This blog addresses the importance of transfer pricing processes
Three challenges and a way forward for your Transfer Pricing setup in 2023 (and beyond) – Part II
Multinational companies have typically a defined transfer pricing system with a written Transfer Pricing (“TP”) policy, including a definition of methods, markups and margins. This is often accompanied by a basic or more sophisticated TP compliance approach. But what happens in between the TP policy and TP compliance?
Simply put, companies will have to be ready to demonstrate not only that their actual TP outcomes are in line with their TP policy, but also that they are managing their transfer prices appropriately. Our blog series will shed some light on three key topics:
Part II – Processes and process descriptions
Transfer prices often significantly impact local profit levels and tax payments. For this reason, companies should ensure that the calculated prices, amounts of management fees charges, etc. are correct and that (data) checks and controls have been performed. Having a clear process for all key transaction groups, with proper controls documented in writing, helps improve the accuracy of TP outcomes and is an important supporting element to counter accusations from tax authorities to deliberately shift profits with corresponding consequences.
It is highly recommended to document your key TP processes in case this has not been done yet or review if existing process descriptions are still correct and complete. This is a good opportunity to think about process enhancements and cover new or updated processes in the internal control system or tax compliance management system. Obviously, the larger the amounts at stake, the more important it is to cover your processes and protect your company and employees.
While awareness of appropriate transfer pricing processes has increased within companies, practical challenges may exist in how to approach the issue. In general, a starting point is to have a complete overview of the status quo:
- What are your key transaction groups?
- What are key challenges for each of these transaction groups?
- Is there a good level of understanding of the processes, which teams are involved and what do they actually do?
- What are the blind spots and unresolved issues?
Such a simple (high-level) overview has been proven to be helpful in approaching this topic and the stakeholders in a structured way and in defining a way forward. While mapping transfer pricing processes may seem like an additional administrative burden, experience from previous projects has shown that discussions with different teams do result in new insights into how things work and in sustainable process improvements.