Globalization and international business development lead to an exponential growth of MNEs’ cross-border transactions. From the tax authorities’ perspective, increasing cross-border internal transactions or intra-group profit and expense allocations requires allocating proper tax audit resources to secure the taxable incomes within their tax jurisdictions. If multinational companies fail to justify their intra-group prices at the market prices during a tax audit, they face price adjustments and possible non-compliance penalties, leading to double taxation.
In the international tax area, transfer pricing is one of the most complex and resource-intensive areas. To be compliant with transfer pricing regulations, taxpayers have to (1) ensure that their prices are at the market level (i.e. arm’s length) and (2) prepare documentation to demonstrate this.
If you are unsure how to set the transfer pricing and fulfil your compliance obligations, the most common solution is to outsource the transfer pricing to external tax consultants. With the help of local tax experts, multinational companies can make sure their transfer pricing (including documentation) follows the local requirements. However, the cons include the cost of outsourcing, particularly as multinational companies expand into new markets; they are required to engage more tax experts. In addition, outsourcing to external parties may undermine companies’ information privacy and data security. Besides, it would be a challenge to align the overall transfer pricing policies and have a consolidated overview of all the entities if several tax consultancy firms use different methodologies to implement local transfer pricing compliance. Finally, multinational companies would likely lose dynamic control of their intra-group pricing policies. When they are carrying out normal business operations, it can be challenging to spot a non-compliance risk and make necessary adjustments. This may lead to substantial year-end adjustments or/and double taxation in several jurisdictions.
Some multinationals prefer building traditional transfer pricing in-house functions. In this model, a company would usually hire ex-consultants and transfer pricing professionals from industry and tax authorities to handle transfer pricing processes (including the documentation). The benefit of this approach is that it can be cost-effective, would give better control over the group’s transfer pricing, and the company would build and maintain industry and company-specific knowledge and expertise. However, the downside of this approach is that the costs are essentially fixed, and in-house specialists may sometimes be not fully up-to-date with the recent TP trends, so the setup can be ineffective overall.
Alternatively, multinational companies can roll up their sleeves and start converting their tax process into the digital world. Of course, there will be a learning curve for the tax novices to become confident with managing transfer pricing using a new solution, particularly in the beginning. But tax digitalization can indeed address the abovementioned issues more efficiently and effectively.
When it comes to digitalizing the tax process, here are a few steps to follow:
You first should define what needs to be converted, who in your company will do the work, and when will the conversion be in place. You would also need to collect the data required by the transfer pricing legislation. A well-developed TP solution should also indicate the required information, the deadline and the materiality thresholds of the TP documentation requirements. After populating the data into the digital platform, you may need assistance from the service provider, particularly their review and/or recommendations to ensure that your converted documentation is fully compliant with the TP requirements and is ready for the tax audit.
The proper digital transfer pricing setup would allow your company to:
In conclusion, digitalizing your tax process has more advantages than disadvantages, particularly in the long term and on a large scale. While it may require some efforts at the beginning of the journey of digital transformation, you will significantly reduce the workload of preparing TP documentation, avoid the risk of double taxation, minimize the input errors in your documentation, align the information across different documentation, and save more time and resources for reviewing your files.
About the author:
Scott Chen works as a transfer pricing analyst at Aibidia. He assists clients in their journey of digitalizing transfer pricing documentation and provides ad-hoc support, including country-specific requirements. Scott previously worked as an M&A tax compliance specialist at PwC and a business development analyst at Neles. He holds a master’s degree in accounting from Aalto University.