Preparing transfer pricing documentation is a necessary evil for many companies. From data gathering to finding time to do the documentation, the whole process does not sound very appealing. The task might fall on the desk of a tax manager, who has no idea what pricing policies local managers have used for specific intercompany transactions or where to find the contracts initially signed 10 years ago. To solve the issues related to transfer pricing documentation, many companies rely on outsourcing the process to consultants. This method, however, has its own problems. You can read more about the pros and cons of different organizational approaches to transfer pricing here . The other way is to digitalize the transfer pricing process – we talked about digitalization here.
Preparing the transfer pricing documentation is rarely a fun project, especially if it is done once a year. It often involves copy-pasting data from different sources and trying to remember what has happened throughout the fiscal year. Often the documentation is not based on actual real-time data but is compiled from several reports, contracts, or simply copying the documentation someone did five years ago. Creating or updating the documentation manually is error-prone and tedious work, especially if one has to prepare documents for tens or even hundreds of group entities.
Having a data-driven approach and implementing automation both saves time and results in better quality documentation since all the information presented in the documentation is automatically pulled from the factual transaction data and held in one single repository.
These issues were familiar to the Genan Group, the industry leader in end-of-life tyre recycling, which has been Aibidia’s client since 2021. Here is what Christian Madsen, the CFO of Genan, was saying about the problems that brought Genan to Aibidia in the first place: “It is now very easy for us to update our transfer pricing documentation from year to year. That is very positive because updating transfer pricing documentation when no changes have been made should be very easy, but that just simply wasn’t the case earlier”.
By removing the tedium and time-wasting of yearly documentation updates, Genan can now approach transfer pricing more strategically with a view to the future. “Aibidia’s platform has really enabled us to be in front of the transfer pricing wagon rather than running behind it – we are now in an excellent position to approach transfer pricing from a forward-thinking perspective”, Christian says. No more templates and no more wasted time.
Based on a survey conducted by Aibidia in 2020*, the most common transfer pricing issues were related to data. 90% of the respondents mentioned at least one type of data-related problem to be among their main daily challenges, and 85% of those who had difficulties in data collection also experienced challenges in data analysis. Along with the problems in gathering and analyzing the data, over 50% of companies with at least 1 000 employees reported having problems with local data quality.
Building a centralized data storage solves several problems in the transfer pricing process. In addition to decreasing the risk of losing key personnel, the amount of time and resources saved from spending hours searching for different documents and reports can be significant. The foundation of good quality documentation is good quality data (opposite of the garbage-in, garbage-out syndrome) that should be stored in a reliable place where it is available when needed. The ideal situation would be to have all the data down to the transaction level per sender-receiver relationship. This data can be structured and linked with accounting data at the value chain level. The data can be linked to each group entity and thus provide a full view of the consolidated earnings of the entire group. Having an integrated and transparent system allows for a detailed analysis of the whole group’s performance.
Creating a process and implementing a proper solution to manage transfer pricing-related data is beneficial when it comes to documentation or audits and can provide direct benefits in the form of analytics and insight.
The same documentation process is often repeated each year by the same person or a small group of people. As a result, the company may end up in a situation where only a handful of people know how the group’s transfer pricing is managed, where and how to find the correct data, and prepare the documentation.
In this situation, losing the key personnel is a considerable risk for the company, as no one else would know what to do or where to find the information. This was also faced by Genan, and according to Christian Madsen, digitalization of transfer pricing process has been a game-changer for them: “We know that everything is in the same system, and we know that all of the documentation we would need to present if we had an audit is very easy to find. This also means that if I didn’t show up to work tomorrow, somebody else could jump onto the Platform and easily find everything they need”. By centralizing transfer pricing documentation and processes and having a single source of truth for the Group, Genan has become much more transparent and far less people-dependent.
Another challenge with transfer pricing documentation is often the lack of control and transparency, which might impose direct financial risks or inefficiencies, easily worth millions. Missing or insufficient documentation may result in adjustments or penalties in many jurisdictions, in addition to the costs of overlapping work in different countries. Even when fully outsourcing documentation, control and monitoring are very limited. Data is provided to consultants, who compile the documentation based on the limited information, often without a complete understanding of the business. This knowledge lies only within the company and sits with people who make decisions and work on actual transactions.
Creating a group-wide process and implementing a common platform for documentation enables full visibility and control of the group’s transfer pricing. In addition, transfer pricing technology provides the agility to monitor the situation on an ongoing basis, which can be real-time, monthly, quarterly, or semi-annually, reducing the risk of year-end transfer pricing adjustments and providing valuable insights.
It can be nearly impossible for the group’s tax team located in the headquarters to stay up-to-date with local documentation requirements in each jurisdiction where the group operates. This creates compliance risks, as the documentation that is acceptable in one country might not work for another jurisdiction. For this reason, local managers should be able to participate in the transfer pricing process easily. Implementing a group-wide transfer pricing platform makes achieving local compliance much more straightforward.
While the transfer pricing industry is known to rely on manual practices, the extent of this situation is somewhat surprising. Based on Aibidia’s survey, transfer pricing professionals almost solely rely on manual practices to manage the challenges they face in their day-to-day activities. As can be seen in the chart below, over 80% of answers are pure “muscle” strategies, i.e. doing things manually and increasing the resources used.
We have categorized the different ways of approaching transfer pricing in levels. The starting level is “Ostriches”, who hide their heads, hoping there will be no transfer pricing issues. Companies at the top level, “Eagles”, have fully digitalized their transfer pricing processes and proactively tackled all of the above challenges. You can read more about digitalizing transfer pricing here.
*The purpose of the survey was to understand the daily challenges of in-house transfer pricing professionals, how they mitigate those challenges and what is their ideal transfer pricing world. The survey was carried out in Autumn 2020 through 100+ interviews with in-house professionals from various sized MNEs operating in a number of different industries.
About the author:
Maija Arimo is a transfer pricing analyst at Aibidia. Maija worked on complex transfer pricing projects that involved the conversion of documentation into digital format, advanced functional analysis and transfer pricing methodology digitalization. Maija recently finished her Master’s thesis on the topic “Data-Driven Documentation and the Use of Technology in Transfer Pricing: The Emergence of Digital Transfer Pricing”.
The Genan Group is the industry leader in end-of-life tyre recycling, ensuring a more sustainable future by helping solve one of the world’s most serious waste problems. Genan uses Aibidia to cut manual work, become less personnel-dependent, stay compliant and remain prepared for the future.
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