Digital Transfer Pricing Overview

Digital Transfer Pricing

Transfer pricing is not an exact science – it involves opinion. We have read, heard and learned this and rightly so, as the traditional approach to transfer pricing is not entirely data-driven.

A famous quote from American Engineer William Edwards Deming unreservedly applies to the traditional approach to transfer pricing “Without data, you are just another person with an opinion”.

Now it is time to unlearn things with Digital Transfer Pricing that has “Data” at its nucleus and a transfer pricing taxonomy to structure and categorize the data.

Digital Transfer Pricing is a technology platform that breaks the data inertia of the traditional approach by providing a full suite of tools that completely transforms how the transfer pricing function is managed currently. With the right technology and tools, Digital Transfer Pricing has made transfer pricing a precise science!

There are many benefits of Digital Transfer Pricing
  • Objective, data-driven analysis
    It offers objective, data-driven analysis and insights, which makes your transfer pricing process future-proof.
  • Faster, economical and more accurate
    It is faster, cheaper and more accurate than the lengthy, manual and often subjective traditional approach of transfer pricing documentation.
  • Real-time and interactive
    It provides real-time and interactive dashboards that deliver insights needed to take proactive action and eliminate year-end transfer pricing adjustment risk.
  • Automated Reporting
    Automated 3-tier transfer pricing documentation eliminates human error and saves time so that you can focus on value-added activities.
  • Plug and play
    It is a cloud-based platform, so there is no rip-and-replacement needed in the existing IT system.

 

We have covered the benefits of Digital Transfer Pricing in more detail under each of the five building blocks of Digital Transfer Pricing.

Digital Transfer Pricing Building Blocks

The five core building blocks of the Digital Transfer Pricing

Digital Transfer Pricing is a breakthrough technology platform that manages all facets of transfer pricing. At its core are five building blocks – data ingestion and parameterization, analytics and machine learning, control and collaboration, automated reporting, and workflow management.

 

1. Data Ingestion and Parameterization

Data is the nucleus of Digital Transfer Pricing (‘DTP’). Intercompany transactions within the MNE Group generates structured and unstructured data. DTP works by extracting this data readily available in MNEs ecosystems such as ERP, accounting software, or data cloud. Such raw data is standardized and categorized using transfer pricing taxonomy.

Overview

Transfer pricing analysis requires a wide range of data. These include group entities and ownership data, management data, business activity data, functional analysis data, financial data such as controlled transactions and their values, financial margins, price data, comparables data, and so on.

The quality of transfer pricing analysis largely depends on the quality of data ingested. DTP platform standardizes and curates the data before using it for transfer pricing purposes and eliminates GIGO Syndrome.

How it works
  1. Extract all the transfer pricing relevant data from the ecosystem – ERP, accounting software, data warehouse, data cloud, and desktop activities.
  2. Standardize and categorize the data using digital transfer pricing taxonomy.
  3. Curate the data to undertake insightful analytics.
Benefits
  • Avoid GIGO syndrome, as the DTP makes it possible to use only quality data for your transfer pricing analysis to ensure quality output;
  • Enables you to undertake a data-driven objective analysis;
  • Start reporting in a consistent manner using the same data across the entities within the MNE Group; and
  • Have complete control and visibility over your data

 

2. Analytics and Machine Learning

Advanced analytics is like an x-ray of MNEs intercompany transactions/arrangements. It analyses the controlled transactions and global value chain and identifies risk areas by viewing the data from the lens of tax authorities.

Overview

Analytics is like an X-ray of MNEs intercompany transactions/ arrangements. It provides MNEs with insights that not only identify the gaps in existing arrangements, but understand why they are happening, the impact they have on your transfer pricing outcomes, and what can be done to fix them.

DTP shows you precisely what is happening in your inter-company arrangements with real-time, augmented, powerful analytics and dashboard. It is easy to use, powerful and highly scalable.

You can view the analytical insight from multiple angles, for instance:

  • Legal entity view – provides interactive analytics on inter-company transactions of each entity in the Group;
  • Transaction view – provides interactive analytics on the entire value chain of a particular inter-company transaction at the group level; and
  • Risk Analytics analyses your CbCR and other data and lets you see how tax authorities see your data.
Benefits

Advanced analytics tools help:

  • to draw out a story from a data set, removing the clutter and noise whilst highlighting the most pertinent information;
  • make sense of complicated and big data sets;
  • identify risk areas to take corrective measures proactively; and
  • create a dashboard to view data from multiple angles.

 

3. Control and Collaboration

Real-time and interactive dashboards deliver proactive insights that are interoperable across various teams. It provides complete control over the transfer pricing function.

