What is operational transfer pricing?

RSM transfer pricing professionals highlight recent developments and planning opportunities for maximizing how companies manage their transfer pricing lifecycle from planning to implementation, to compliance. Learn about how implementing an operational transfer pricing approach could yield benefits for your business. Listen to the conversation here:

Or, read the transcript below, edited for clarity:

Emma Sweeny (ES): Today I am sitting here today with Anju Singh who leads RSM’s national operational transfer pricing group. Anju brings with her 20 years of diversified tax experience from the Big Four and other well-known firms. We're delighted to have her here today to walk us through operational transfer pricing and what we're seeing in the industry today. Anju, to start off can you walk me through what operational transfer pricing is for those listeners or readers who aren't familiar?

Anju Singh (AS): Sure. Thank you, Emma. Operational transfer pricing (OTP) is the proactive management of transfer pricing policy that enables us to have an end-to-end solution. What I mean by that is if we think about the transfer pricing life cycle, it can be broadly categorized into three main areas: planning, implementation, and compliance. Focus is traditionally on the compliance area and planning. OTP comes into play in the implementation category. The overarching goal is that there is an alignment between the three categories. For example, what we are plan at the beginning of the year is what gets implemented in the systems and records the company has, and that is what is reported in the form of transfer pricing documentation. By creating this alignment, we are able to ensure policies are actually happening on the ground consistently, around the globe.

(ES): That’s a great overview. Now let’s transition to why OTP is gaining so much traction lately.

(AS): I am happy to expand on that. It's been trending since base erosion profit shifting (BEPS) came into effect in 2015. One of the big themes of the BEPS project was to increase tax transparency, whether in the form of new disclosure requirements as proposed in Action 12 and 13, or in the form of automatic exchanges of information between tax administrations. What these developments led to was tax authorities now having access to tremendous amounts of data in real-time. Those tax authorities are also acquiring new tools and technologies and becoming more savvy using them to analyze the data. It isn’t surprising that they are asking more detailed, data-centric questions and is beginning to shift their focus from being compliance-driven to more processes and controls the company has. Other than the BEPS project, there has always been political pressure from governments around the globe to ensure they are getting their fair share of profits. This may get further magnified in a post-pandemic world as companies begin to reassess their transfer pricing positions and become more consistent. With that in mind, OTP will become even more important in the next few years.

(ES): That's a great point you raise. As clients look to move forward and use OTP. What are some typical challenges companies are facing?

(AS): In my experience, one of the biggest challenges companies face is with their financial systems and the data it holds. We have to understand that systems are configured for the overall business of financial reporting for management reporting and not for legal entities. They rarely have information available at the right level of depth and detail that is necessary for transfer pricing purposes. Getting complete and accurate data, in itself, is a huge challenge for companies because there are layers and layers of manual activities they have to do to extract, manipulate, and validate before they can use the information. Adding to this, many companies are still using very archaic technologies. Even many large multinational companies have very manual processes and are still using spreadsheets to run their OTP calculations. Another aspect that adds to the complexity is there are multiple stakeholders involved in the end-to-end process. A tax team does the planning and policy setting, IT providing the data infrastructure and support, and ultimately the finance or operations teams that execute the policy, with the tax department handling the management, reporting, and documentation in the end. You can see there are multiple touchpoints and if you don't manage it properly or have clear accountabilities or a streamlined process, this could lead to a variety of problems downstream.

(ES): Wow. You've given us a lot to think about. We’ve talked about some of the problems, but what are some solutions? What would you recommend to companies considering OTP and asking ‘is this right for me?’.

(AS): There is a range of technology solutions available from Excel-based solutions, to vendor-offered solutions, to ERP-based solutions. However, as they say, there is no one-size-fits-all. Every company's fact patterns are unique. It is important proper consideration is given to ensure any solution picked is the right fit for the company's business and the industry it operates in. Before you embark on any technology solution, it's important you level-set on the entire end-to-end process. It's important you identify your current state.

• Where you are today with respect to your data and process?
  
• Where do you want to be?
• What's your future state?

And then, determine the gaps and plan a roadmap for how you will get there. Finally, there is a common misconception about operational transfer pricing solutions – that they are too time-consuming or too costly. Which isn’t true. You don't need to have a big budget for operational transfer pricing. Once you have defined your roadmap, you can start by streamlining even small chunks, like automating your cost allocations, or setting a more efficient process for your profitability reviews. By having a step-by-step, phased approach you will see a clear benefit in the overall process for your organization.

(ES): Anju, thank you so much. You've given a great overview of operational transfer pricing and I certainly look forward to having you back to dig into some of these concepts a bit deeper. It's been a pleasure speaking with you today and thank you.

(AS): Thank you so much, Emma. Appreciate it.