How do you measure and demonstrate the value added by your transfer pricing function?

Not only transfer pricing contributes to general strategy, especially in the light of Pillar II, but it is an important element in the multinational's commitment to tax transparency. If a multinational wants to be truly transparent and sees tax as a way to give back the society and highlight their CSR commitment, it is crucial for them to look at transfer pricing as a part of the responsible tax strategy framework. Transfer pricing is then crucial to get right in order to be a socially responsible enterprise as well as stay committed to ESG considerations.

Measuring and demonstrating the value added by the transfer pricing function involves aligning with business objectives, quantifying tax savings, emphasizing documentation and compliance, showcasing risk mitigation efforts, and highlighting the function's contribution to dispute resolution, communication, training, and continuous improvement. Combining quantitative metrics with qualitative evidence strengthens the case for the strategic importance of the transfer pricing function within the organization.Here are key steps: Align with Business Objectives: Quantify Tax Savings and Efficiencies: Documentation and Compliance: Risk Mitigation: Benchmarking and Best Practices: Efficient Resource Utilization: Value in Dispute Resolution:

Strategic transfer pricing aligns with business goals, managing tax risks and stakeholder expectations. Key to success are clear value drivers, robust data analysis, and effective communication. Staying abreast of global tax reforms and digital impacts is crucial. Expert insights offer practical perspectives, essential for finance professionals and corporate strategists in navigating this complex field.

Medir e demonstrar valor agregado na fun??o de Pre?os de Transferência exige uma abordagem estratégica e orientada para resultados. Primeiro, garantimos a conformidade fiscal e mitigamos riscos, evitando penalidades e prejuízos financeiros. Além disso, otimizamos a carga tributária global, contribuindo diretamente para o aumento do lucro líquido. Implementamos práticas que alinham os pre?os de transferência com a estratégia de negócios, promovendo eficiência operacional e transparência. O valor é mensurado por meio de relatórios precisos, auditorias bem-sucedidas e o reconhecimento de economias fiscais relevantes.

Aligning the transfer pricing function with overall business strategy is pivotal for measuring and showcasing its value. This alignment ensures that the transfer pricing approach supports key strategic decisions, including market entry, product development, supply chain optimization, and mergers and acquisitions. Furthermore, it plays a vital role in managing tax risks, meeting compliance obligations, and meeting stakeholder expectations. The symbiotic relationship between transfer pricing and business strategy guarantees that the function not only fulfills regulatory requirements but actively contributes to value creation and sustains a competitive advantage in the dynamic business landscape.

Defining value drivers and indicators is crucial for assessing the impact of the transfer pricing function on business performance. Value drivers, encompassing factors like market share, customer satisfaction, innovation, and operational efficiency, directly influence profitability and growth potential. Correspondingly, value indicators, including revenue, margin, return on investment, and tax rate, serve as metrics measuring the outcomes of these drivers. This strategic approach enables the establishment of clear criteria for evaluating and benchmarking the effectiveness of the transfer pricing function, aligning it with broader business objectives and ensuring a comprehensive understanding of its contribution to overall performance.

The conclusions drawn from this step will either validate the process followed in step 1 and 2 or else it will indicate a deficiency in the overall transfer pricing model which needs a fix. The only cases which will not cover under the above outlined ambit would be out-lieres of the industry or from a industry which lacks data.

Ideally, this step goes further than collecting and analyzing data that support the entity's value drivers. It involves collecting and analyzing data for companies / transactions with similar value drivers as that of the transaction in question. And validating or improvising the benchmark established in the earlier step to ensure that it is in line with industry standards.

In an ideal world, a business manager would be able to identify all of its companies value drivers. ?Ideal“ because due to the diverse duties of a prudent and ordinary business manager as stipulated in the context of the arm‘s length principle cannot have a final overview of activities performed of a grown company in all details. Also the interdependence between functions, different entities, central service providers, etc can make such an assessment or estimate a very complex exercise. Since different functions in an multinational group assess/assume their value adding differently, I always use the mean of multiple interviews with different functions and tiers. This way, you‘ll be able to identify differences and to address these.

I consider this step to be the most crucial in all transfer pricing work. As a specialist with over 20 years of experience in the field, I can attest that conducting a milestone meeting is when we have a close approach with our clients. During this process, we not only solve problems but also aim to minimize risks and provide comprehensive solutions that enhance fiscal efficiency. Restricting oneself to solely an economic and compliance approach is a serious mistake; we must focus on planning efficiently and strategically aligning ourselves with our clients' objectives. This alignment ensures that our fiscal strategies not only comply with regulations but also drive long-term success for the company.

The communication of (draft) results is of crucial importance as it allows to address potential differences in the outcome of eg interviews and data or between the assessments of different seniority levels. Most importantly, communication is necessary to identify and perform appropriate measures from the observations made. All steps that are made in the context of identifying the value creation, the business model and its allocation of functions performed, risks assumed and assets employed are ultimately made to chose the best suitable transfer pricing method to remunerate the involved transaction parties for their contribution. This will not happen without making informed decisions.

Depending on the level of risk-aversion and the tendency to be fully compliant, tax payers are dealing with the determination of transfer prices and an appropriate transfer pricing landscape in different stages of their growth and international expansion. Depending on the business model itself, this can range from rather quick (IT-start-ups or digital business models that work without regional boundaries) to regular speed when considering a typical goods related business model that includes production, distribution, etc. As a general rule, the earlier you consider TP aspects and have access to early stage pragmatic advise (eg a boutique consultancy) the better you can avoid path dependencies that cost real money when challenged later on.