Overview

Transfer pricing is cross-functional – interacting with operations, finance, HR and tax teams, for instance. So interoperability of the platform is essential for effective control and management of transfer pricing function. DTP platform is a single interface for teams to collaborate – exchange information, insights and take action.

DTP platform’s real-time and interactive dashboards deliver proactive insights that are interoperable across various teams. Unlike the traditional approach to transfer pricing, where the cross-functional teams interact, collect, and analyze data only once a year to prepare the transfer pricing documentation, the deviations between pricing policy and actual outcome only become apparent at the end of the year. Usually, that is too late. The DTP Platform is flexible and capable of monitoring outcomes as per the requirement that can be real-time, monthly, quarterly, or half-yearly.

Benefits
  • Eliminates the risk of year-end transfer pricing adjustments;
  • Enables faster and data-driven decision making; and
  • Facilitates interoperability of information across various departments

 

4. Automate Reporting

Automated 4-tier transfer pricing documentation eliminates human error and saves time so that you can focus on value-added activities.

Overview

Automation is an integral building block of DTP platform. MNEs can automate 4-tier transfer pricing documentation – Local File, Master File and Country-by-Country Report. The technology that underpins the automation capability of the platform includes machine learning and robotic process automation, for instance.

The platform automates all aspects of transfer pricing documentation – from transactional data and functional analysis to benchmarking analysis, making it comprehensive, intuitive and scalable. With the DTP platform, the in-house tax team can save time and focus on value-added activities.

Benefits
  • Generate 100% compliant and error-free transfer pricing document that meets the requirement of OECD as well as Local Regulations;
  • Take complete control of your transfer pricing compliance by managing it in-house and bringing cost-efficiency; and
  • Save time and focus on value-added activities.

 

5. Workflow Management

Workflow management allows you to work cross-functionally and across multiple jurisdictions collaboratively to manage the transfer pricing process.

Overview

Workflow management is critical for a seamless transfer pricing process. DTP platform is a unified platform that allows users to assign tasks to the team members, set timelines, automate follow-up, check status, and manage user access rights across different functions and jurisdictions in the MNE Group. It makes the entire transfer pricing process collaborative, transparent and real-time, thereby bringing time and cost efficiencies.

Benefits
  • Fully scalable – users can add as many team members as required;
  • Work in collaboration across function and jurisdictions; and
  • Have complete control by assigning tasks, checking status, automating follow-ups, and real-time interaction.
Digital Transfer Pricing Tools

Underlying the core building blocks of DTP are five powerful tools

Underlying the core building blocks of DTP are five powerful tools – transfer pricing strategy design, model implementation, operational transfer pricing, global transfer pricing documentation, and tax audit defense, APAs & rulings.

1. Transfer Pricing Strategy Design

Framing a robust transfer pricing strategy/ policy is the foundation of a future-proof transfer pricing function. A well-designed strategy can generate significant benefits beyond tax outcomes if it is tailored to the unique footprint of the MNE Group that can be delineated by Value Chain Analysis (VCA).

DTP platform with built-in VCA solution helps MNEs to delineate the actual transaction with respect to commerical facts, economic value creation and benefit (including benefits beyond tax outcomes). Designing a transfer pricing strategy that is not based on commercial facts and is not aligned with value creation activities of the MNE Group runs the risk of re-characterization and adjustments during transfer pricing audits.

The benefits of a well-designed transfer pricing strategy are as follows:

  • Minimize risk of disputes with tax administration;
  • Strengthen your position in APA, MAP and tax rulings;
  • Tax optimization;
  • Provides certainty and reduces the risk of year-end transfer pricing adjustments; and
  • Competitive dvantages over rival MNEs that have not adopted optimal transfer pricing strategy.

2. Transfer Pricing Model Implementation

No strategy works until it is executed! It is unreservedly applicable to the transfer pricing strategy as well. Execution of transfer pricing strategy designed by the MNE Group requires an appropriate implementation across the relevant group entities and their ecosystem i.e. ERP, accounting software, data warehouse and data cloud.

Effective transfer pricing strategy/ policy implementation translates into operational and financial outcomes that align with the designed strategy and, consequently, with the arm’s length standard.

DTP platform is a dynamic and scalable platform where MNEs can implement the designed strategy and test outcomes on a real-time basis.

3. Operational Transfer Pricing (‘OTP’)

OTP tool is a solution that ensures accurate, transparent, and efficient implementation of transfer pricing strategy/ policy in the financial and accounting records of the MNE Group using technology. The right OTP tool assures that the agreed-upon transfer pricing strategy/policy is realistically working on the ground and across the Group.

