Five common challenges with Operational Transfer Pricing

Implementing Transfer Pricing policies can be challenging for all businesses – no matter the scale or complexity.  

Operational transfer pricing (OTP), which looks at how these policies are implemented, cuts across data, process, people and technology. Getting this right however is no simple task. In fact, according to a previous Deloitte market survey, almost 70% of Heads of Tax at over 250 multinationals believe there is room for improvement in their Group’s OTP processes.  

Given the breadth of the data required for Transfer Pricing, and the different teams across Tax and Finance often involved in carrying out OTP processes, the challenges can be wide ranging and have a real impact on an organisation. 

Inefficient or inaccurate Transfer Pricing policy implementation can lead to real cash outflows due to large year-end adjustments, tax fines and penalties. Similarly, the loss of precious time performing repetitive, manual tasks is pulling important resources away from higher value add activities. 

So, what are the most common OTP challenges and why do they pose such a problem to organisations? And what are some of the considerations Groups should consider when tackling these challenges? Here is our top 5: 

One - Unreliable Data:

The underlying data for Transfer Pricing calculations can be difficult to extract from source systems, especially in the format that is needed. It can also be hard to ensure that there is the right level of granularity in the data collected and that this is consistent across the Group, particularly where there are disparate source systems being used.  

Risks can arise where different teams across an organisation use differing versions of data sets (for example, where local statutory adjustments are made outside of source systems), which can result in inconsistencies with Transfer Pricing policies, tax and statutory filings and increases the need for “one source of truth” and effective controls and records.   

As tax authorities increasingly request real-time data -  something that looks to become the norm in the future - accessibility to accurate data on a timely basis is becoming increasingly important. That is why Groups should consider standardising source data and ensure sufficient appropriate governance is in place so that data is accurate and consistent across the Group. 

Two - Non-standardisation of calculations:

A group’s end-to-end OTP calculation involves a series of interconnected processes, from data extraction and manipulation, through to calculation and reporting. These processes are often manual and prone to human error, especially where companies rely on legacy Excel spreadsheets. Any part of the end-to-end process can be standardised and automated. Not only can this reduce risks arising from manual processes, but also reduces time and effort spent in preparing and executing calculations.  

As tax departments budget become more constrained and finance processes are increasingly sophisticated, there is pressure mounting on Transfer Pricing to do “more with less”. Groups should assess where there are manual steps throughout the calculation process (and associated risks), and consider standardising these elements, whether these are in Excel or more sophisticated technology solutions. 

Three - Key person risk:

Another key challenge is where specific knowledge is held by a sole individual in the organisation in respect to the OTP processes. When they leave or retire, there is a risk that the process cannot easily be continued without them, particularly where large and complex models are in place. This can be compounded where there is a lack of process documentation (which set out the necessary steps to execute an OTP process) and/or lack of training to transfer the knowledge to the wider team.  

Where Groups face key person risk, process documentation can be developed that sets out the data required to run calculations, the steps to execute the process, and who is involved at each step, along with the associated controls. This can then be used for future training purposes but also ensures that all teams involved are clear on their role and responsibility.  

Four - Poor risk management and controls:

Poor risk management and controls, often a result of a lack of a wider governance framework, can be one of the most overlooked challenges. To ensure that Transfer Pricing risks are managed, a clear risk strategy needs to be set and carried out, identifying where the greatest risks sit and their associated potential exposure.

Risks should then be mitigated through implementation of robust controls for every part of the end-to-end process, with supporting documentation including clear definitions of the roles and responsibilities across different teams. Performing a holistic risks and controls review of all Transfer Pricing processes can help Groups evaluate where risks lie across the Transfer Pricing function and whether there are sufficient controls in place to mitigate those risks or where further controls need to be implemented. 

Five - Choosing the right technology:

Many companies still predominantly rely on Excel spreadsheets which may lack adequate controls and the associated audit trail to perform the OTP calculations and to be able to provide the supporting documentation when requested by the business or tax authorities. There is now a wide range of technology tools in the market to help automate these calculations, many with added data visualisation capability through highly customisable dashboards which allow for faster and effective decision making. As companies face specific challenges in their OTP calculations, selecting the right technology tool which best addresses these challenges is critical for a successful outcome.

The use of enhanced technology to automate or further automate the implementation of Transfer Pricing policies can bring significant rewards. In considering how technology can best enhance the Transfer Pricing implementation process it is necessary to evaluate the OTP solutions based on the specific requirements of the Group and the Transfer Pricing model, considering functionality, user experience, ease of implementing changes to the solution, fit with current IT architecture and scope beyond the immediate requirements.  

As there are many options in the market, a vendor selection process can help assess the most appropriate technology tool based on a Group’s requirements, future ambition and budget.

How can we help:

Where any of these challenges resonate or where you wish to discuss further, please get in touch with the team or take a look through our OTP website  for information on how we can help.