What you need to know about Operational Transfer Pricing

Operational Transfer Pricing

A.???Introduction

Often MNE Groups face biggest challenges in ensuring that business model and transfer pricing policy translates into a simple intercompany agreement that is accurately reflected in the financial statements and statutory returns.?More often, the data we need for transfer pricing is not "tax sensitized" and is scattered and spread across disparate IT systems and databases. These challenges can be turned into an opportunity to create a pragmatic, user-friendly solution by designing and streamlining the business processes―and then automate them using an appropriate technology solution that fits the MNEs’ long term IT vision.

B.???What is Operational Transfer Pricing?

There is no legal definition of Operational Transfer Pricing (OTP), It simply means implementation of end-to-end process by ensuring that the transfer pricing policy is correctly reflected in the financial statements of MNE group. Effective transfer pricing policy implementation translates into operational and financial outcomes that align with the designed policy and, consequently, with the arm’s length standard. Furthermore, the right OTP assures that the agreed-upon transfer pricing policy is realistically working on the ground and across the group. In the transfer pricing lifecycle, OTP focuses on the price setting, monitoring and adjustments. OTP involves:

??????Mapping intercompany transactions and processes;

??????Establishing pricing conditions and calculation rules in/outside of ERPs;

??????Implementing TP calculation engines;

??????Automating TP related calculations and accounting entries (incl. invoicing);

??????Documenting internal controls; and

??????Standardising reporting/ analytics.

An OTP tool/ solution enables the automatic collection, validation, standardization, and categorization of system-based and non-system-sourced data in a single platform. The tool then analyses data to validate its alignment with the transfer pricing policy and generates an insightful dashboard for real-time monitoring of transfer pricing outcomes throughout the year.

C.???Common causes of OTP issues for MNEs

In addition to MNE group wanting to improve their overall tax processes, there are number of factors that trigger a more in-depth desire to improve OTP processes.

??????Tax audits raised up issues of incorrectly applied transfer pricing policies or business risk review identifies process/governance issues that lead to higher risk rating;

??????External stakeholders challenge the speed and accuracy of transfer pricing calculations and outcomes, particularly in regulated industries;

??????Statutory audit flags up issues with application of policies;

??????Tax departments need to meet a “do more with less” challenge from Finance/CFO;

??????Higher levels of assurance are required by the Board driven by new legal obligations (e.g., SAO, CCO);

??????Only one individual understanding OTP calculations or spreadsheets and concern that all that knowledge might be lost (key person risk).

D.???Why is OTP so important right now?

Companies are increasingly required to carry out scenario planning due to a dynamic tax regulatory environment. The ever-changing tax requirements and forensic approaches to local tax/TP audits have brought companies to consider separate tax data warehouses.

The OTP is increasingly becoming relevant for MNEs due to meeting of annual Base Erosion and profit shifting (BEPS) reporting requirements such as Country-by-Country Reporting requirements and transfer pricing documentation and filing (including electronic filing) requirements. As a result, the tax administration can now access tremendous amounts of MNEs’ data. With that, the focus of tax authorities has also shifted. They now evaluate whether the transfer pricing policies are accurately reflected in the financial results and are there an appropriate overall control framework to ensure that. However, historically, the ERP systems of MNEs are designed to generate data relating to business segments or for financial reporting purposes.

Therefore, they seldom provide the quality data required for transfer pricing analysis. The common observation is that the in-house tax team downloads the unstructured data from ERP systems and reworks it manually before sending it in a spreadsheet template to the headquarters or adviser for further processing. Handling a high volume of intercompany data on spreadsheets is not an intuitive process and is prone to human error. For these reasons, the OTP solution has become increasingly relevant for MNEs.

E.???Benefits of OTP to MNEs

Improving MNEs’ OTP framework has many benefits, such as:

??????It has the potential to significantly reduce operating costs, given a combination of factors, including; reduction in payroll due to lower manual effort required, lower indirect or second order tax effects, lower tax penalties due to increased accuracy, etc;

??????Automation significantly reduces manual efforts and process turnaround time, reduces the risk of manual errors through process controls and increases traceability and audit trails;

??????Clearly defined and established OTP processes more easily cope when transfer pricing team ?embers change. More impactful analytics and reporting through data visualisation;

??????Higher accuracy and reliability in external reporting;?and

??????Significant time saving which can be spent on tax strategy and analytics.

?F.???Conclusion

While the OTP tool/ software is helpful to ensure that the actual financial outcomes of the MNE Group are in sync with the designed transfer pricing policy, designing and implementing the OTP tool requires a time commitment from various stakeholders and entails a cost for the MNE Group. Hence, the tax/ transfer pricing team of the MNE Group should first take a consensus from all the relevant stakeholders and also necessary budget approvals. Further, a detailed evaluation should be done before investing in the OTP tool/ software. Typically, complex, high value and high-frequency transactions are suitable for considering OTP solutions.

?

?

?

?