Operational Transfer Pricing
Automate your transfer pricing documentation through a pragmatic approach to transfer pricing technology
One of the biggest challenges in transfer pricing is ensuring that your business model and transfer pricing policy translates into a simple intercompany agreement that is accurately reflected in your financial statements and statutory returns. Often, the data you need for transfer pricing is not "tax sensitized" and is scattered across disparate IT systems and databases. We'll turn these challenges into an opportunity to create a pragmatic, user-friendly solution. We'll work with you to design and streamline your processes―and then automate them using an appropriate technology solution that fits your long term IT vision. As a result, you'll transform your tax department, and go from simply being compliant to being in control.
- What is operational transfer pricing?
- Watch the first video in our series
- How Deloitte can help?
- OTP and the impact of COVID
- Related content on external source
Operational transfer pricing is the end-to-end process of ensuring that the transfer pricing policy is correctly reflected in the financial statements of legal entities.
Alternatively, OTP can be considered as being the accurate, transparent and efficient implementation of transfer pricing policies in the books and records of a company based on quality data and robust processes and controls. Achieving quality OTP outcomes helps provide confidence that agreed upon transfer pricing policies are actually happening on the ground, all around the world.
What is OTP?
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There are a number of circumstances, in addition to companies generally wanting to improve their overall tax processes, that tend to trigger a more in-depth look at and/or desire to improve an organisation’s OTP, including:
- Tax audits flag up issues of incorrectly applied transfer pricing policies or an HMRC 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 (i.e. “Key person risk”).
- Current electronic reporting and filing requirements (Country by Country Reporting, DAC-06, SAF-T) have considerably broadened the range of information available to tax authorities, and the speed they receive it;
- Tax authorities have never been in a better position to perform transfer pricing audits and to process information;
- Increasing focus by Tax Authorities on how transfer prices are set, not only the outcome of the pricing;
- Companies must take control and ensure that their transfer pricing policies are accurately reflected in the financial results, within an appropriate overall control framework;
- Significant quarterly or year end adjustments on intercompany transactions may evidence weak controls and create undesired outcomes from a tax, customs and VAT perspectives.
Improving your OTP framework has many benefits, most notably:
- 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 members change.
More impactful analytics and reporting through data visualisation.
- Higher accuracy and reliability in external reporting.
- Significant time saving which can be spent on tax strategy and analytics.
OTP is an integrated process that not only helps with identifying and initiating the transfer pricing analysis of a potential intercompany transaction, moving through the pricing analysis onto recording and reporting it, but also ensures robust ongoing monitoring, maintenance and analysis of the overall process.
The monitoring of intercompany transactions ensures compliance with the transfer pricing policies and the company’s strategic tax goals through reconciliation and validation. This can be coordinated with the invoicing flow of the intercompany transactions which is typically carried out on a monthly or quarterly basis to ensure that there is timely consideration and action to update and analyse key inputs and outputs of the end-to-end process.
There are a broad range of technology solutions available in the market ranging from ERP solutions to OTP specific software, finance software and custom-built options. Different companies have very different needs and choosing the right technology tool and solution can be a complex process.
When assessing what OTP technology solution might be most suitable, it is important to consider a number of key criteria:
- Ability to scale and deploy quickly, regardless of geography or sector;
- Overall flexibility and ability to adjust to specific needs, even after initial pilots and template creation;
- High performance and user-friendly, able to handle large data volumes while still being responsive;
- Amount of existing local general ledger systems within the company;
- Ability to handle complex calculations and rules without creating too great technical complexity
- Cost of ownership;
- Current IT landscape; and
- Number of people involved in the OTP process globally.
Tax calculation results are highly aggregated and documented in static reports, requiring these deliverables to be manually updated each time data is refreshed and minimising end-user functionality to dynamically interact with reported data.
