About Operational Transfer Pricing
What is Operational Transfer Pricing all about?
How does it connect to the classic tax function domains like TP planning, TP documentation, and TP controversy?
Operational Transfer Pricing management
The core task of any Operational Transfer Pricing function consists of the implementation and continuous monitoring of Transfer Pricing policies and rules at a transactional level for all MNE group companies.
OTP management is responsible for the initial setting and updating of Transfer Prices including the data maintenance in the systems of all group companies trading with each other. In addition, it is responsible for the active and continuous monitoring of the entities’ financial results, turning the knowledge gained from variance analysis into corrective measures to ensure an arm’s length pricing and corresponding remuneration.
Finally, any Transfer Pricing analysis by the tax function is supported through adequate data provision, applying reliable TP reporting systems that have to be set up and customized individually from a technical perspective.
The OECD’s Base Erosion and Profit Shifting (BEPS) initiative
The BEPS initiative is one of the most prominent developments in Transfer Pricing, demonstrating that tax administrations are increasing their efforts to maximize tax revenues from multinational groups.
The introduction of complex regulations with more and more documentation requirements is proof of this. Master and local files and country-by-country reporting (CbCR) are the new normal.
Not surprisingly, corporate tax departments have prepared themselves and defend their Transfer Pricing setups and methods based on intensive documentation work. Compared to the advanced level already achieved here, the operational implementation of Transfer Pricing outside the tax function, in particular in IT systems and underlying data structures, has often been given far less consideration.
With more and more BEPS rules now in place, the whole global value chain has come into focus.
To prove the adequacy of Transfer Pricing transactions to be at arm’s length, various single-sided TP methods have been applied to analyze the profitability levels. Therefore, a new dimension of globally consistent and integrated data will be needed to evaluate what is really happening in a multinational enterprise to understand the “big picture”.
In most cases, local ERP systems currently used do not provide the required data for the tax-related transaction types and groups in a standardized way.
A common issue is non-standardized and non-harmonized product master data and non-transparent invoice and value chain flows. Differently deployed and non-harmonized ERP systems, inconsistent charts of accounts and structures complicate an efficient data analysis massively.
Systems were simply not set up to answer questions on profitability in the relevant dimensions of tax and Transfer Pricing.
Guiding principles from IFRS plus internal management reporting requirements are still setting the scene. As there is usually no alternative, data must often be derived from many different IT systems manually.
The frequently used but by far weakest solution is the extensive manual collection and recalculation of financial results of group entities based on spreadsheets. When Transfer Pricing tax audits are conducted years later, such an offline approach is hardly stable, in particular if the data and/or the responsible employee is no longer available due to staff turnover.
Only with a suitable reporting system and appropriate IT platform can efficient Transfer Pricing management be ensured. Once established, Transfer Pricing analytics work will no longer take days or weeks and all data is always up-to-date and easily accessible in the short term or even years later.
Nowadays, tax authorities across countries also challenge multinational corporations by auditing their operational implementation of the Transfer Pricing system.
Auditing the day-to-day processes and financials on a granular data level are just one example. Tackling transactional data, systems and processes is one option to easily detect weaknesses or errors within the MNE group’s Transfer Pricing system.
Tax, finance, and IT functions
Tax audit findings in organizational processes, IT systems, and a lack of data consistency can have serious consequences.
This emphasizes more than ever the fundamental need for a cross-functional approach between the tax, finance, and IT functions.