The digitalization of tax and operational transfer pricing processes can have a huge impact on a multinational company’s ability to efficiently forecast and report its tax liability. With the coming rollout of the OECD’s action plan on Base Erosion and Profit Shifting (BEPS) in over 130 countries, there are big changes looming, and today’s investments in multinational tax reporting and transfer pricing software will pay big dividends as finance teams step up to meet the challenge of shifting to the new paradigm.
It’s not just BEPS, however, that is driving the need for greater agility in tax and transfer pricing activities. We’re also seeing greater volatility in global events, uncertainty in global trade policies, and more. The pandemic demanded greater agility as well, as a wave of relief programs and special tax provisions required tax professionals to pivot quickly to deliver maximum benefits to their organizations.
Tax and transfer pricing software helps corporate finance teams to get more done with fewer resources. A solid investment in tax and transfer pricing software is as crucial to multinational enterprises today as running a strong ERP system. The reputational risks associated with regulatory audits and last minute scrambles to complete tax returns are too great, and the upside for truly managing the ‘data behind the numbers’ is now simply too large to ignore.
Challenges in Tax and Transfer Pricing
Today’s multinational organizations need to face and overcome four challenges relating to tax and transfer pricing.
Increased complexity: The first challenge is the increasing complexity of the global economy, driven by shifting trade agreements, the ongoing impact of the pandemic, and the far-reaching implications of the BEPS framework. This, in some cases, constitutes a significant change in the way governments tax multinational companies.
Greater scrutiny: There is a trend toward increased scrutiny from tax authorities around the world. Many have shifted to digital models that enable them to more easily analyze data in detail. This trend will further accelerate under BEPS, which will likely incorporate even stricter measures. Tax authorities are now paying closer attention to accounting systems themselves, and some are employing data scientists to study how companies are handling their transfer pricing processes.
Data proliferation: The volume, velocity, and variety of data that multinational entities must process is growing. That can make it especially difficult for tax teams to manage, interpret, and share information with stakeholders using old-school manual processes. The use of spreadsheets to manage operational transfer pricing can lead to inaccuracies, compliance risk, and/or limited visibility into potential problems at year-end.
Talent acquisition: Multinational companies that fail to stay up-to-date technologically can also risk falling behind in the race to attract the brightest tax and transfer pricing professionals. A growing number of candidates are emerging from top business schools with data analytics skills. They are unlikely to be attracted to companies that have established themselves as companies that have not kept up with the latest tax technology.
A Holistic Approach to Tax Forecasting, Transfer Pricing, and Tax Reporting
In a recent report entitled “The Corporate Tax Management Imperative,” Ventana Research underscored the importance of having a single source of truth for tax and transfer pricing: “The application of analytics to tax is important to managing tax expense and tax compliance risks. Our research reveals that 64% of participants [of our Office of Finance benchmark research] believe that their company could reduce its tax expense if it had the ability to quickly drill down into the details of transactions and balance sheet items to gain insight into its tax position for each taxing jurisdiction.”
A unified view is critical. When a company implements tax and transfer pricing software together, it creates synergies that enable the tax team to remove uncertainty from the process. Suddenly it becomes possible to automate tax calculation and tax reporting. Tax and transfer pricing solutions provide clear guidance for tax-related decisions.
The best tax and transfer pricing software extracts data from multiple sources, aggregates it, and standardizes it across all group entities. This saves valuable time and resources because it eliminates the need to manage data manually, consolidate information from multiple companies into spreadsheets, or refresh static information with new data periodically.
When the tax team has a single source of truth for tax and transfer reporting decisions, the team can more effectively assess tax data as changes unfold. They can help senior executives anticipate where there might be perceived issues related to taxes paid. “This awareness can help guide tax-related decisions and help prepare a company to respond to any challenges,” Ventana adds.
Unfortunately, most multinational entities (MNEs) are still using spreadsheets to manage transfer pricing, despite the availability of purpose-built software designed to proactively monitor and continuously manage transfer pricing policies company-wide. When transfer pricing teams are so restricted by time-consuming, error-prone, manual processes, they tend to only monitor prices periodically, perhaps even once a year. With transfer pricing software, teams can deliver faster and more accurate transfer pricing data and use scenario planning to identify disparities between forecasted and actual tax liabilities.
Making the Transition to Digitalized Tax and Transfer Pricing
Tax and transfer pricing requires an investment, to be sure; but those costs should be weighed against the resources required to manage these processes manually, the value of the insights the software can deliver, the increased accuracy of tax reporting, and the benefits of avoiding scrutiny and reputational risk.
Organizations considering which software to implement should be prepared to compare and contrast technical features, matching their current needs with the capabilities of systems from a range of different providers.
Ask what the typical implementation process looks like, and what kind and level of support and training will be provided. Ask which data sources can be connected with the product and how it handles data coming from separate ERP systems. Find out whether data will be accessed in real time, or whether manual imports and updates will be necessary.
The best tax and transfer pricing software will support fully burdened Profit & Loss (P&L) statements, broken down not only by jurisdiction, time, and entity, but even by line of business, with no limits on the types or volumes of data that can be incorporated. Built-in workflow management is another valuable feature. Ask whether it’s included, and how it can support the specific needs of your team.
If you’re considering digitizing your tax and transfer pricing processes, we hope you’ll take a look at insightsoftware’s offerings. Longview Tax and Longview Transfer Pricing are two integrated products that automate many of the manual tasks associated with ongoing operational activities. Reducing the burdens of manual consolidation, reporting, and ongoing tracking allow tax and transfer pricing professionals to focus more of their time on valuable analytical activities, thereby elevating their stature as strategic business partners within the organization. To learn more, contact us today for a free demo.
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