KPMG report: Transfer pricing planning 2.0

Looking at the evolution of business and tax models globally, priorities for transfer pricing planning include:

• Supporting the business with agile holistic solutions
• Optimizing resources and securing transfer pricing outcomes with digitalization
• Communicating clearly with all stakeholders

In the transfer pricing lifecycle, planning allows for profit outcomes to follow evolutions in the business and regulatory developments. So with mergers and acquisitions (M&As) at an all-time high in 2021, digitalization affecting most industries, the agreement of a ground-breaking global minimum taxation, and more flexible working situations becoming the new norm, transfer pricing planning—in other words, the setup of a sustainable transfer pricing system—remains high on the agenda of multinational companies. And the pace is picking up. 

The complexity and speed of business changes mean businesses frequently will have to make decisions ahead of the regulatory guidance even if it has been prolific in the last few years. And the frequency of those decisions is increasing.  The following discussion briefly outlines three (non-exhaustive) priority areas.

Finance and tax teams looking after transfer pricing are ever keener to shadow business partners, understand the latest trends, anticipate evolutions, and support business decisions with agile planning. Agility requires constantly asking the fundamental questions and finding solutions to adapt. 

Some changes are very subtle and happen over time. Other business changes may be more significant following the coronavirus (COVID-19) pandemic, for example the introduction of direct-to-consumer businesses. The key is to keep challenging the status quo and having a strategy for capturing both more and less visible changes, for example how data may be driving increasing value in marketing and supply chain management. 

New business models may arguably need new transfer pricing approaches, but important common starting points remain value creation and market references. Basic questions continue to include: 

• Are key drivers of value in the business still the same?
• Is profit still recognized where value is created in the business, e.g., following a digital transformation or an acquisition or a change of company strategy?
• Where are key decisions being taken?
• Have risk and/or data management capabilities been transferred abroad?
• How would third parties agree to topics such as international remote working and under what terms? 
• Will the profit result withstand scrutiny from shareholders, management, tax authorities, and increasingly the public?

The COVID-19 pandemic has highlighted the importance of flexible price-setting policies that allow for required adjustments related to uncertain business and/or market situations. Secondary methods to test profit outcomes may be another solution to explore in case of uncertainty. 

Agility also comes from offering solutions that take into account both business objectives and taxes in a broad sense—whether social security in connection with remote working, the indirect tax treatment of transfer pricing adjustments, or the various tax considerations linked to carbon credits across the value chain. With the tax landscape evolving, not least because of BEPS 2.0., having a holistic view of the operating and tax model is no longer optional. 

Automating processes to help get a better view on all transfer pricing related metrics will, among other things, help save time and provide greater and more robust business and tax insights. In planning, examples may include the automation of pre-defined tax risk assessments linked to remote working, or defining standard financial “cockpits”—to name but a few. 

Importantly automation can help secure transfer pricing outcomes and keep a holistic view on related tax effects. Increased visibility on transactional data enables more informed decisions around transfer pricing planning and tax results, and how these are then captured in multiple reports (indirect tax compliance, country-by-country reports etc.).

In addition to existing multiple internal and external stakeholders, companies are also increasingly faced with public communication, for example in relation to the environmental, social, and governance (ESG) agenda, or the EU public country-by-country (CbC) reporting. 

Clearly and consistently articulating the transfer pricing strategy to an increasing variety of stakeholders has never been more important.

In summary, suggested priorities for tax functions to consider and address under transfer pricing planning 2.0. include: 

• Anticipating business evolutions and supporting the business with agile holistic solutions
• Optimizing resources and securing transfer pricing outcomes with digitalization
• Paying extra attention to clear and consistent communication to all stakeholders

Read a May 2022 report prepared by the KPMG member firm in Switzerland