For Companies Automating Their Transfer Pricing Processes, Navigating the Challenges and Risks is a Journey
Companies face three main challenges when preparing to implement operational transfer pricing (OTP) technology—finance system and data issues, accountability questions, and continually changing compliance requirements.
That is the key takeaway from a recent Thomson Reuters Tax & Tech Talks podcast episode that featured OTP specialists from KPMG.
“Those three challenges are driving . . . a new view of operational transfer pricing,” said Andrea Tolley, a partner at KPMG UK.
1. Finance Systems & Data
Corporate finance systems often are not designed to accommodate tax requirements and are ill-suited for managing OTP, Tolley said. “The systems aren’t. . . designed for the type of data and the level of data you’re going to need to do your operational transfer pricing,” she said.
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KPMG Transfer Pricing Director Meenakshi Iyer noted that OTP data often are not harmonized across large multinational companies. They operate multiple finance systems that produce data and reports in disparate formats. “Someone needs to figure out the best way to harmonize the data and then apply the transfer pricing policies. That is another pervasive challenge.”
Many firms have not advanced beyond the use of Excel spreadsheets to manage OTP, Tolley said, “which is a huge risk for any organization because it’s a significant reliance on the technical skill and the knowledge of the individual to run and manage that Excel spreadsheet.”
“If you use Excel, you’re not alone,” she said. “Lots of big companies are still using Excel as the primary method. That is slightly changing, but ‘changing to what’ is the big question.”
2. Who’s Accountable?
“The second key issue emerging for operational transfer pricing is the lack of accountability for the actual financials,” Tolley said. Corporate Finance Departments are focusing more on management reporting and less on statutory reporting or tax reporting, she said. “That’s leaving a huge gap with the legal entity accounts and who’s responsible for those financials—not necessarily the reporting of those financials, but who actually knows what all the numbers are, where they come from, are they accurately recorded, and can you forecast that information?”
Iyer added that the accountability issue comes down to actual, tactical questions. “Does the actual calculation or the execution of the transfer pricing sit within Finance, or does it sit within Tax, or does it sit within a separate department, which is called the Operational Transfer Pricing Department?”
Another challenge for corporate transfer pricing specialists is the increased complexity reflected in recent and anticipated OTP guidance from the OECD. “They’re pushing for much more complex transfer pricing, just even around basic transactions like management services,” Tolley noted. “And just trying to manage all of those things and then do your end-of-year reporting is quite difficult for any Tax Department to manage.”
As transfer pricing policies become more complex, Iyer said, the volume of data increases and burdens the Tax Department. “They have to provide evidence as to the origination of the data and how it results in the final legal entity results,” she explained. “All of this adds to the complexity of what the Tax Department has to deal with.”
4. Making it Work
Automated solutions can help companies overcome these OTP challenges—and these preliminary steps will help ensure technology adoption is successful.
- Transparency and Centralization—Within a company, “there are different stakeholders involved in the operational transfer pricing process,” said Isabel Becerra-Foster, an OTP specialist at Thomson Reuters. “So, for example, the transfer pricing manager, being part of the tax team, might want to set the transfer pricing policy in a certain way, but it’s ultimately Finance that will be executing that policy.”
This disconnect means transfer pricing managers and other personnel may not have visibility into workflow processes and result in costly errors. Companies can prevent this problem by adjusting and clarifying roles, responsibilities, and workflow procedures.
A related issue, she said, is a decentralized structure in which individuals apply for the OTP policy work in different offices that manage various types of transactions. “When a multinational corporation is looking to automate operational transfer pricing,” she said, “centralizing certain functions is a good starting point.”
- Piggybacking on a Finance System Upgrade—Iyer recommended transfer pricing professionals on the road to automation stay informed of plans to upgrade their companies’ financial system—and piggyback on existing projects when the opportunity arises. For example, ensure OTP requirements and data needs are priorities when your company implements a new Enterprise Resource Planning system. “You can get easier approval and a reasonable amount of budget to do something worthwhile,” she said.
- Be Methodical—”You don’t have to do everything at once,” Tolley said, even though tax authorities are advancing their digital capabilities. “They want to pull the information directly from your systems, so there’s a fear that you need to get the system up to speed today. The journey for systems is a very long one. You can put in a short-term solution to solve your problem now while still considering what you’re going to do long term. And your long-term solution may look very different from what you’re going to do with the next few years. “
Becerra-Foster agreed. “Transfer pricing can change over time. Businesses change over time, so policies need to adapt over time, as well,” she said. “When thinking about that journey, think about a system that can adapt to those changes, has that ability to manage the data required, and has that audit trail that can help you when the tax audit comes.”
Manage every step of the transfer pricing process with confidence and build a knowledge base that scales with your business. Learn more about Operational Transfer Pricing.
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