Automation of your Transfer Pricing documentation process can be challenging exercise. The importance of data and the help it gives to ground facts, plans and strategies are undoubtably true in transfer pricing. Organising this data could be a headache as accounting and finance data could differ from tax data. A 2019 study by Ernst and Young showed that only 7% of companies in Germany, Austria and Switzerland make use of automated interfaces of connections to accounting systems.
“Data really powers everything that we do.” — Jeff Weiner
Tax experts have been struggling with data collection for automating Transfer Pricing processes for many years. The data collection process for transfer pricing can be a painful process where documentation need to be inserted manually. This brings along inconsistencies and a constant planning process to steer profit along global value chain units. The transfer pricing documentation compliance requirements have also increased in complexity over the years.
Main hurdles in automating your Transfer Pricing process
Many multinational companies must overcome the hurdle of compliance and are looking for processes to streamline and centralise the documentation. In the past companies made use of local advisors that often-asked high fees and led to fragmented implementation as consistency lacked due to advisors doing the process different in different countries and industries.
When multinational enterprises (MNE’s) do transactions, the key focus is on the price charged for products and services along the different business units. These amounts charged for interest, licenses, goods and services differ considerably between units. Additionally, the bottom-line earnings of local units with services and deliveries to other units must be analysed in order to give accurate feedback. Therefore, the transfer pricing data model becomes complex even for experienced controllers. The challenge for the controllers is that the business systems for business areas, units, divisions and lines offer reporting options but these are not relevant to transfer pricing criteria.
Most MNE’s have systems to deal with this complexity, but the headache usually only comes at year-end time. Then the appropriate data needs to be put into the transfer pricing documentation going to tax authorities. The main hurdle therefore is to obtain data in a consistent manner across business units and different countries.
Why manual is outdated
Companies need to meet the compliance requirements set forth in BEPS Action 13. The master and local file approach have been used to do this in many countries around the world. In order to meet the required compliance standards companies, need to keep a record of transfer pricing documentation in the form of a local file for each of the legal entities forming part of the multinational enterprise.
With the use of office applications transfer pricing documentation can be prepared. By using software tools, the exchange of documents can be guided by workflow functionalities bringing consistency. The challenge comes in when the documents are manually collected for the local and master file. The problem comes when controllers load data from the local ERP system and rework this data manually before sending it to a spreadsheet template. It is obvious that this manual process will include hitches, due to large amounts of data being manually resubmitted.
Automation of Transfer Pricing processes
The digital era we live in have shaped professional planning, forecasting, reporting and consolidation functions with a high degree of automation. One of the newest additions to this professional automation process has been the intercompany transactions and the tax implications coming alongside.
The solution lies in having a structure where all the data records down to the document level with regards to inter-company transactions are included. This data process would include all sales per receiver-sender relationship at line-item level. This would imply that the data linked to the material master can be aggregated by the transaction group. By linking the accounting data, combining the value chains on a technical level and automatically importing the data, it creates a more trustable flow. What could happen as an example is that intercompany vendors and customers can receive a consolidated earnings view for the entire group. Such a data collection system where integrated mechanisms for allocation of overhead cost can be allocated ultimately allows analyses down to earnings before interest and taxes. If a product passes through a number of companies in manufacturing, it can be calculated what the preliminary profit on the product would be. This is also useful for the transfer pricing purposes.
This would allow the target margins to be defined for tax purposes and also make the unit price visible along the entire international value chain. This would enable the company to evaluate the required tax rate against the actual values the company are achieving. This would also enable the transfer pricing staff to directly access the necessary documentation when the tax authorities query certain results.
If actual data collection only takes place once a year to prepare for transfer pricing documentation the results will deviate from the desired tax results. This is why it’s important to have an automated process to continuously analyse what is happening. This would enable the organisation to pick up discrepancies and report inaccurate transactions at an early stage. The automation is of key importance when sudden price changes happen, as the new price data would automatically filter through, compared to being put in manually.
Key benefits of automating Transfer Pricing processes
- It creates an centralized system for all the needed transfer pricing documentation. This includes pricing guidelines and transfer pricing methods.
- The automated software can generate documents form the archive quickly and accurately.
- It limits manual entry while implementing a workflow system to manage the approval and review process.
- It ensures compliance with transfer pricing requirements. The system provides a clear audit trail and allow for easy collaboration among stakeholders.
- It integrates with existing financial systems to ensure data accuracy.
- Allows for continuous regulatory monitoring that can quickly identify potential inefficiencies or issues. This could help to improve processes.
Automated solutions like the TPGenie product Intra Pricing Solutions offer create, update and manage your transfer pricing documentation. This includes reporting through Master file, Local files, Intercompany Agreements, Benchmarks and Country-by-Country Reporting. The automation also includes the benefits of assisting in transfer pricing planning, risk management and control. The files will be automatically generated including all the necessary attachments: your intercompany legal agreements (SLAs) and your economic analysis benchmarks. This all while also being a very user-friendly tool to use to guide you to finalise transfer pricing documentation.
The content of the software is constantly updated to ensure that it is BEPS Action 13 compliant. The tool efficiently creates and updates OECD compliant transfer pricing documentation for the legal entities in your group and assists you with transfer pricing planning, risk management and control. TPGenie is also capable to generate the standardised electronic format for the exchange of Country-by-Country reports between jurisdictions for swift and efficient implementation of the BEPS measures. The software is easy to maintain, manage and update. TPGenie is a highly secured cloud hosted SaaS solution. There is good support from the Intra Pricing Solutions IT Experts and the software is easy to incorporate in your IT architecture with options for using Single Sign ON (SSO) using SAML 2.0 or two factor authentication.
The major benefit of using TPGenie is the time saved that was previously spent on documentation preparation and energy needed to meet compliance obligations. When tax authorities request your transfer pricing documents, you will have all necessary data available within one click of a button.
State of the art transfer pricing solutions like the TPGenie offers solutions to consolidate financial data related to transfer pricing on an ongoing basis and not only yearly. To automate can mean that the tedious process of manually collecting data could be a thing of the past. The automating of the transfer pricing system could mean that proactively controlling the distribution of profits within the MNE during the course of the year and this enables entities to achieve arms-length profit ranges for each type of transaction and transfer pricing method. The automation could become a key compliance and success factor for any transfer pricing manager around the world.
- Schoeneborn, F & Rastogi, D. 2020. Embracing the automation of transfer pricing.