017, 2018 and 2019. How many companies do you find? 2. Investigate each company carefully and discard those that:

• Engaged in significant manufacturing activity • Engaged in significantly different activities • Served a narrow client base • Provided services with very different market characteristics • Operated in limited or different geographic markets • Undertook significant research and development • Underwent a major disruption to the normal course of business (i.e., bankruptcy,

merger, significant acquisition of a company which engages in different activities, etc.)

• Lacked sufficient data; or, • Had significant related party transactions

Question: How many companies do you end up with? You should end up with no more than 20. 3. Build the profit level indicator selected above for each company and year 4. Calculate the three-year average for each company 5. Build the interquartile range Part 6 Alternative. Answer this question: What is your transfer pricing recommendation for Safeway, Inc.?