Transfer Pricing Management in Times of Uncertainty

2022 became a time of uncertainty, with many factors playing a negative role. Most multinational corporations face the reality of high inflation, fluctuating FX rates, disturbed supply chains, sanctions, and war. The question is – how to approach TP management when costs are growing, and it’s getting more difficult to predict and control business results?

Here are a few factors to consider.

1. Growing expenses accompanied by a cost reduction push

In the last months, we’ve seen substantial prices increase worldwide. It becomes more and more difficult to maintain positive margins. In parallel, management has started considering reducing costs and putting investments on hold. In the transfer pricing world, we observe an increase in traditional compliance costs, with TP documentation outsourcing becoming more expensive. We expect the inflation spiral to hit other aspects, like database subscription costs and advisory support.

As a result, compliance bills for most multinationals that rely on traditional TP management approaches may increase by at least 20-30% in the next year.

At the same time, management is looking for ways to reduce costs, especially on traditional compliance elements.

Most transfer pricing in-house specialists received (or will receive) the request to develop ways to reduce, or at least maintain, the external consultant support.

2. Economic uncertainty

Transfer pricing experts face a reality where supply chains and traditional business models are disrupted. This can result in greater margin variation and unpredictable transfer pricing results. In parallel, businesses actively adjust their business models and often create new ones, and transfer pricing policies and systems need to be adjusted quickly. While many companies do not have reliable operational transfer pricing solutions deployed, assessing the results in real-time is difficult.

Therefore, transfer pricing models are accumulating entropy which is difficult to counteract.

3. Post-covid surge in transfer pricing audits and OECD reforms

In addition to general economic disruption, transfer pricing and the international tax world is getting more difficult to keep pace with. Many TP audits that were on hold in 2020-2021 during the pandemic are now activated, with new ones initiated. In parallel, OECD continuously pushes international tax reforms forward, creating even greater uncertainty for taxpayers worldwide.

With the transfer pricing world facing a “perfect storm” of uncertainty and recession, there is an opportunity to meet cost savings targets, regain control over operational transfer pricing, and improve audit readiness. The answer to these challenges is transfer pricing digitalization.

How can digitalization help?

Firstly, deploying an internal digital transfer pricing system can help maintain control over operational transfer pricing. It is much easier to monitor and adjust prices and margins on an ongoing basis with digital solutions than relying on manual Excel processes that involve dozens of people. By this, transfer pricing managers can have full visibility over what is happening in their areas of responsibility, proactively manage risks, and avoid large year-end adjustments.

Secondly, digital transfer pricing compliance solutions can bring the preparation of documentation in-house while not inflating the time needed. Automated data gathering and report generation, intelligent analytics, and workflow management can turn transfer pricing compliance into a painless process with greater transparency and predictability while maintaining costs low.

Thirdly, companies that have deployed digital transfer pricing solutions are much better prepared for new tax regulations and requirements. With the existing infrastructure, deploying another app and connecting it with other solutions is much easier than building an isolated custom application from scratch.

We strongly believe that times of uncertainty not only create risks but also bring opportunities. We encourage TP experts to think out of the box – and start shaping a better post-crisis world already today.

About the author:

Borys Ulanenko is a Digital Transfer Pricing Category Lead at Aibidia. Borys has more than 9 years of experience in transfer pricing with a background in industry and consulting. In addition, Borys is the founder of the educational platform StarTax Education. At Aibidia, he focuses on developing new transfer pricing applications and contributes to marketing and business development.