Travelling Route 0 & 1 - Digital Transformation & Technology in Transfer Pricing (TP)

Whenever a tax or TP department is embarking on or moving along on its digitalization journey, a variety of challenges emerge. These must be tackled with consideration, to establish robust business cases provided to management for decision-making, to obtain necessary funding for the digitalization project(s). Financial and people resources in departments involved are scarce. Consequently, such business cases will have to compete with other IT projects in the company.

Current trends in the IT market for TP are linked to the areas of:

1. documentation/ content generation tools.
2. operational TP/ intercompany price setting software and other
3. data analytics and/or reporting and visualization tools (e.g., for benchmarking, value chain analysis, CbCR, or other specific applications).

Such specialized software solutions/ tools may either be running on integrated IT platforms (i.e., several applications on one platform, drawing on one comprehensive data source or “data lake”) or on a standalone basis (i.e., multiple individual systems, drawing on the same – or on different data sources).

When tax departments or businesses consider the adoption of tax or other IT technology, the following areas need to be addressed:

• Data availability and – quality.
• IT strategy- and IT infrastructure-fit of the new IT application identified.
• Make or buy decision and corresponding resources’ need and availability.
• Internal financial data security and corresponding compliance requirements.
• Personal data privacy and confidentiality requirements (if applicable).
• Training – and employee up-skilling needs to cope with change.

Inhouse project teams need to be established and engaged and senior management needs to be convinced that the tax/ TP experts have provided the right digitalization solution for the problem at hand.

With a view to these aspects, Jenny Himsley (ARKK), Shan Sun (Deliveroo), Dr. Markus Schneider (Bayer) and myself exchanged different ideas, viewpoints, and experiences on our TP Minds 2024 breakout panel Tax Transformation & Technology in London last week.

Among other topics, we discussed whether and to what extent Pillar 2 or other regulatory developments in tax/ TP are driving the adoption of technology by the tax function, what advantages the incorporation of tax technology into the tax function may have (potentially beyond compliance obligation fulfillment), or how a successful business case for tax technology may be built.

Going for an external IT solution creates dependency risks, while the alternative, i.e., reliance on a specialized self-developed (inhouse) IT solution may turn into a frustrating and long-drawn experience, if the “language barrier” between tax - and IT specialists cannot be overcome:

In theory, (almost) everything seems possible in IT system- or tool development from the perspective of an IT expert – provided the prospective user can accurately describe all requirements of such system or tool development in detail!

In practice, however, the corresponding gap can lead to budget - and timing overrun in IT projects.

Beyond the inhouse tax technology perspective, tax authorities in countries become increasingly proficient in “connecting the dots.” They are on their way to analyze data and information provided by corporate taxpayers more efficiently and effectively with the help of IT tools, to identify tax/ TP risks, to find and challenge inconsistencies in taxpayers’ documentation provided, and to ask more specific questions for additional information and explanation in a tax/ TP audit, for example.

Finally, it is (or: it became) obvious for the panelists and their audience that each company (and tax administration) needs to find its own way and pace on the route to technology adoption in tax and transfer pricing.

This evolutionary process is bound to last and so our journey continues … ??