Transfer pricing déjà-vu financial year end
As we are moving to the end of the calendar year, many companies have to deal again with typical topics at year end closing. A classic and recurring theme relates to year-end transfer pricing adjustments. This is specifically the case when within the transfer pricing system so-called routine entities such as limited risk distributors or contract manufacturers are entitled to a defined target margin but there is a gap between the target margin and the actual YTD margin. As there is typically a time-lag between transfer pricing adjustments and the intended P&L impact, one-off year-end adjustments are often the only possibility to still get to the desired margins for group legal entities.
What appears at first glance reasonable from a transfer pricing perspective, may induce other follow-up actions such as changes to VAT or customs declarations. Even though such adjustments should lead to arm’s length results, it could be challenged if third parties would agree to such retrospective price adjustments. Further, a mismatch between transfer pricing policies and actual outcomes may indicate weaknesses in processes and internal control. Therefore, it is highly recommended to take care of operational transfer pricing process and stay out of trouble – not just at year end.
A structured approach for better outcomes
Operational Transfer Pricing (OTP) is focused on the accurate implementation and execution of transfer pricing policies. Recently, multinational companies have been focusing on OTP recognizing how it can add value through streamlined processes and better outcomes. While the challenges and pain points are very specific depending on the company’s business model, its transfer pricing model or multiple non-integrated systems, a successful OTP project takes the following steps:
1. Establish efficient processes
- Mapping the current state processes including data sources for full transparency
- Design new to-be processes including KPI’s and a controls framework with clear responsibilities
2. Automation of processes
- Review and select appropriate technology to support data insights, monitoring functionalities and decision making
- Implement and deploy new processes and technology for ongoing use
While the benefits of better operational transfer pricing process can be significant, there is no way around a thorough assessment of the current as-is process in the beginning. Investing into this will typically yield a high return for companies and can be done in a scaled approach.
Establishing a “single source of truth” should be another key objective in the course of any OTP project. Data gathering from different sources, the transformation of raw data based on a defined set of rules will provide the required consistent data outputs for entity level and transactional level insights as well as compliance purposes. Here various flexible tools and applications can help companies to build up their own digital assets within the tax function.
Also a long walk starts with the first steps. Designing and implementing the optimal operational transfer pricing framework is often more a marathon than a sprint. However, taking a first step by getting full transparency of the relevant as-is processes is typically something that can be done with reasonable efforts – so you do not have any déjà-vu at the next financial year.