COVID-19 introduced an unprecedented level of volatility in world markets, and the shockwaves that arrived in its wake exposed a wide chasm between two main types of multinational organizations: Those with agile internal processes and those without.
In a world built on complex and globalized supply chains, COVID-19 tested that internal agility, sometimes to breaking point.
Operational transfer pricing teams had a unique perspective during the crisis, because their work involved the oversight of profits, losses, and other tax-related matters across their organizations’ entire portfolio of subsidiaries.
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These teams were responsible for pulling the levers across company portfolios to minimize undue global tax risk during the volatility that COVID-19 created, and will continue to produce.
It’s crucial that operational transfer pricing teams are well equipped and fully empowered to proactively manage their portfolios during such crises. Having the right people, processes, and technology within the department can often have an outsized impact on the entire organization’s performance. Conversely, when the operational transfer pricing function suffers from deficiencies, it can put the entire organization at risk.
This is what we refer to as the “productivity chasm” in operational transfer pricing—a gaping canyon that will increasingly make a difference between those organizations that can better plan for the future, and those that cannot. COVID-19 served as a wake-up call for the organizations that had not yet realized this, and triggered many multinationals to investigate alternative approaches in order to avoid operating at a permanent disadvantage due to their greater exposure to tax risk.
Leaders and laggards
Organizations that had properly invested in their people, processes, and technology were able to maintain a finger on the pulse of what their subsidiaries were up to during the crisis. Had companies dropped prices to stay afloat and avoid layoffs? Did others raise prices because of increased expenses in their supply chain? Were any taking advantage of government loans and credits?
This visibility allowed transfer pricing teams to work quickly through numerous “what-if” scenarios and potential responses, then coordinate with their finance teams and subsidiary directors either to revise the projections or the prices. The ability to take this kind of swift action will continue to add significant value.
On the flip side, organizations that had failed to sufficiently invest in their people, processes, and technology across their finance, tax, and transfer pricing functions were at a woeful disadvantage, completely unable to proactively track the health of their supply chains.
Lack of visibility meant that organizations were essentially leaving their subsidiaries flying blind. They were completely uncoordinated with the pricing changes they decided to make in response to obstacles that surfaced since the first COVID cases were reported back in December.
While these companies did the best they could with the information and resources at hand, a multitude of knee-jerk reactions and misinformed choices will come to a head when they run their year-end reports, see shocking variances, and have to submit gargantuan pricing adjustments. The worst, however, will happen when the tax authorities come knocking.
Governments are becoming increasingly confident in their fights against the companies they deem to be dodging taxes, and large year-end adjustments are exactly one of those audit triggers that can land tax teams in the hot seat and put their organizations on the hook for hundreds of millions of dollars in penalties and back taxes owed.
Crossing the chasm
Although the productivity chasm is wide, it can still be crossed. Laggards that invest in the improvement of their processes and technology can absolutely catch up with the leaders of the pack. So how can corporates take the first steps toward building best practice operational transfer pricing processes?
Finance, notably tax, is one area of business that can most benefit from automation, whereas operational transfer pricing is a process ripe for modernization.
However, many multinational enterprises continue to use spreadsheets to manage operational transfer pricing. Data collected and stored in this format are difficult to share and update centrally, especially when teams are working remotely.
The spotlight on the transparency and effectiveness of operational transfer pricing comes at a time when tax authorities are looking for more transparency from multinationals and their transfer pricing activities. The OECD’s BEPS recommendations mean tax authorities can access data from detailed digital tax filing requirements, while tax regimes are changing and are more complex to navigate than ever before.
This means boards of directors are looking for more certainty in the operational transfer pricing models and reports provided by their tax teams. Not only do they want to avoid a close-of-year scramble to ensure pricing is correctly allocated, but they also want to be able to provide tax authorities with an accurate audit trail if, or when, they are challenged to defend their pricing.
Building visibility and confidence
The alternative to managing such a complex process using spreadsheets is to adopt a platform designed from the ground up for operational transfer pricing. The main aim of this approach is to increase both visibility and confidence in the numbers, so that operational transfer pricing teams can coordinate with finance and business unit colleagues to make well-informed decisions earlier on, and throughout the year, rather than making large year-end adjustments.
Centralized, consistent, and clear visibility into actuals—and the resulting variances from transfer pricing strategies—is what allows for true competitive excellence. Using the right platform, teams can maintain harmony between their strategies and actuals, which translates into overall harmony among individual stakeholders and external auditors.
As Ventana Research writes in its report The Corporate Tax Management Imperative: “Having consistent, reliable data and a system that scales to handle an organization’s volume of transaction enables pricing management that has consistency and control. A dedicated application enables senior corporate executives and internal audit [staff] to have greater visibility and assurance in the application of transfer prices.”
The competitive advantage of having tight coordination over pricing throughout internal supply chains will continue to widen the chasm separating the leaders from the laggards. But it’s entirely possible to catch up by adopting the right processes, controls, and supporting technology.
Although any sort of organizational change is complex to steward effectively, numerous examples show that it is nevertheless possible, as long as the right legwork is done at the beginning of the process. Organizations that want to bridge the productivity chasm need to take stock of their current situations, lay out what needs to be improved, gather support from both the executive board and the wider team, and then execute methodically.
One of the silver linings in any crisis is that change can expose weaknesses and highlight strengths. COVID-19 has presented organizations with the opportunity to reflect on where their processes have experienced the biggest stresses and strains, and how they can be ready to face future shocks. There may never be a better opportunity to ensure critical tax systems are in the best shape to help organizations operate effectively, remain compliant, and improve transparency.