As with many tax topics, compliance is a key motivator for tax departments. Under the spotlight of increased public scrutiny and reputational risk, organizations know that compliance is the only option. The approach to tax risk management and reporting—including disclosures on transfer pricing risk—will, to a certain extent, depend on external requirements (particularly from accounting and tax regulations). However, companies also face a strategic decision when it comes to tax risk appetite, transparency, and communication. There is also a common underlying goal of laying bare a company’s tax considerations in order to safeguard confidence in financial reporting.

For many tax departments, transfer pricing risk management is yet another compliance exercise to add to the growing list. For an overburdened, understaffed tax team, risk assessments are dutifully repeated each reporting period and gratefully forgotten until the next time. Or until a risk event occurs.

Bang!

The use of a formulary approach [amount x probability] for assessing transfer pricing risks is the starting point for most organizations. However, without a framework for risk identification, mitigation, and especially modifications, new or unlikely scenarios inevitably slip under the radar. When probability is small, risk is deemed low. If a risk incident does occur, however, the results can be explosive. Tax risk blow-outs have shown to be consequential both in terms of outside perception and increased focus inside the organization.

A better way

An intelligent approach to transfer pricing risk management saves time in terms of those annual risk assessments. But it also has the potential to save significant effort—and expense—further down the road.

• Transfer pricing risk diagnostics: A diagnostic approach to transfer pricing shifts the emphasis from reactive to proactive. Transfer pricing professionals are juggling an increasing list of compliance and other duties. But by consolidating resources in a sound transfer pricing risk control framework, the transfer pricing team can focus on managing root causes of risk, rather than reacting to outcomes of poorly managed risk.
• Targeted resource allocation: With a clear overview of risk, transfer pricing teams can intelligently allocate resources. Depending on a company’s specific circumstances, that could mean focusing funding and people hours on a specific high-risk area. It could also mean picking some low-hanging fruits, i.e., quick and easy wins. It’s about setting priorities for maximum positive impact.
• Tracking and transparency: An effective, streamlined transfer pricing risk control framework enables the tax team to track progress in areas of strategic importance. Transfer pricing has broad reach within the organization but may lack sufficient “clout” to influence decisions and processes affecting transfer pricing and the broader business. Metrics on progress and outcomes can strengthen the transfer pricing team’s communication inside an organization and help tax leaders build persuasive business cases for better transfer pricing beyond just risk management.

A paradigm shift

Transfer pricing teams are busy. Often, though, too much time is spent diligently performing repetitive risk tasks, without taking a step back. In other words, professionals are doing the tasks right, but not necessarily the right tasks. And as transfer pricing regulations grow in scope and complexity, the patchwork of transfer pricing risk management approaches is no longer fit for the purpose.

Read a July 2019 report prepared by the KPMG member firm in Switzerland