Companies operating in multiple countries face significant challenges in accounting for intercompany transactions. They’re required to apply specific transfer pricing methods to set the prices of goods and services exchanged among the entities they control.
Regulatory scrutiny of transfer pricing practices is more intense than ever before. The adoption of the BEPS 2 inclusive framework is evidence that authorities around the globe are focusing greater attention on the transactions that take place between related entities and how that may impact tax liability and compliance.
Getting it wrong can be costly. Auditors and regulators require extensive documentation, and if they find that transfer pricing has been done incorrectly or inappropriately, they may be required to restate financial results. Fees or penalties could be applied as well. Perhaps just as importantly, it can lead to substantial negative publicity and reputational damage. Transfer pricing has frequently been misused in the past as a means of shifting profits to low tax jurisdictions, so great care must be taken to get it right and avoid negative consequences.
Challenges of Operational Transfer Pricing
The lion’s share of the hard, detailed work rests in operational transfer pricing – the practice of tracking and maintaining transactions among related entities under a single corporate umbrella. Without operational transfer pricing, companies would have little to no visibility as to how they are performing relative to their transfer pricing strategy. They need to ensure that cost allocation rules and calculations are applied properly, that transfer pricing records are fully auditable, and that price-based forecasts can be adjusted over time as rates, rules, formulas, and data change.
Here are some of the key challenges associated with operational transfer pricing, and ways your organization can remedy them by using purpose-built tax software to stay in compliance.
Error-prone, outdated processes: A significant volume of transactions among related companies creates especially thorny challenges for the tax specialists in your organization. In many firms, transfer pricing records are managed manually, often with data exported from a range of different ERP systems, which must then be standardized and consolidated into a single source.
That often happens in an Excel spreadsheet, where there are ample opportunities for errors to crop up. Copy/paste mistakes, variations in number formats, multiple currencies and exchange rates, and multiple versions of the same spreadsheet can all lead to inaccuracies. If you’re only dealing with one or two transactions each month, it might be manageable, but when you need to account for tens of transactions, or potentially even hundreds, the likelihood of errors skyrockets. So too, does the manual effort required to keep abreast of all that incoming data.
Purpose-built tax software automates operational transfer pricing practices, eliminating that manual effort and bringing order to the chaos.
Lack of clear standards, documentation, and centralized control: For globally distributed organizations, it can often be a challenge to maintain sufficient uniformity in the tools, methods, and standards applied in managing operational transfer pricing. This leads to inconsistent or unpredictable transfer pricing results, making it difficult to forecast an effective tax rate (ETR).
The solution is to establish uniform policies, along with effective internal controls to ensure compliance with those policies and empower local teams across the globe with the proper tools for getting the job done.
With the right transfer pricing software, everyone is operating from a single source of truth, which functions as a common framework and a common dataset. The right solution also makes it possible to monitor transfer pricing results consistently on a global basis, something that simply cannot happen with disjointed, spreadsheet-based processes.
Multiple source ERP systems: Multinational companies almost inevitably end up working with an array of different ERP systems. Subsidiaries often have very different operational requirements. A manufacturing entity located in Asia, for example, might need an ERP system that addresses their specific needs around production; whereas a US-based sales and distribution organization must focus on warehouse management, e-commerce, and shipping.
This naturally leads to a diverse collection of ERP systems, each with its own unique data model and chart of accounts. When a new company is being set up for the first time, or when the parent company acquires an outside organization, it adds further to the challenges of multiple ERP systems.
The addition of a new company creates further complexity with respect to operational transfer pricing, particularly if that company comes with a different ERP system.
Purpose-built tax software solves this problem by providing a standard framework within which transfer pricing management and compliance can occur. Transfer pricing software that integrates with multiple ERP systems makes the process even easier because it automates the flow of information from each subsidiary into a single, unified repository for transfer pricing information.
Delays in the accounting close process due to intercompany accounting: Operational transfer pricing is as much about performing the period-end closing as it is about regulatory compliance. In many companies, the year-end is associated with a flurry of pricing adjustments in preparation for an annual audit. When companies rely on manual processes to manage transfer pricing, the number and scope of such adjustments is naturally higher than it otherwise might be. In fact, the process of calculating such adjustments and double-checking the numbers can be a major project unto itself.
Purpose-built tax software ensures that accuracy and compliance happen on an ongoing basis. That leads to substantially faster closes because it virtually eliminates the error checking process that inevitably comes up in companies that rely heavily on manual processes.
Bringing Order and Control to Your Operational Transfer Pricing
Longview Transfer Pricing from insightsoftware harmonizes all aspects of operational transfer pricing by creating a central framework for standard calculations, eliminating manual effort, and providing a single source of truth for all member companies worldwide. It gives you increased visibility to what’s happening, providing an opportunity to make adjustments earlier than you otherwise would. As a result, you can avoid material end-of-year adjustments that cause alarm both internally and externally.
Longview Transfer Pricing connects strategy and policy with execution, enabling you to quickly and accurately collect and organize transfer pricing data, identify gaps in targeted profitability and make corrections before closing the books, all in an effort to achieve financial intelligence.
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