OTP tool is increasingly becoming relevant for MNEs due to OECD BEPS recommendation on increased documentation, reporting and filing (including electronic filing) requirements. The tax administration can now access tremendous amounts of MNEs data through automatic exchange of information and Country-by-Country Reporting. However, historically, the ERP system of the MNEs are designed to generate data business segment-wise or for financial reporting purposes. It seldom provides quality data required for transfer pricing analysis. The common observation is that the in-house tax team downloads the unstructured data from ERP systems and rework it manually before sending it in a spreadsheet template to the headquarters or advisor for further processing. Handling a high volume of intercompany data on spreadsheets is not an intuitive process and is prone to human error.

An OTP tool enables the automatic collection, validation, standardization, and categorization of system-based and non-system sourced data in a single platform. The tool then analysis data to validate its alignment with the transfer pricing policy and generates an insightful dashboard for real-time monitoring of transfer pricing outcomes throughout the year.

The benefits of the OTP tool are as follows:

  • Save time in manually collecting and working on data
  • Active and real-time monitoring of transfer pricing results/ outcome
  • Ensures compliance with the Group’s transfer pricing strategy/ policy; and
  • Interactive dashboards provide insights needed to act proactively.

4. Global Transfer Pricing Documentation

Global Transfer Pricing Documentation is an automation tool for generating 3-tier transfer pricing documentation. It eliminates human error and saves time so that the in-house tax team can focus on value-added activities. The tool automates all aspects of transfer pricing documentation – from transactional data and functional analysis to benchmarking analysis, making it comprehensive, intuitive and scalable.

The technology that underpins the automation capability of the tool includes machine learning and robotic process automation, for instance.

The benefits of the OTP tool are as follows:

  • Generate 100% compliant and error-free transfer pricing document that meets the requirement of OECD as well as Local Regulations;
  • Take complete control of your transfer pricing compliance by managing it in-house and bringing cost-efficiency; and
  • Save time and focus on value-added activities.

5. Tax Audit Defense, APAs & Rulings

The tax administration of today has access to a wide range of taxpayer’s information readily available. It is attributable to the increased reporting requirement, automatic exchange of information and CbCR filings implemented by countries based on OECD BEPS recommendations. Tax administration has never been better positioned to perform transfer pricing audits and process information than they currently are.

Increasingly the focus by tax administration is shifting on how and why transfer pricing strategy/ policy is designed in a particular manner and not only on testing the outcomes of the transfer pricing arrangement. Thus, MNEs need to have coherence in their approach, reporting and documentation. It is essential to have a consistent storyline across the MNE Group. With the pressure of intensive transfer pricing audits, the issue of data availability and consistency is becoming increasingly important.

DTP makes MNEs audit-ready. It is a unified platform for data collection, categorization, analysis, validation, reporting and documentation purposes across the MNE Group. It helps MNEs use consistent data and approaches and accurately delineate actual and coherent storylines across the MNE Group. Further, the reports generated using the automated Global Transfer Pricing Documentation tool are fully compliant with the Local Regulations.

Apart from financial data, DTP platform also enables MNEs to document and collate transfer pricing audit relevant data. Intercompany transactions such as intra-group services, royalties, etc., require MNEs to undertake need-benefit analysis and produce supporting documents relating to it. The problem of need-benefit documentation becomes apparently painful at the time of audit that typically happens few years after the transaction date. DTP platform facilitates MNEs to document the non-financial data on a real-time basis for easy retrieval during transfer pricing audits.

The benefits are as follows:

  • Be 100% audit-ready
  • Take complete control of your transfer pricing audit and mitigate transfer pricing adjustment risk; and
  • Save time with easy retrieval of relevant information.
Digital Transfer Pricing Taxonomy

The Taxonomy is the technical blueprint of transfer pricing regulation transformed into a machine-readable format

The Taxonomy is the technical blueprint of transfer pricing regulation transformed into a machine-readable format. It is at the heart of Digital Transfer Pricing as it enables technology utilization across transfer pricing data and processes, from analytics to document automation in all formats.

DTP taxonomy has three parts:

 

1. Data structure and input

DTP taxonomy accurately defines data structure and attributes and thereby ensures fully compliant documentation. Data structure creates a machine-readable framework that a computer can readily process. Further, data structure allows for clearly defined data input criteria and enables API capabilities.

 

2. Mapping

A structured data schema allows mapping transaction-level information with a legal entity, transfer pricing policy, benchmarks, inter-company agreements, etc.

 

3. Output

A well-defined data structure and mapping automates transfer pricing documentation and provide insightful analytics.