Dive into the world of Operational Transfer Pricing (OTP)
Blog: Per-Gustav Wickström
I have started to view transfer pricing (TP) slightly differently during the last couple of years. To exaggerate, I as advisor, have often designed and implemented new transfer pricing models all the way to having policies and agreements in place covering the new transfer pricing setup. Then one and a half years later, I may have reminded the client that they should prepare the statutory transfer pricing documentation reports for the past financial year.
Once we start the work and map the transaction flows, we may not have a clue on how that clean and simple TP model can generate the complex transaction flows. And quite importantly: why are the margins not at the desired level?
To be clear, tax technical experts may have often designed the new transfer pricing model on the paper, but then dropped a pen when the new model should be implemented. This is where Operational Transfer Pricing (OTP) kicks in. What is it about and what I see increasingly in this field? Let me tell you.
What is OTP and what does it need to succeed?
OTP is essentially everything that happens after you have set the transfer pricing policy, but before it is time to prepare the statutory TP documentation. In a good OTP world you should focus on the following matters:
- People: Create an overall governance model, define clear responsibilities between stakeholders and minimize labor intensive, repetitive work.
- Process: Have clearly defined and efficient processes with control points as needed, workflow elements typically included in the technology solution.
- Data: Ensure that high quality financial data is available on time and in a desired format.
- Technology: Utilize technology solutions to automate the OTP process, process the data and perform the analytics.
Challenges and opportunities
The observations that I have done on OTP contain both challenges and opportunities.
The great challenge is that many multinationals are struggling big time with their OTP related work. It often relates to issues with retrieving the desired data or with the data quality. Very frequently, the work is highly manual and done in a different way in each business area, with the central tax or OTP team having limited control and visibility. This all results in a lot of time spent on managing OTP but with poor results.
However, there’s also an opportunity to improve the situation, and especially a good technology solution can bring a lot of value. The target should be to automate all manual and rule-based processes, allowing stakeholders to analyze high quality data real time instead of spending time on retrieving, processing, consolidating and calculating data and then making decisions when it often is late.