Forecasting: Key Driver for an Effective Transfer Pricing Strategy

September 2020

As business leaders around the world assess the impact of the economic downturn on their companies, one of the most demanding tasks is understanding the effects on short- and long-term operating and financial results. With year-end tax planning matters top of mind, companies must adjust forecasts and manage cash flow to recover and stabilize their business. The repercussions of the adverse economy on transfer pricing—supply chain disruption, dramatic shifts in customer demand, declines in revenue with no corresponding reduction in costs, eroded profit margins and the consequent challenges in supporting the arm’s length nature of results—is particularly acute. Finance, tax and treasury teams must make difficult decisions on their approach to intercompany pricing policies, deciding whether to maintain existing models or adjust pricing targets, all while taking into account the impact to their U.S. and foreign affiliates.
 
To help determine the appropriateness and level of downward pricing adjustments, advisors and companies rely on “past performance” of the most recent economic crisis to justify current pricing and missed target margins. Alternatively, some are exploring complex economic adjustments to their comparable benchmarks next year to document lower results for compliance purposes.
 
BDO has developed a technology-enabled proprietary Forecast Engine to help businesses across varying industries make swift decisions on current-year pricing adjustments based on aggregated data from Wall Street analysts. Output from BDO’s Forecast Engine gives companies dashboard access to the latest equity-analyst projections allowing them to view real-time financial forecasts for any grouping of publicly traded companies, including transfer pricing-comparable sets or enterprise-level financials for industry competitors. These customized dashboards help clients visualize ranges of what Wall Street anticipates for any number of financial metrics, e.g., revenue growth, EBIT/EBITDA margins, effective tax rate, mark-up on cost, etc. Data sets can be used on a stand-alone basis or compared in the dashboard to historical results, which provides companies with an accurate baseline by which to refine their in-year transfer pricing and target margins, compare forecasts to industry peers, mitigate risk and preserve cash.
 
Using the Forecast Engine, companies should be better able to manage cash flow for current needs and eliminate the dependency on after-the-fact adjustments or complicated economic modeling to support missed transfer pricing targets, thereby mitigating the risk of costly year-end or post-year-end adjustments.
 

Summary 

For transfer pricing tax executives, potential implications to existing transfer pricing models and necessary year-end adjustments are increasingly difficult to model. BDO’s Forecast Engine distills analysts’ forecasts to provide real-time information to refine current-year pricing and target margins, thus helping reduce costly year-end transfer pricing adjustments and preserving cash.
 

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