Tax and finance practitioners agree: Reducing the risk of errors and inaccuracies—and providing greater data transparency—are key concerns when it comes to operational transfer pricing (OTP) reports. That’s because operational transfer pricing—practices and technology to manage the requirements around intercompany pricing and transactions—continues to face high scrutiny from regulators and tax authorities.
Large adjustments and post-year true-ups are receiving strong push-back, putting businesses under the microscope, and creating undue risk. Tax authorities are investing heavily in examining how accounting systems handle OTP and are challenging organizations to defend the accuracy and validity of their intercompany transactions.
But many organizations overlook operational transfer pricing because there has been very little best practice guidance in this area. The guidelines on OTP have traditionally focused on the legal ramifications, rather than needed process guidance.
What’s more, multinational companies are challenged by the scope and complexity of OTP process refinement in part because intercompany transactions rely on diverse teams who operate in silos.
Forward-thinking businesses know that improved OTP processes are an inevitability as the external climate of transparency heats up. Creating process efficiencies on their own time, before urgent public pressure or external solicitation, will ensure organizations are not outpaced by business transformation.
Here are five questions to ask yourself that will help you boost your operational transfer pricing effectiveness:
Question #1: How often are you monitoring your transfer pricing?
The frequency that you monitor your transfer pricing will depend upon a host of considerations. Many companies find regular monitoring difficult because of the complexity required to produce operational transfer pricing reports.
Executing these processes can be timing consuming—and working with huge volumes of data can mean that outputs are not easily digestible. Many companies don’t have specific operational pricing tools as part of their accounting methods, adding a further roadblock to efficiency.
All these challenges mean that most companies only handle OTP once or twice a year, leading to larger post-year adjustments and true-ups. These practices, however, catch the eye of tax authorities for audits.
A better practice is to implement a monitoring process that includes in-year and post-year check-ins for improved accuracy. Consider a target model with touch points on an ongoing basis.
One model to consider: Begin with a light review at or around the three-month mark (or by the end of the first quarter). By month six, or halfway through the year, implement monthly steering to assess how things are shaping up. By the 12-month mark, or year-end, you should have a pretty clear picture of your operational transfer pricing. With this model in place, you should expect minimal changes in the post-year-end period, alleviating some of the burden associated with this time of year.
Question #2: Do your stakeholders have visibility on the transfer pricing process?
All too often in business, we see different departments working in silos when they really should be working together. There remains a need to bring together people and information from both finance and tax to build effective processes. Operational transfer pricing brings that full circle.
That’s because OTP practices have multiple stakeholders for different steps of the process. Each of these stakeholders have unique motivators and drivers to keep in mind.
CFOs, heads of tax and finance, and external stakeholders like tax authorities will place a high-level strategic lens on your operational transfer pricing reports. They will want to see your end-to-end operational transfer pricing as clearly mapped processes that point out any risk factors and areas under improvement.
Tax and finance practitioners who handle the regular reporting will have to have open lines of communication and well defined roles and responsibilities.
Systems should also be in place to handle alerts, notifying relevant stakeholders when issues need to be escalated. Where possible, alerts should trigger in real time to better manage transfer pricing errors.
Each distinct group of stakeholders should be communicated to at a level—and in a fashion—appropriate for the audience. Top-level executives won’t want to be bombarded with swaths of data. They would better benefit from being walked through a profitability analysis or future forecasting based on segmented reporting.
Similarly, those involved in the escalation process may not need to see individual allocations or financial statements, but would want to see full traceability and transparency through layered reporting.
Be sure to tailor your communication as needed and include clear and specific action requests that tell each group what is needed and expected of them.
Question #3. Does your documentation cover the OTP process details?
Process documentation frequently overlooks detailed activities. Often, these details are housed in the minds of employees who handle the operational transfer pricing processes, known as tacit knowledge.
This practice creates a risk for organizations. Relying on individuals’ tacit knowledge places an undue burden on finite resources and extends the risk of manual error. This is further complicated when the method of data housing is relegated to programs like Microsoft Access and Excel, which is far too often the case.
Another major challenge is bringing together the multiple sources of relevant documentation into one consolidated location. The list of relevant data sources may be governed by a department entirely disconnected from the owner of the company’s business and taxation rules, for example.
There should be strong documentation not only around the roles and responsibilities involved in your operational transfer pricing, but also the work instructions that sit beneath the roles. Codifying your process into detailed and complete documentation will allow you to identify gaps in your OTP practices. You can then use this codified knowledge to assess where automation can assist you.
Question #4. What aspects of your transfer pricing can best be improved through automation?
Perhaps you want to shorten the time needed to gather and prepare information. Maybe you want to stop grappling with spreadsheets and Access databases as a means to improve your departmental efficiency. You might want to devise ways to reduce inaccuracies and errors that are requiring large post-year true-ups and stressful audits. Or perhaps you are looking to provide benchmarking and more meaningful insights into your data to guide senior management’s strategic decision-making.
In truth, you may wish to improve the speed, accuracy, efficiency, and insights stemming from your operational transfer pricing. Adding automation by means of OTP software is a surefire way to fulfill these wishes.
While all these efficiencies seem great in theory, putting them into practice by introducing automation can seem daunting. Many people can be overwhelmed by adding technology. With workdays already packed to the brim, many wonder how they can find the time to execute change.
However, adding automation does not require a full-scale overhaul of your practices or a major disruption to your established ways of doing things. Oftentimes you can just add elements that solve your most pressing challenges or major pain points. Longview’s Tax Operational Transfer Pricing technology can be linked in with Excel for example, so you can just replace one difficult transactional allocation model rather than your whole framework.
The key is to use automation to connect strategy and policy with execution. Real-time operational transfer pricing tools lessen the manual, rote tasks that are all too time-consuming, enabling you to free time to be more strategic and forward thinking.
Question #5. Are you prepared to present a case for change on how OTP software can help?
After you’ve assessed the ways in which automation can enhance your accounting and finance departments, you’ll have to communicate to stakeholders how and why this will benefit the organization.
Building a business case for adding OTP software is a great way to explain the need for change. Each stakeholder will be impressed to see you answering the question, “What’s in it for me?” demonstrating how the changes will positively impact them.
To do this, it is helpful to construct a narrative that clearly communicates the benefits of the operational transfer pricing software. It’s effective to begin by addressing the current challenges faced in the operational transfer pricing process, the existing information gaps or areas for improvement. You’ll then need to underscore how OTP software can fill those gaps and alleviate those challenges.
Quantifying those improvements goes a long way. For example, if you’re hoping to achieve operational improvements like shorter OTP data processing, explain that those efficiencies will be gained by harnessing easy data importation functions in the OTP software. You can leverage insightsoftware’s robust team to help you explain the functionality and benefit of connected finance.
Proactive management of operational transfer pricing can ultimately provide a strategic benefit to any organization. Aligning your stakeholders to a more real time, consolidated model will not only remove the onus on manual work, but can also provide the opportunity to drive key business insights.
By adding functionality that enables you to use your OTP data more intelligently, you ensure your business is firmly focused on the future. Gone is the risk of being outpaced by business transformation. Instead, you have the assurance that your OTP practices are valid, accurate and leading-edge.
Find out how you can fully connect finance. Learn more about Longview Transfer Pricing.