Transfer pricing is one sub-function of tax that interacts and leverages the data from multiple functions/departments of MNE Groups, such as operations, finance, legal and human resources. Accordingly, designing and implementing the Operational Transfer Pricing (OTP) solution requires collaboration among various departments of the MNE Group, including the Information Technology (IT) department. Therefore, the success or failure of the OTP project depends mainly on how synced relevant departments are.
Before discussing how to design and implement OTP, first a short introduction to OTP and why is OTP so relevant for MNE Group these days?
There is no legal definition of the term operational transfer pricing or OTP. However, it simply means an accurate implementation of the transfer pricing policy in the financial and accounting records of the MNE group. Effective transfer pricing policy implementation translates into operational and financial outcomes that align with the designed policy and, consequently, with the arm’s length standard. Furthermore, the right OTP assures that the agreed-upon transfer pricing policy is realistically working on the ground and across the group. In the transfer pricing lifecycle, OTP focuses on the price setting, monitoring and adjustments:
Typically, an OTP tool/ solution enables the automatic collection, validation, standardization, and categorization of system-based and non-system-sourced data in a single platform. The tool then analyses 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 OTP is increasingly becoming relevant for MNEs due to the OECD base erosion and profit shifting (BEPS) recommendation on increased documentation, reporting and filing (including electronic filing) requirements. As a result, the tax administration can now access tremendous amounts of MNEs’ data. With that, the focus of tax authorities has also shifted. They now evaluate whether the transfer pricing policies are accurately reflected in the financial results and are there an appropriate overall control framework to ensure that. However, historically, the ERP systems of MNEs are designed to generate data relating to business segments or for financial reporting purposes.
Therefore, they seldom provide the 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 reworks it manually before sending it in a spreadsheet template to the headquarters or adviser for further processing. Handling a high volume of intercompany data on spreadsheets is not an intuitive process and is prone to human error. For these reasons, the OTP solution has become increasingly relevant for MNEs.
Designing an OTP solution involves collaboration between various departments of the MNE Group. The tax/ transfer pricing team would typically lead the project, but a successful design and implementation require the involvement of other departments, particularly finance/ accounting, Information Technology (IT), and process improvement/ change (some large MNEs have teams to evaluate every change in the existing process).
Typically, the following steps are involved in evaluating, designing and implementing OTP solutions:
While the OTP tool/ software is helpful to ensure that the actual financial outcomes of the MNE Group are in sync with the designed transfer pricing policy, designing and implementing the OTP tool requires a time commitment from various stakeholders and entails a cost for the MNE Group. Hence, the tax/ transfer pricing team of the MNE Group should first take a consensus from all the relevant stakeholders and also necessary budget approvals. Further, a detailed evaluation (as discussed above) should be done before investing in the OTP tool/ software. Typically, complex, high value and high-frequency transactions are suitable for considering OTP solutions.
About the author
Sunny Kishore Bilaney is a digital transfer pricing leader for the Asia-Pacific region at Aibidia. Sunny has more than 14 years of transfer pricing experience, working for leading transfer pricing consulting firms. At Aibidia, Sunny focuses on business development and thought leadership.