KPMG report: Operational transfer pricing health check

Adapted from an article prepared by the KPMG member firm in Switzerland

Adapted from an article prepared by the KPMG member firm in Switzerland

Companies are facing constantly increasing compliance requirements in many areas—including tax and transfer pricing.

Compliance requirements not only refer to the preparation of documents—such as tax and transfer pricing returns, Local files, and similar documentation—but also to the underlying finance and tax processes. This is in line with globally increasing requirements regarding internal control systems and tax compliance management systems. Many companies do not have a proper tax compliance management system yet, and this could give rise to more severe, unanticipated consequences.

Importance of transfer pricing processes

There are a number of common processes (a process being a series of activities that are connected in order to produce a specific outcome) within the transfer pricing life cycle, such as with regard to the review of transfer pricing policies, the annual transfer pricing compliance process, and the operational transfer pricing processes related to the daily pricing and execution of intercompany transactions.

Among the transfer pricing 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 effect 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 thereby creating a need for constant and clear communication and coordination. 

As operational transfer pricing processes are critical and challenging, taxpayers need to have a clear understanding of them—and also have written process descriptions and validate 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 taxpayer’s position in disputes with tax authorities. Operational transfer pricing processes that are properly mapped and embedded into a tax compliance management system can protect companies and their employees from accusations that adverse transfer pricing outcomes are a result of organizational deficiencies and that a company acted with intent. 

Operational transfer pricing health check provides transparency

Transparency on key transfer pricing processes is the first step and a must-have, and is 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 compliance management system to support the business and protect the company.

Read a February 2022 report prepared by the KPMG member firm in Switzerland

 

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