A good data visualisation tool draws out a story from a set of data, removing the clutter and noise whilst highlighting the most pertinent information to the user. These dashboards would drive a multitude of benefits:
- A wider scope for enhanced data insights;
- Analysing the data in a batter way;
- Faster decision making;
- Making sense of complicated data; and
- Increased accessibility.
Visualisation solutions can be leveraged with either direct integration with data sources, or manual upload of source data, to create web and mobile-enabled dynamic dashboards and to provide enhanced data insights, enabling end users to efficiently make strategic business decisions.
Visualisation is becoming an increasingly effective tool in the ‘Age of Big Data’ to make sense of large sets of data.
Whilst there are many different options, Deloitte uses a standard framework approach when helping its clients with improving their OTP processes can help guide an organisation’s TP team to make TP automation a success, using the following steps:
First, mapping out current processes, including identifying all key interfaces with other stakeholders and identifying people responsibilities
Identifying gaps or issues in the current process, then determining which parts of the process to automate and identifying any potential challenges in effecting change
Having established this baseline, the next phase is to design the target state for the OTP model going forward. In this phase, it would be established who is best placed to perform each task, determine target timelines and assess what tasks are low value-add or repetitive which could be automated
Transition from current state to target state would be determined and evaluated. This involves creating a transition plan and managing change activities such as handing over existing tasks to new process owners, defining new RACI matrices and updating the target state to take into account practical aspects encountered during transition
We offer half day and full day workshops with you and the relevant key stakeholders within the business to walk you through the steps above and ultimately set out the roadmap in order to achieve your goals.
Watch: OTP video series
In a changing transfer pricing landscape with increased regulation and tax authority scrutiny, it has never been more important to have effective and continuous implementation and monitoring of TP policies throughout an organization.
Operational transfer pricing (“OTP”) focuses on the details of how practical these policies actually are to implement for the business and the best way to do so.
With this in mind, we have put together a series of short videos where Deloitte transfer pricing professionals outline the key points that you should know in respect to OTP and how Deloitte can best help your organization navigate to a successful solution.
Operational Transfer Pricing (“OTP”) provides confidence that the agreed-upon transfer pricing policies are actually happening on the ground, all around the world. This not only enables the business to implement these policies, but also to confirm that they are consistent in all the company’s records.
This area is under increasing scrutiny due to the BEPS project and tax authorities around the world testing, in detail, the actual outcomes of TP policies. Without a robust OTP system in place, organizations might not be able to implement TP policies consistently nor respond appropriately to TP audits.
For many companies, transfer pricing represents the largest tax risk if the company and tax authority cannot agree on the appropriate arm’s length price. This can result in large penalties from the tax authorities, which has implications not only on finances, but also on reputation in the market.
Watch the complete video series
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OTP and the impact of COVID-19
The current global environment forces tax teams to do more with less, focus on preserving cash, reducing costs and providing increased value in a difficult business environment. Ensuring that efficient and appropriate operational transfer pricing processes are in place, has never been more important.
With this in mind, there are a wide range of short-term responses and more longer-term changes that can all help mitigate the potential financial and operational impacts of COVID-19.
OTP and the impact of COVID
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How Deloitte can help?
There are a wide spectrum of technology solutions available in the marketplace that can fulfill your current business needs―but there is no one "perfect solution". To help you to identify the best fit for your organization, Deloitte has a unique approach and process to help you:
- Improve your existing transfer pricing processes
- Identify data and people gaps
- Leverage your existing IT infrastructure and future IT vision
By implementing a suitable technology solution and updated processes, you will enjoy the following benefits:
- An accurate reflection of TP policies in your financial statements;
- A near real-time access to data necessary to monitor your transfer pricing
- A timely identification of any TP adjustments necessary;
- An efficient and quick book close process; and
- Readily available data segmentation that makes it possible to fulfill TP documentation and compliance requirements.
Related content from external source
Want to learn more about Operational Transfer Pricing? Read our article, Getting started with operational transfer pricing (as published on Expert Guides, July 2021).