Transfer Pricing

Following Action 13 of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, various jurisdictions around the globe implemented new compliance rules and documentation requirements for large multinational enterprises (MNEs).  The Country-by-Country (CbC) reports contain aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which an MNE operates. Given the expected level of transparency, it is key to prepare documentation crisply and concisely, in a way that can be understood by stakeholders across the many countries where an MNE is present, and avoid contradicting any parts of the story already disclosed elsewhere.

Belgium introduced transfer pricing documentation requirements in line with the OECD’s recommendations in 2016. By doing so, Belgium moved from an era where no (systematic) transfer pricing documentation was required, to a formal transfer pricing documentation obligation which includes the electronic filing of the required documentation. The required documentation must be filed by qualifying taxpayers and consists of three layers, including: Country-by-Country reports, Master File (Form) and Local File (Form). Taken together, these three documents oblige taxpayers to articulate constituent transfer pricing positions.

KPMG can assist a Belgian constituent entity or permanent establishment (of an MNE) in preparing and filing the required Belgian Transfer Pricing Documentation, in an efficient and timely manner. Additionally, KPMG’s Global Transfer Pricing Services team is able to assist with harmonizing the documentation approach and streamlining the underlying processes – from data collection and analysis through to the preparation of compliant documentation.

> Explore our Transfer Pricing Technology Solutions

With the increase in digitalization of tax data and tax authorities increasingly using tools to collect and assess such data, MNEs need to ensure that they have reliable, complete, and accurate tax and transfer pricing data at all times. An effective integration of TP technology solutions is therefore no longer a nice-to-have, but a necessity. MNEs often face the following challenges when addressing transfer pricing documentation globally:

• Preparing full documentation for every company is a time-consuming and challenging task.
• Global documentation projects can take on a life of their own and become unnecessarily expensive, when no real cost-benefit analysis was undertaken in advance.
• Badly implemented documentation can cause more problems than it solves and becomes outdated very quickly.
• As tax authorities have started using the Master File, Local File and CbCR to risk assess entities, it is important that these documents clearly articulate a consistent message – which might be difficult to achieve with a decentralized documentation approach.

Well-fitted TP technology solutions help to address and manage the above challenges. These solutions facilitate efficient data processing and management, and can also provide insights into transfer pricing processes and opportunities for improvements.

KPMG’s Global Transfer Pricing Services team is able to assist with harmonizing the documentation approach and streamlining the underlying processes – from data collection and analysis through to the preparation of compliant documentation. KPMG also uses the following tools to facilitate the process, making the global documentation process more efficient and effective:

• Alteryx – For data preparation and profiling, to facilitate automated data output for purposes of transfer pricing documentation
• TPAD – For the automation of documentation preparation
• KPMG Digital Gateway – For data analytics, timetabling, and project management, among others
• CbC Risk Assessment – For risks presented by CbC reporting positions

Alteryx is an external solution that serves as a single platform to unify analytics, data science, and process automation. Leveraging Alteryx’s Extract, Transform, and Load capabilities, KPMG has been able to integrate the use of Alteryx into the transfer pricing documentation process to help MNEs with processing the vast amounts of data for transfer pricing purposes. This process can otherwise be particularly cumbersome for a resource-challenged Finance / Tax function, where relevant data may need to be sourced from multiple systems applied within the group.

By combining Alteryx with KPMG’s transfer pricing expertise, KPMG is able to provide tailored assistance to MNEs to enhance their multinational documentation process, such as through:

• Data management – including using raw data extracts and transforming such data into structured, controlled, transactional data.
• Structuring of data and analytics – preparing ready-for-use data packs that provide the appropriate drill-downs on controlled transaction amounts, margins / mark-ups, by the necessary transaction categories, also enhancing capabilities to identify outlying results or transactions.
• Identify outliers and using data analytics on global datasets, reconciling different datasets and making sure review efforts are focused where they matter most.
• Automation of transfer pricing documentation – generating standardized documentation in a time-efficient manner without compromising meeting documentation requirements, while reducing manual errors.

Globally, transfer pricing documentation compliance requirements have increased with respect to format and timing of preparation. MNEs often consist of numerous legal entities, resulting in a burdensome process for achieving full transfer pricing documentation compliance. If a group consists of entities with a high degree of similarity with respect to functions, risks and assets, the documentation process can be improved and partly automated with the use of TPAD.

