Typical challenges among multinationals within Operational Transfer Pricing (OTP)
Blog: Per-Gustav Wickström
In my previous blog, I noted that many multinational companies face challenges with Operational Transfer Pricing (OTP). I will now provide a bit more insight on what I typically see in the field.
Data gathering and processing
Management reporting typically focuses on business areas or regions, whereas transfer pricing needs data on legal entity level. Additionally, the data typically needs to be segmented into a more detailed level, depending on the transfer pricing setup. In order to retrieve e.g. the function or product specific P/L data for each legal entity across the global supply chain, a number of steps may be required, including:
- Collecting the needed source data with the persons in the organization having access to it
- Transforming, editing, segmenting and calculating the data in spreadsheets
- Reviewing the edited data with relevant persons
- Making conclusions on the edited data
In many cases, the first three steps above may be quite huge exercises by themselves, involving a lot of people and a good probability that something goes wrong in one or another excel formula. Often they need to be repeated several times to get it right.
It is also quite common that the numbers are not prepared in the same manner across the multinational. This may be due to different source systems (e.g. several ERPs in use), differences in the processes (e.g. TP adjustments done in different circles) or inconsistencies in the data processing (which is quite likely to incur when mainly operating through excel spreadsheets). Unfortunately, conclusions that are made based on wrong or inconsistent data will most likely not be accurate.
And just to add one more use case: imagine the situation where you need to analyze data from five years back and the person who made some initial calculations back then is not available anymore. That is not an easy task without a robust audit trail.
Manual, non-harmonized processes
In many cases, the OTP processes are fairly manual. The process may relate e.g. to any of the following:
- The above described steps to retrieve segmented P/L data
- The work to charge out management or other central service fees
- The activities needed to get an intercompany transaction list with pricing principles needed for statutory transfer pricing documentation purposes
When stakeholders need to spend a lot of time on the manual and repetitive tasks, they have less time for more value adding and analytical tasks.
The various processes related to OTP are often surprisingly complex and may not be optimized from an end-to-end perspective. Instead, for historical reasons there may be big differences e.g. between business areas, where each stakeholder has developed its own process.
Limited central visibility
The central tax team at multinationals typically would like to have good visibility into the key transfer pricing data on a timely manner. However, given the amount of work needed to retrieve the data, the challenges in data quality and consistency and the non-harmonized OTP processes, the central tax team often has quite limited visibility into relevant data during the year. A full picture may sometimes not be retrieved until after the financial year in question and by then it may e.g. be too late to conduct TP adjustments in an efficient manner.