KPMG report: Transfer pricing and the audit committee agenda, implementation steps

Second installment, as adopted from a report prepared by the KPMG member firm in Switzerland

Second installment, as adopted from a report prepared by KPMG member firm in Switzerland

A prior KPMG report examined various transfer pricing topics that could be optimal for audit committee involvement. The next step—after involvement of the audit committee in transfer pricing issues—would be how to implement audit committee involvement. 

An audit committee (given its other responsibilities) has limited time to devote to transfer pricing issues. Thus, this requires that the necessary information is condensed, is to the point, and is easily understandable so that individuals with limited transfer pricing experience can quickly grasp and understand the issues. At the outset (or for that matter, at any time for audit committees that have not dealt with transfer pricing in the past) and then at regular intervals, a summary of a comprehensive transfer pricing “health check” with evaluation of items such as the transfer pricing policy, compliance status, and processes would be necessary so that all parties start on the same page and so that there is a baseline understanding.

On an ongoing basis, the audit committee could deal with these topics through the help of “dashboards” that provide the required information in a condensed graphical format and that allow for audit committee members to focus on areas with potential risks. Such dashboards could provide an overview of the group’s profitability on an entity-by-entity basis (compared to standardized transfer pricing benchmarks), given the entities’ functional profiles as well as an overview of the allocation of the group profits among the various jurisdictions where it is located. Such overviews can be used by the audit committee to assess, at a high-level, whether the profit allocation is broadly in line with the group’s understanding of where value creation takes place. 

What does this mean, in practice?

The creation of transparency regarding these topics is not only in the interest of the audit committee, but also may benefit those parts of the organization operationally dealing with transfer pricing topics—such as the tax department.

A health check would, in any case, be performed periodically to determine that intercompany transactions are priced according to the transfer pricing policy (as targeted by the group). Furthermore, this type of exercise can also be useful to look beyond and foresee specific operational challenges, by allowing a moment to assess the status quo. Such a health check does not have to be the result of a long, manual exercise but can be relatively easily performed through automated data analytics tools. The compliance status could be developed out of workflow management systems that are used to organize the compliance process, which many organizations still view as a project.

Condensed information on compliance in different countries, ongoing tax audits and their status, and similar items are beneficial for the operational units at the group’s headquarters. Therefore, the development of such dashboards would not be merely understood as a means to satisfy audit committee requirements, but also as a possible overall process for the organization. A description of processes could be helpful because many organizations handle numerous transfer pricing topics on a rather ad-hoc basis. 

Other important aspects to consider

The tax world changes and evolves, and so do the responsibilities of audit committees—including those responsibilities that are connected to transfer pricing.

The topic of environmental, social, and corporate governance (ESG), for example, has received increasing attention in recent years. To the extent that ESG measures lead to changes in a group’s value chain or business restructurings, transfer pricing may be significantly affected—although, given the increasing public scrutiny connected to the ESG topic, it could in any event be beneficial to review a group’s transfer pricing policy even before major changes in the value chain or business restructurings take place.

Similarly, the increasing number of non-financial reports with which many groups must comply might lead to changes in the group’s structure (such as “onshoring” of certain activities, in-housing of certain services, etc.). Thus, audit committees need to consider evaluating the transfer pricing implications that such changes may have on their organization, and how to determine that, process-wise, the transfer pricing effects of these change initiatives are appropriately considered so as to manage potential risks in this area.

What items to address now?

Actions that can be taken within an organization to increase the focus on transfer pricing include:

  • From an audit committee perspective, to seek dialogue with the tax and finance departments to evaluate together which information may be necessary so as to have a broad overview of where an organization stands in terms of transfer pricing.
  • Ideally, such an information overview would be organized regularly based on a schedule and possibly in the form of a dashboard, which can provide a graphical overview of the information and allow for easy identification of areas of risk.
  • Relevant operational units could be urged to view this not merely as a supervision exercise, but rather as a means of making the organization, as a whole, more robust.
  • From a non-audit committee perspective, actions can proactively be taken by the tax and finance departments to facilitate information access for the audit committee, providing a schedule and determining that the main areas of risks are appropriately covered to facilitate discussions.

Read an April 2022 report prepared by the KPMG member firm in Switzerland

 

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