For many MNEs, transfer pricing is one of the major tax risks. This is because if an MNE and the tax authorities cannot agree on the arm’s length price, this can result in fines or disputes. This is not only bad for the company’s finances but also for its reputation. With this in mind, it is understandable that it is of utmost importance that the same transfer pricing policy is applied throughout the organisation.
In short, what is operational transfer pricing?
OTP is the management of transfer pricing policies throughout a MNE using technology. By effectively streamlining these policies, an OTP aligns transfer pricing requirements with commercial goals, thereby promoting compliance and reducing complexity.
Background of operational transfer pricing
In the past, MNEs used enterprise resource planning (ERP) systems. However, these systems were aimed at managing the company as a whole rather than specific legal entities. As a result, these systems proved less suitable for the transfer pricing process. Instead of these systems, manual processes were used to determine intercompany prices, for example. Companies were able to do so because there was enough time for it after the year-end closing.
However, this is no longer the case in the current spirit of the times. Today, reporting to the tax authorities is almost in real time. In other words, the time one had to manually determine the intercompany prices has disappeared.
In addition, the Base Erosion and Profit Shifting (BEPS) project is important. As a result, different tax authorities exchange more and more data with each other. This makes it easier for tax authorities to check whether the arm’s length price is correct. It also ensures that each country wants to get a fair share of the profits. This makes it important that an MNE determines its transfer prices in a consistent manner.
In other words, it is important today to align activities with tax compliance. Transfer pricing requires input from and alignment among various stakeholders within the enterprise, and automation can help achieve this alignment.
Why is operational transfer pricing important?
Today, data is invaluable. This also applies to transfer pricing. Almost every company uses data to optimise business processes. This has not gone unnoticed by tax authorities and they are increasingly focusing their investigations on this data.
Besides the fact that tax authorities exchange more data as a result of the BEPS project, this project has also led to increasing legal requirements for the determination of arm’s length prices. For example, country-by-country reports. It is important that the same transfer pricing policy is applied everywhere.
It is therefore essential for companies to have an organised and easily accessible system in which transfer pricing data can be analysed and assessed. In the absence of such a system, it can become difficult to substantiate a certain tax position. This can lead to lengthy and costly disputes during audits.
In addition, a properly implemented OTP policy has a number of other advantages:
- It helps avoid unnecessary tax leakages or customs costs;
- It reduces financial risk;
- It provides foresight.
OTP can be used to implement a uniform transfer pricing policy throughout your organisation. As a result, many manual processes can be automated and you create a system that allows you to substantiate your tax position to the tax authorities.