The Transfer Pricing Lifecycle: A Holistic Approach

May 2022

BY

Yvonne GolbyTransfer Pricing Implementation & Automation Managing Director

In recent years, the pressure on multinational enterprise’s (MNE’s) tax departments has increased and transfer pricing teams have not been spared. Faced with the need to do more with less, coupled with ever-increasing scrutiny from tax authorities, transfer pricing and international tax planning has become a balancing act of opportunity and risk. In this article we discuss how a lifecycle approach to transfer pricing can help a company prioritize the challenges faced, mount strategic responses and improve collaboration across corporate functions.

Optimally, the first step in approaching transfer pricing from a lifecycle perspective is to take a critical yet problem-solving approach to assessing the current state of the MNE’s lifecycle. The goal of this first step is to set the stage for designing an improved future state through the identification, discussion and resolution of the challenges faced through the transfer pricing lifecycle.
 

Taking the time to understand the challenges

The transfer pricing lifecycle consists of four main phases: planning, execution, compliance and controversy. Each of these phases follows from the ones before and builds on their outcomes. For example, transfer pricing planning can be an outgrowth not only of changes in a business’s footprint or economics, but also from the outcome of a transfer pricing controversy. Similarly, the execution phase of the transfer pricing lifecycle naturally follows planning, and lessons learned from execution may inform not only the compliance which follows, but also the next planning cycle.
 

To be successful in their assessment of their transfer pricing lifecycle, MNEs should dig deeper to understand their position within the four dimensions of tax transformation: data, technology, process and people.    

Data: What data is needed to execute/document a transfer pricing policy and on what time frame? Where is the data sourced and is it available at the time and in the format needed?

Technology: Does current technology hinder or help? Are there opportunities for increased efficiency? Are opportunities being missed due to technology limitations?

Process: What is the end-to-end transfer pricing process and what sub-processes exist? Who are the process owners? How well is the process documented?

People: Is the entire tax department, along with all other stakeholders, on board with the transfer pricing strategy, execution and defense? Is there good collaboration and support between departments that both rely on and support the transfer pricing lifecycle? Is there adequate training for those tasked with the day-to-day execution of transfer pricing calculations?
 
The challenges observed at each phase of the transfer pricing lifecycle can hinder an MNE’s ability to identify and seize opportunities, but by being curious, asking questions, listening and collaborating with those linked to the transfer pricing lifecycle, many challenges can be resolved.

Assessing each phase of the lifecycle through the lens of data, technology, people and process, the challenges may include:
 

Planning

  • An uncoordinated approach to transfer pricing documentation leading to inconsistent reporting of facts
  • Difficult and time-consuming data extraction/manipulation to demonstrate the results of the transfer pricing policy
  • Entity results outside of supportable ranges
  • Personnel turnover that hinders confirmation of prior year fact patterns
  • Varying local country requirements and standards
 

Execution

  • Difficult and time-consuming data extraction
  • Difficulties tracking calculation audit path to match data reported
  • Systems constraints on ability to model potential impacts
  • Lack of clarity around decisions made in the past
  • Calculation errors identified after audit commencement
 

Compliance

  • Reduced scenario planning capabilities
  • Systems limitations
  • Unwillingness of non-tax functions to participate in the process
  • Conflicts between tax planning and local country performance indicators and/or overall business needs
  • Limited view that intercompany transactions are eliminated and thus do not warrant significant planning
  • Insufficient time for adequate implementation preparation
 

Controversy

  • Resource constraints and/or heavy reliance on one member of the team
  • Manual/offline adjustments
  • Calculation errors
  • Insufficient visuals/monitoring capabilities
  • Inadequate controls
  • Lack of cross-functional communication and transparency
  • Large year-end adjustments
 

A strategic response

Not all challenges in the transfer pricing lifecycle are major impediments; however, if left unresolved, those challenges may snowball and lead to a host of problems, from inefficiencies and lost opportunities to significant financial impacts.

Addressing all identified challenges may be unfeasible, so a strategic approach is needed: first, identify and tackle the quick fixes, and then develop a strategic plan to address the medium- and long-term issues that remain.

When developing the strategic plan, it is important to take a step back and look at the bigger picture. Each phase of the transfer pricing lifecycle is intrinsically linked and the outcome of one phase affects the others. For example, changing the execution of transfer pricing calculations may impact the ability to extract data for local tax audits, or solving a resource challenge in one area may lead to improvements in other phases of the transfer pricing lifecycle.
 

Collaboration across functions

One of the most common challenges, at every stage of the transfer pricing lifecycle, is insufficient cross-functional collaboration. Tax departments should not operate in a vacuum, success lies in working together with other corporate functions. For example, IT provides systems access and data, and Treasury provides data on intercompany loans. Conversely, IT relies on the transfer pricing team for critical pricing information, and Legal must receive inputs on the terms of intercompany pricing to execute intercompany agreements.

This mutual reliance can be fostered to lead to better aligned cross-functional team relationships and results:
  • Bringing together cross-functional stakeholders and discussing common organizational goals can lead to successful implementation and execution of broader business goals.
  • Listening to stakeholders outside the tax department will allow a process to be designed that works for all, with greater buy-in for implementation of the selected policy.
  • Identifying data sources and constraints for new or refined transfer pricing policies can provide a head start for successful implementation.

Once this cross-functional team approach is adopted, implementation design-and-build can proceed in a way that will identify and resolve issues and exceptions, create robust process documentation and foster transparent roles and responsibilities. In short, the transfer pricing lifecycle can begin on a solid footing that will positively impact future phases in the cycle.