Operational Transfer Pricing (OTP) for businesses in the Middle East

Multinational groups often encounter inconsistent Transfer Pricing (TP) data from their business divisions and units which may increase complexity and pressure on internal resources. These can include for example: 

• Inaccurate tax payments in different jurisdictions;
• Year-end adjustments resulting in volatile profit margins across different years; 
• Customs, Value Added Tax (VAT), and exchange control issues arising from differential payments; 
• Challenges to give supporting data during tax and TP audits; and
• An inconsistent basis for allocating costs between group entities. 

In the context of obtaining reliable data for TP purposes, businesses often have complex and diverse structures in their commercial operations across multiple jurisdictions. This makes it difficult to manage data associated with tax and TP implications beyond simple compliance. However, managing data across operations from a tax and TP perspective, requires a holistic view that encompasses all areas of a business, as there are many interdependencies. 

This holistic view often requires insights into large volumes of transactional data from several disparate sources within a business. The question is: What role does the use of technology play in all this? Do tax and finance teams have ready access to the appropriate data they need to ensure compliance with tax and TP reforms and other government and regulatory reporting requirements?

The increase in TP related disclosure requirements intensifies the need for a structured TP process and the importance of a connected TP function. Historically, tax and TP functions in Multinational Enterprises (MNE) have been focused on formal compliance obligations, such as documentation requirements, controversy, and litigation. However, currently to ensure that a business adheres to TP policies, operational processes of the TP function have to be effectively managed. On this basis, an effective OTP strategy may assist in addressing both formal and material compliance on an end-to-end basis.

In this publication, we consider how OTP may be able to address these issues by embedding MNE’s TP policies within their day-to-day operations to ensure cohesive and accurate intra-group accounting and hence facilitating more effective data management.