Reshape Your Year-Round Tax Function With Transfer Pricing Software

In many organizations, transfer pricing adjustments are like a lot of other last-minute activities. They seem to be ignored throughout most of the annual cycle. Then, they suddenly take on a great importance at year-end. That leaves the tax team scrambling to address an entire year’s worth of transactions. It also leads to interdepartmental friction in many cases.

If transfer pricing is changed retroactively for the entire year, that can have far-reaching implications. In some cases, it can disrupt planning and budgeting processes by radically changing the assumptions managers used in setting expectations for the coming year. That can lead to a domino effect, even impacting performance-based employee compensation plans.

Last-minute transfer pricing changes can have significant real-world implications for the organization. A better approach is to proactively manage transfer pricing throughout the course of the year using purpose-built transfer pricing software.

The Root of the Problem: Manual Processes

Surprisingly, even many large global companies are still using manual processes to manage tax planning and transfer pricing. This hinders visibility into how each subsidiary is tracking throughout the year against its profitability targets. The result is a year-end scramble to make adjustments after finance numbers have been finalized.

If tax teams have sufficient bandwidth, they may be able to generate monthly or quarterly estimates based on trial balance activity. Unfortunately, that’s simply not possible in most organizations. According to a survey conducted by insightsoftware, 70 percent of respondents reported tax teams do not perform these kinds of pre-close provision calculations. The remaining 30 percent calculate year-to-date actual balances toward the end of the year, with estimates for the final months of the annual cycle.

The fact that the data is constantly changing renders this task even more challenging. The tax, transfer pricing, and finance teams at many organizations operate within their own distinct silos with limited communication among them. Add the complication of sharing information across multiple corporate entities, and it’s little wonder that many teams prefer to handle transfer pricing calculations only once a year.

Easing the Burden With Transfer Pricing Software

Gaining control over transfer pricing calculations is far easier than it may sound. The key is to dispense with manual processes and informal communication channels. Emails, phone conversations, and file sharing are poor solutions for the problem. Instead, utilize purpose-built transfer pricing software that provides a common, unified platform and enables everyone to work from the same playbook.

Automation of operational transfer pricing (OTP) processes is long overdue for most organizations. Dedicated transfer pricing software increases visibility, improves compliance, and establishes confidence in the final numbers. That allows OTP teams to coordinate more effectively with finance teams and business unit managers to make informed decisions early, rather than waiting for year-end to make highly disruptive large-scale adjustments.

This measured approach is a welcome departure from the uncertainty produced by manual methods and substantial year-end changes.

Accuracy and Consistency

Tax teams that rely on spreadsheets and manual methods to perform transfer pricing calculations frequently tell us that accuracy and consistency are recurring problems for them. A large global software company, OpenText, was using over 40 spreadsheets to manage these processes prior to investing in a dedicated transfer pricing solution.

This carried a high degree of risk. After all, we’ve all seen cases where a formula was overwritten or the wrong value was entered, leading to an error in the resulting calculations. Even a seemingly small error can lead to a major problem, especially when tax compliance is at stake.

Purpose-built transfer pricing software, in contrast, offers a structured and unified system for managing all of the information associated with these important tax calculations. This results in consistency and accuracy across the board, which leads to much greater confidence in the final results.

Accelerating the Year-End Close

A significant ancillary benefit of using transfer pricing software is the ability to close the year substantially faster and with greater confidence than with manual transfer pricing calculations. That produces better results for executive management, and it’s less stressful for employees.

Updating manual spreadsheets can be a tremendously time-consuming process, consuming days or even weeks of time. If your organization is engaged in significant mergers and acquisitions activity, that adds even further to the complexity involved with transfer pricing calculations.

At OpenText, the tax team was experiencing high turnover because of the stress and workload surrounding quarterly transfer pricing calculations. Managers were hiring new employees as fast as they could but eventually recognized that their organization needed to work smarter, not harder. They turned to Longview Transfer Pricing from insightsoftware.

Longview Transfer Pricing enabled OpenText to move from a quarterly cycle for transfer pricing calculations to a monthly cycle. They were able to automate many of their processes, eliminating enormous amounts of manual effort as a result.

The transfer pricing team was able to shift from low-value activities such as updating spreadsheets to high-value activities such as analysis and investigation. Longview Transfer Pricing empowered the team to focus on reporting, flux/variance analysis, and identification of important trends. They were also better prepared for audits and were no longer concerned about the risks associated with manual spreadsheets.

By shifting to a year-round approach to transfer pricing, OpenText has been able to increase the organization’s speed and efficiency, improve confidence in the numbers, and generate additional value for the company by simulating scenarios to drive better business decisions.

If your organization is struggling with the year-end rush to make transfer pricing adjustments, Longview Tax can help. To learn more about our transfer pricing software and hear how OpenText has benefited from automation, watch our free on-demand webinar, Taking Our Operational Transfer Pricing from Reactive to Proactive.