The annual preparation of transfer pricing documentation is – similar to the filing of a tax return – a necessity to fulfill compliance requirements in many countries. Companies should therefore think about how to maintain a sufficient compliance level in a cost efficient way. The nature of transfer pricing documentation gives opportunities to realize synergies and benefit from automation. This is due to the fact that even though differences in local legislation exist, necessary key information is the same for many countries. In order to prepare transfer pricing compliance in an automated way, the following elements are essential and need to be combined:
- TP documentation structure: the basis for efficient and automated transfer pricing compliance is to define a documentation structure that can be used group-wide and allows for easy update of the annual information. The BEPS Action 13 approach with a Master File and Local Files provides the conceptual basis. An important element is the clustering of transactions and the definition of transaction groups. Ideally, transactions should be grouped together in a way that there is not too much granularity and that the documentation of these transactions groups (so-called transaction modules) can be used in a uniform way by all entities involved in the relevant transactions. This might require certain changes but also offers opportunities for simplification to the existing transfer pricing documentation system.
- Workflow: once an efficient TP documentation structure has been established and templates for the Master File and Local Files including transaction groups have been created, a clear process for the annual update and preparation of the TP documentation needs to be defined. Who reviews the TP documentation templates at the beginning of the compliance cycle, who provides transaction volumes, who provides the local company information and who finally signs-off the final Master File and Local Files? This process should be managed through a workflow solution to ensure that tasks are executed and the required information is provided on time. While a huge variety of workflow tools are today available in the market, tax departments should check which workflow solutions are already in use in their companies. The most suitable solution is the one that allows a seamless connection of the different process steps.
- Update of financial information: a lot of information can be provided and incorporated in a centralized way. This often refers to intercompany transaction volumes. Once retrieved from the source system, the specific information per legal entity can be compiled. Data analytics software like Alteryx can help to process large data amounts and provide the aggregation level that is needed for TP documentation (sales transactions, IC services charges, etc.). With the help of the workflow solution this Information can then be merged automatically with the TP documentation templates. An important element to keep in mind is that transfer pricing documentation is a once-in-a-year process. Establishing a data model that aggregates transaction volumes and compiles other relevant information always in the same way helps to ensure consistency as opposed to a manual process that may be slightly different year over year.
For every company an automated TP compliance framework may look differently depending on the company structure and the TP system. However, a well-defined documentation structure, a customized workflow solution including information gathering and data processing are always key elements. It is recommended to start with a review of the current transfer pricing documentation structure and the preparation process. This is the first step to implement an automated and sustainable approach to transfer pricing compliance.
Once an efficient process has been defined the appropriate tools and solutions can be selected and connected to get to full or largely automated transfer pricing compliance. Here it is recommended to consult with experts inside or outside your organization to select the appropriate technology. Like in many other tax and finance areas, the TP compliance process can then be developed further considering costs and benefits.