As transfer pricing practices and legislation evolve, many organizations find themselves working with a patchwork of uncoordinated transfer pricing solutions and processes. The result can be convoluted daily business and a muddy foundation for decision-making. It may be time to take a fresh look at the transfer pricing model.
Those businesses that are constantly adjusting their transfer pricing model to deal with changes in master data, pricing, invoicing, and forecasting are not alone. Common practice does not equal best practice though, and leading organizations are reducing complexity by aligning systems, cutting out redundancy, and embracing automation.
Design the future
For a fresh look at transfer pricing, it’s time to take a step back and consider the transfer pricing model from an operations perspective. Operational transfer pricing combines transfer pricing requirements and commercial goals to reduce complexity and improve outcomes.
One of the main challenges here is the fact that transaction flows, pricing, master data management, and other key determinants of operational transfer pricing are driven by decisions outside a company’s finance and tax divisions. Designing a transfer pricing operating model requires intense examination of the business processes as a whole. The commercial facts and characteristics of the value chain, as well as the systems for managing operational transfer pricing-related data, must be at the center of an effective operational transfer pricing model. This way, when changes happen, the governance is automatically in place to determine they are reflected accurately and intelligently in the transfer pricing processes and outcomes. This approach is useful not only for new or changing transfer pricing operating models, but also to facilitate integration following acquisitions, mergers or restructurings.
Leading organizations have been observed to be consciously stepping away from legacy pricing approaches and exploring alternatives—including potential efficiency gains from technology enablement.
Focus on outcomes and impacts
Given the complexity of the transfer pricing environment, many organizations find it helpful to start at the end—what are the desired outcomes? For instance, there may be specific profit allocations in mind for each jurisdiction in which the business operates, or for particular portions of the value chain. In many instances, this logic may have been in place at some point in time, but commercial, systems, and organizational changes challenge the operational transfer pricing model. In those instances, mapping activities, flows, and processes in those jurisdictions and working backwards to explore the underlying circumstances may be beneficial and can be the starting point for further analysis and optimization.
As businesses consider bringing their operational transfer pricing to the next level, they may find a resource-efficient way to find out whether they are leading or lagging with their transfer pricing model (and where). A blueprint of where the business stands allows them to make quick, informed decisions about changes and engage with other stakeholders.
Who’s in charge?
True control in transfer pricing is about ownership of processes and governance. For some companies, this is a challenging way of thinking and involves collaborating with a broad range of stakeholders from different organizational areas (such as, sales and operations planning (S&OP), accounting, financial planning and analysis (FP&A), treasury, sales, and research and development (R&D).
It’s important to choose the right governance model to determine that operational transfer pricing issues are dealt with in an organized way, involving all relevant stakeholders. Regardless of the industry, a company can benefit from better alignment of automation, governance, and processes to its specific business footprint. There is no one-size-fits-all when it comes to governance models that empower more efficient operational transfer pricing. However, focusing only on the transfer pricing outcomes—and not on governance and processes—can be shortsighted.
Data depends on processes
Good data is the basis for informative benchmarking and reporting. Extracting meaningful metrics from transfer pricing processes is much easier if the underlying processes are in place. Advances in data-driven technology make analytics a real option for most companies.
Choosing among the many available automation approaches—from robotic process automation (RPA) to enterprise resource planning (ERP) enabled operational transfer pricing—can seem like a complicated process. However, a structured approach starting with transparency on the operational transfer pricing processes, desired outcomes will bring the company to the right technology choice.
A valuable investment
Investing in operational transfer pricing is a valuable step towards controlling the global transfer pricing footprint. Efficient operational transfer pricing management means that the underlying processes are integrated and coordinated. In leading organizations, the daily transfer pricing business almost takes care of itself.
Read a December 2019 report prepared by the KPMG member firm in Switzerland
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.