SAP PaPM for Operational Transfer Pricing

SAP PaPM is a new-generation modeling and reporting engine designed for business users. It can be configured for a wide range of profitability and cost management scenarios, among others transfer pricing. A typical use case is the management of profit margins for routine distribution entities.

Finance and Tax departments of multinational enterprises (MNEs) are confronted with various reporting obligations, be it for managing business internally, or to satisfy mandatory (compliance) requirements. One specific area is Operational Transfer Pricing (OTP), which is about the accurate execution of defined transfer pricing policies within an MNE daily, e.g., managing profit mark-ups for manufacturing entities, product pricing and managing target margins for sales entities, central service costs or profit splits arrangements. This area has lately been critical for both companies and tax authorities. 

Even though data underlying intercompany transactions is typically available in one central  system (ERP), many multinational enterprises still have a manual OTP process around this data. Various technology solutions are available on the market to support companies with their financial and tax reporting obligations including specific solutions addressing OTP, one of them being SAP Profitability and Performance Management (PaPM). 

SAP PaPM is a new-generation modeling and reporting engine designed for business users. It can be configured for a wide range of profitability and cost management scenarios, among other transfer pricing. Built on the in-memory platform SAP HANA, SAP PaPM can pull data from and write it back to SAP S/4 HANA, SAP BW and other SAP modules, as well as external databases such as Oracle, Teradata and other data sources such as Excel and CSV. PaPM is known as a “multifunctional calculation champion” using parallel processing and can be stored on-premise or in the cloud.

While transfer pricing challenges are specific to each of them, MNEs need to assess which functionalities of any technology solution best address these challenges. For example, a typical use case is the management of profit margins for so-called routine distribution entities. Here, the functionalities of SAP PaPM allow to build a customized and powerful global solution.

• Aggregation of Business data:
  • connect and integrate PaPM into source systems
  • create models without replicating data, avoiding redundancy in the architecture
  • process large data volumes in real-time, e.g., budget, actual and forecast data

• Calculations and simulations:
  • use scenario analysis to calculate new transfer prices to stay within defined margin ranges; using deviation parameters, MNEs are also able to assess the sensitivity of an entity’s profitability to any of their P&L items 
  • drill-down results in country- or product-specific reports based on the granularity level of the input data, ensuring standardized data quality among entities 
  • build what-if scenarios
  • use low-code development and preconfigured functions that make modeling easier, especially to users with no technical background
  • document each implementation step 

When it comes to visualization, results are presented on PaPM in suitable dashboards and tailored to user-specific needs. For further visualization capabilities, results can be consumed in SAP Analytics Cloud (SAC). Finally, as a non-tax-specific engine, PaPM helps to improve the coordination between various business functions, such as controlling, tax and accounting. To ensure transparency and compliance with risk management guidelines, PaPM also allows to schedule activities, assign them to performer and reviewer roles and trace modeling history.  

Technology solutions like SAP PaPM play a fundamental role in the digital transformation of the tax function. They form the basis to fulfil future requirements to internal and external stakeholders. Whatever use case an MNE has identified and wants to implement in PaPM, it is recommended to build a blueprint and test it thoroughly before starting with the implementation.

Overall, PaPM offers a significant reduction of time invested in routine planning and controlling intra-group liquidity flows. In the context of an evolving tax landscape, it can even support MNEs in monitoring their effective tax rate and satisfying BEPS Pillar 2.0 requirements. 

Using SAP PaPM, we can help you to:

• integrate it with your current ERP system (SAP modules or external databases)
• perform calculations to gain key profitability insights deriving from your transfer pricing policies
• implement, monitor and improve such policies in the context of (large-scale) ERP transformations