Requirements regarding internal control systems and tax compliance management systems are ramping up. A structured process mapping approach is critical to detect shortcomings and improve processes. Plus, it can be a strategic tool to steer tax management and support the company in case of challenges.
Companies are facing constantly increasing compliance requirements in many areas, with tax and transfer pricing being one of them. Compliance requirements do not refer only to the preparation of documents such as tax and TP returns, local files and similar. They also refer to the underlying finance and tax processes. This is in line with globally increasing requirements regarding internal control systems and tax compliance management systems (Tax CMS). Here it is important to note that many companies do not have a proper Tax CMS yet, which may have more severe consequences than many organizations are aware of.
Importance of transfer pricing processes
A process is a series of activities that are carried out and are connected in order to produce a specific outcome. There are a number of common processes within the transfer pricing life cycle, e.g. with regards to the review of TP policies, the annual TP compliance process and the operational transfer pricing processes related to the daily pricing and execution of intercompany transactions.
Among the TP processes it is typically the operational transfer pricing processes that are most critical and challenging. They are critical because these processes may have a significant impact on the allocation of taxable income between legal entities and thus on taxable income per jurisdiction. And they are challenging because often, various teams and data sources are involved which creates a need for constant and clear communication and coordination.
As operational transfer pricing processes are critical and challenging, it is important to have a clear understanding of them. This means that there should be written process descriptions and it should be validated that any existing process descriptions are still reflecting reality. This is important in order to comply with internal governance and control requirements as well as to strengthen the position in disputes with tax authorities. Operational transfer pricing processes that are properly mapped and embedded into a Tax CMS can protect companies and their employees from accusations that adverse transfer pricing outcomes are a result of organizational deficiencies and that a company acted on intent.
Operational Transfer Pricing Health Check provides transparency
Having transparency on key transfer pricing processes is the first step and a must-have, especially relevant and highly recommended when the outcomes of the processes are (regularly) not as expected, e.g. target margins are not achieved, profit split results deviate from the defined policies, etc. A structured process mapping as part of an “Operational Transfer Pricing Health check“ provides the necessary transparency with manageable efforts. This is the basis to appropriately document well-functioning processes, detect short-comings, improve processes and outcomes as well as ultimately capture them in a Tax CMS to support the business and protect the company.