TPAD is a dynamic tool used to populate Word documents based on information requests and documentation templates. The information request only contains local entity specific information, whereas the documentation template contains general information applicable to all the specific types of entities. By combing the documentation template and the information request, several local files can be created at once using TPAD, establishing a time-efficient process and reducing potential errors induced by manual handling of large data batches. Advantages of TPAD include:

• Leverages from “economies of scale” to automate the population of information into multiple documentations on the basis of a standard template.
• Simplification of cooperation between central TP and local organization for information gathering ensures a clear audit trail.
• Intuitive interface allows for easy use by non-IT professionals.
• Work with well-known formats (i.e. Word and Excel) – no coding experience required.
• Possible applications beyond transfer pricing (I/C agreements, etc.).
• Work with company-specific template/letterhead.

MNEs must prepare themselves for the uncharted territory of increased tax transparency and sweeping global tax reform. MNEs armed with information about the risks presented by their Country-by-Country (CbC) reporting positions are better equipped to determine whether their global value chains have been properly documented, whether they should consider restructuring to reduce the risk for potential controversy with tax administrators in the post-BEPS world, or whether they should undertake other proactive risk-mitigation measures, such as entering into Advance Pricing Arrangements.

KPMG’s CbC risk assessment and benchmarking services can help MNEs to analyze their CbC reporting positions to identify potential risk areas by individual taxing jurisdictions, as well as to understand how their CbC reporting positions compare to those of other groups. More specifically:

• We can analyze an MNE’s CbC reporting positions based on the risk criteria identified by the OECD, as well as other relevant factors, and tax authority risk factors. Our risk assessment provides MNEs with a detailed view into their BEPS-related tax exposure from their CbC reporting positions and an overall risk rating for each country listed on their CbC report.
• We can also benchmark the MNE’s CbC reporting positions against an anonymized pool of unrelated KPMG clients’ CbC reporting positions to provide further input into an MNE’s CbC risk profile. This is an important insight as tax authorities will undertake a similar comparison as they accumulate CbC reports shared from the MNE’s home jurisdiction.

The KPMG Digital Gateway is a cloud-based platform providing one-stop access to KPMG’s suite of tax technologies and supporting services, industry news and current KPMG Tax thought leadership. It combines the expertise of KPMG’s global network of professionals, our alliances and our technology solutions to form one integrated platform that supports tax and legal leaders, as well as asset managers, and the evolving needs of their departments. The Digital Gateway brings a wealth of tools to tackle regulatory change, turn data into value, streamline compliance and planning, while enabling effective collaboration across tax, legal and finance departments, among others.

Specifically, KPMG Digital Gateway also hosts a range of capabilities to help streamline the transfer pricing processes of MNEs – such as data / information collection,  timetabling against local requirements, customized analytics and dashboards, process and project management, document storage, among others – all while staying connected with a group’s other workstreams, such as corporate tax compliance, indirect tax compliance, BEPS 2.0 analytics, and DAC 6, to name a few.

Multinational companies that engage in cross-border transactions spend significant time and effort designing transfer pricing policies. However, the effective implementation of transfer pricing policies can be a complex, resource-intensive and risky process. It requires significant integration and collaboration across many independent functional areas of an organization, including tax, finance and accounting, operations, and information technology.

Failure to effectively implement transfer pricing policies can lead to significant and material business risks, such as financial reporting issues, increased tax liabilities, misstated financial statements and higher costs in terms of intercompany accounting and tax compliance. The examples of “operational” transfer pricing challenges faced by each company include: 

• Inability to proactively monitor transfer prices.
• Difficulty in creating segmented transfer pricing data.
• Manual data sourcing and adjustments.
• Manual processes with little standardization and few effective controls.
• Poor cross-functional communication.
• Delays and difficulties in closing the accounting process due to transfer pricing entries and intercompany accounting requirements.

In response to the above challenges, Operational Transfer Pricing (OTP) ensures the ongoing cross functional management of the end-to-end intercompany environment from tax strategy through to the accounting, reporting and analysis of intercompany transaction results.

KPMG’s Operational Transfer Pricing services can help you integrate your transfer pricing policies with day-to-day operations, improve the integrity of your intercompany accounting, increase operating efficiencies, and reduce risks. We can benchmark your current state of affairs against leading practices, design processes and controls, and implement enabling technologies.

Depending on your needs, and based on how your processes around OTP are structured, we can assist with the following:

• Process and policy improvement: Using recognized techniques such as Lean Six Sigma, identify and test the processes relevant to determining transfer pricing outcomes, and use the results to identify process improvement opportunities.
• Governance and controls: Help you implementing an appropriate governance framework using tools such as the RACI (Responsible, Accountable, Consulted, and Informed) matrix to ensure that OTP issues are monitored and documented.
• Finance system readiness and technology needs: Support transfer pricing enablement in new system implementations, as well as provide technology solutions when existing systems do not appropriately suit your transfer pricing model, pricing calculations, adjustments, and intercompany flows.

