KPMG report: Automating transfer pricing documentation
Transfer pricing documentation by implementing technology-based solutions, adopted from an article produced by the KPMG member firm in Switzerland
Companies can automate preparation of transfer pricing documentation
Overly manual processes can make transfer pricing documentation a time-consuming and expensive matter. Technology can provide a solution to this challenge by automating (parts of) these processes. However, companies first need to look at where automation really benefits them—there is no “one size fits all” solution.
In recent years, global groups have had to fulfil more and more documentation requirements in order to comply with local or domestic requirements. This worldwide trend is mainly propelled by OECD’s base erosion and profit shifting (BEPS) framework that aims to guarantee increased tax transparency for multinationals by requiring additional documentation such as country-by-country (CbC) reporting.
Since the preparation of documentation can be resource-intensive, the goal of tax functions must be to maximise the efficiency of the documentation process. Technology is one key solution by virtue of its ability to automate selected repetitive tasks.
Aspects to consider
Although it sounds compelling, it is wrong to view automation as the unconditional solution to all problems. One still needs to create the right prerequisites to fully leverage the capabilities of automation and carefully consider which steps in the preparation process of documentation need to be automated so that a solution suitable for the purpose is implemented.
Understanding the process: Before thinking about automating the transfer pricing documentation, companies first need to consider that preparation of documentation is a process and then need to completely understand the manual logic behind it (e.g., where exactly does the data come from? how is the data afterwards mapped?). Automation only pays off if there is a clear underlying logic—every exception from the general rule makes the process less efficient.
Recognise which steps to automate: The preparation of transfer pricing documentation can be divided into six steps:
- Structuring the documentation into modules
- Creating a Master template and list of information request
- Providing the information
- Processing the information
- Generating the reports
- Reviewing the documentation
To determine which steps in the process to automate, companies need to look at where they can replace the most manual and repetitive tasks. One option is to solely automate the generation of the reports. In this scenario, the data is manually transformed into the required form and merged into a Master data file. Afterwards this information is fed into a Master template to fill all placeholders. Another option is to automate the processing of information. In this instance, the raw data (e.g., transaction data from the ERP system) is fed into the automation tool. Before generating the reports, the system processes the data according to predefined rules and converts it into the required format. To determine a smooth processing of information, it is paramount for companies to understand the manual logics applied in preparing data for the transfer pricing documentation.
Standardisation: Automation shows its benefits best when combined with standardisation. Every deviation from a standard makes the system more complex, creates room for error, and reduces the efficiency gains from automating a process. However, it is critical for companies to decide how to balance standardisation and localisation to know to which extent automation it generates added value. The more complexity in documentation and the more localisation to incorporate (different content for different jurisdictions) is required, the less benefit can be expected from automation. The stronger alignment of documentation regulations across jurisdictions that the BEPS project of the OECD has brought about is certainly helpful in this regard.
Further use: One by-product of an automated compliance process is the Master data file, which holds all relevant information used in the transfer pricing documentation process (e.g., transaction volumes, profitability of subsidiaries, etc.) in one place. As a consequence the review of the input data is simplified and the file additionally provides a holistic overview of the data used for documentation. This file can be used for further analytics. If there is already a solution in place which automates the data processing part, such solution can often relatively easily be extended to more analytical topics. As the origin of these solutions is data analytics, adding additional steps into the system to get further insights is not too complicated. For instance, consider using the data for preparing other compliance documents—such as the transfer pricing returns or CbC report. Another expansion of the system could be a dynamic inter-company price-setting, when the system would be used to observe the profitability of different entities or products to adjust the intercompany prices prospectively.
By making use of technology, companies have the capability to automate parts of the process of preparing transfer pricing documentation. However, there are four things to bear in mind:
- Understand the logic in the process of documentation preparation and accompanying repetitive tasks
- Assess which steps in the process can be optimized by automation
- Decide how to balance standardisation versus complexity and localisation
- Determine if the system should be expanded by using data analytics
Read a November 2021 report prepared by the KPMG member firm in Switzerland
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