Reviewing your OTP will increase your organization’s transparency into the transfer pricing results, improve financial reporting accuracy and reduce financial statements and tax risks. This in turn will result in enhanced efficiencies and lower compliance costs.

The realignment of taxing rights with economic substance is at the heart of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) Action Plan. The OECD’s (BEPS) Action Plan encompasses the following aspects: (1) ensuring that substance and value creation are consistent with the location of taxable profits (Actions 8 and 10); and (2) requiring transparency in an MNE’s profitability, tax outcomes and global business value chain (through Country by Country reporting and the Master File, as per Action 13).

By ‘substance’, the OECD increasingly means ‘people’. Other value drivers and features, for example intangible assets and the terms of contracts, are important – as long as they are properly aligned with key people. This means that companies need a coherent and holistic picture of their business, which articulates how and where value is created, and helps to explain profit and tax outcomes.

Value Chain Analysis (VCA) is a vital tool for evaluating and communicating how an MNE works. It provides an end-to-end view of a company’s activities, enabling a better perspective on the way a business works and how each component contributes value. A VCA can be an important tool in demonstrating to both internal and external stakeholders that the jurisdiction of taxable profits is consistent with the jurisdiction of value creation.

KPMG has developed a scalable and flexible methodology for analyzing a business value chain. Hereby, we continue refining and updating our methodology to reflect the latest OECD guidance and leverage our extensive experience in implementing this methodology in many organizations across different industry sectors.

Our methodology includes three phases which can be scaled depending on their application as well as the size and needs of your business. It combines management observations with objective industry and company data to evaluate key business processes, understand how value is created and identify commercial success factors and risks - both for your company and with respect to competitors in your industry. Using the collected data, a ‘value hypothesis’ for your business can be formed and tested through value focused interviews with key business experts.

Tax authorities worldwide increase their audit activities as financially strained governments press for higher revenue collection and public opinion hardens against perceived corporate tax avoidance. The pursuit for greater tax transparency and the vast amount of information to be provided to tax authorities make compliance more complex and feed the risks of transfer pricing controversy. Especially in an international context, the changing rules contribute to considerably more controversy and transfer pricing disputes, which are also getting harder to resolve. Dealing with controversy and transfer pricing disputes can mean uncertainty and complexity for you and your organization.

We can help you with a coordinated approach for managing complex transfer pricing cases, reducing the potential for adjustments, penalties, interest charges, and negative publicity. Our global network of KPMG professionals is experienced in all stages of the tax dispute continuum – from protecting against disputes to pre-transaction analysis and documentation through resolution of disputes. We work with you to help lessen the likelihood of a challenge or audit before a dispute arises. For those matters that ultimately become the subject of a dispute, we work with you to resolve the dispute efficiently and collaboratively.

More specifically, we can:

• Assist with transfer pricing audits to ensure that a complete and accurate view of the transfer prices of a company / group are well-communicated, negotiate outcomes that are agreeable between the taxpayer and the tax inspectors, and provide relief to the tax / finance resources of your company from the intensive process of a transfer pricing audit.
• Present you tailored options to resolve transfer pricing controversies and prevent disputes.
• Help you take control of your dispute resolution process and get effective results, locally and globally.
• Consider tax dispute management technology that may benefit a group in implementing a governance framework for disputes, providing visibility and transparency into all ongoing disputes.

The continuously evolving international tax landscape and domestic regulatory measures increase the need for certainty. Intercompany transfer pricing and international taxation matters represent significant compliance risks for cross-border business activities. Gaining certainty about these aspects, helps to eliminate or prevent double taxation as well as potential future disputes with the tax authorities. This is not only relevant from a compliance perspective, but may also create competitive advantage.

Considering also your company’s situation and global strategy, we can help you to enhance certainty about the transfer pricing and tax implications of your transactions. Accordingly, we can help you to:

• Strategize and formulate an approach to eliminate double taxation, considering the availability of a mutual agreement procedure (MAP) as foreseen in the Double Tax Treaties/European Arbitration Convention.
• Consider the appropriateness of applying for a unilateral, bilateral or multilateral Advanced Pricing Arrangement (APA) based on the transfer pricing risk exposure for certain transactions.
• Consider the appropriateness of applying for a ruling based on the tax risk exposure of your transaction.
• Review the transfer pricing policies agreed under already finalized APAs to consider if a change is warranted, and whether agreed critical assumptions allow for such changes. For ongoing APA discussions, identify clear and unambiguous critical assumptions to be negotiated with the competent authorities to determine situations that will allow multinationals to review their transfer pricing.