Last Thursday, Cedric Stingelin , Jörg Hanken and André Jaekel attended the ITR (International Tax Review) TP conference in NY, which was truly a value-added event. This is to summarize our key takeaways and our key messages to all of you who are interested in Operational Transfer Pricing (OTP):
1. Key takeaways from the conference
Country updates showed that tax compliance requirements continue to tighten. For example, the IRS has stated that the quality of local files needs to be improved: quality over quantity. There obviously is a lack of detail. In our view, one reason for this may be that in recent years, companies have naturally tried to make their TP documentation process more efficient, including the use of TP documentation tools. With such approaches, where multinationals often try to create a few consistent text blocks, which then have to be maintained and then assigned to the respective local files, some individuality is lost, of course. The question is: what is really important? Since the LRDs for most companies are quite similar, there is nothing to be said against the above approach of standardizing the local file texts. However, the financial analysis or arm’s length test should be based on meaningful financial figures. In our opinion, this includes a robust segmented P&L (for multi-functional companies) and an I/C transaction matrix. On this last point, it should be emphasized that the German government decided on September 26, 2024 that an I/C transaction matrix must be a mandatory part of the TP documentation as of January 1, 2025. This matrix should include
– The subject and nature of the transactions,
– The parties to the transactions, identifying the recipient and the provider of the service,
– the volume and consideration of the transactions
– the contractual basis
– the transfer pricing method used
– the tax jurisdictions involved; and
– whether the transactions are not subject to the normal tax treatment in the relevant tax jurisdiction.
The matrix must be submitted unsolicited within 30 days of a tax audit notification. This means that documentation must be prepared short after the FY end. Most companies that do not use OTP software to calculate TPs for goods, services and licenses have to painfully collect, coordinate and finalize the data, sometimes over weeks, using email and Excel. Our customers can push a button and automatically generate the IC matrix as a report and include it in the TP documentation. We can even specify not only the TP method used, but also, for example, the target and actual EBIT margin.
The discussion on Pillar 1 Amount B was interesting on the one hand, but on the other hand it is obvious that the groups do not yet prioritize this topic very highly because it is largely unclear which countries will implement Amount B exactly: Does Amount B have to be applied if the taxpayer meets the criteria? Will the taxpayer have a right to choose? Even if the new list of 66 Covered Jurisdictions who “support” Amount B has provided a little clarity here, Amount B will not be widely applied in practice if the counter-parties are allowed to refuse Amount B. Significant double taxation risks remain. As we have been working intensively on Amount B prior to the publication of the list of covered jurisdictions, we have already included a corresponding function in our online P&L segmentation tool. We can now calculate possible TP adjustments for baseline distribution segments according to traditional IQR benchmarking studies/ IQR and now also according to the Amount B matrix. By the way, did you know that the Amount B target margin can be as high as 12.8% in certain cases?
Operational transfer pricing: Ami Goldenstein (Takeda) and Jörg Hanken (Optravis) presented and discussed best practice OTP approaches in a panel session. The key takeaways are summarized below under #2. We are very pleased that all conference participants were present, which shows the great interest in best practices how to increase efficiency of TP processes. On the other hand, only about 10% of the attendees currently use software for the OTP process (other than Excel). 76% of attendees rated the session as good to very good. We strongly believe that more and more companies will invest in automation solutions, because on the one hand the pressure of tax compliance continues to increase, existing resources are not sufficient, TP documentation and tax audit processes are still too manual and too costly, and of course because TP-specific software has been available for 10 years and can provide excellent support, especially for small TP departments.
2. Key messages from our Operational Transfer Pricing (OTP) panel session
Topic: Why operational transfer pricing is an incredible opportunity for multinationals?
- Many multinationals complain that they pay too much for TP documentation and audit defense. One of the reasons is that they do not have a strong and automated OTP process. As a result, the actual margins may be out of range, so a lot of extra effort is required to find qualitative and quantitative arguments to defend the TP’s in the TPD and tax audit. Another consequence is that the tax/TP team has to search, collect and review hundreds of data points and information centrally and locally after the end of the fiscal year.
- Key message: So, from an outside-in perspective, multinationals should stop the endless search and put themselves at the beginning of the OTP process. They need to be in the driver’s seat and control the OTP process. This is actually possible with a lean team and smart OTP software. The reason is simple: because you control and own the software that actually calculates and invoices TPs for goods, services, royalties according to your TP policy, you can just push a button to get a report with all the details you need for P&L segmentation and IC transaction matrix (e.g. to fill form 5472). No searching required. All you need is the single source of truth of such software.
- Key message: The reason for such inefficient processes is that the Operational TP (OTP) process is not good enough. Our long-term experience and recommendation is to shift budgets from TP documentation to building or improving the OTP process. We believe this approach puts you back in the driver’s seat, at the beginning of the process, not the end. No more searching! Significant time and cost savings! Increased transparency, quality and tax compliance! Use one software to calculate TPs – then get all the reports you need!
- Example: A new way to do service charges…: Imagine having a smart software that calculates all the HQ cost allocations and service charge amounts, where you can edit and maintain the service descriptions, the service benefits, upload IC agreements, automatically create the journal entries, the IC invoices in your ERP, and print a report that covers all the service transactions with all the details you need for TPD and tax audit defense? Because you control this process and use this software as a single source of truth, you no longer have to search for anything. And you don’t need the input of local colleagues. You provide everything that is needed centrally, and the service recipients can log into the tool and print the reports they need. No emails, no lengthy discussions, no reconciliations, etc. You and your colleagues will save hundreds of hours in three areas: calculation, TPD preparation, and audit defense! You will be able to build strong business cases with high ROI! The good news is that it is not a dream!
- Book a live demo of our Service Charge Tool here.
Topic: Data – it’s all about data! Let’s demystify the topic and make it work for us! Why should you as a tax/TP team learn how to access and manage data?
- The starting point is often that Tax/TP teams realize that their processes are very manual and cumbersome. The question is: “How can we increase process efficiency? The answer is often: “You need better technology”. Before we talk about technology and TP specific data, we would like to share our experience from many TP automation workshops with in-house experts and talk about a non-technical reason for inefficiency. We talked to tax/TP teams who told us that they do not have access to their ERP systems. In practice, they delegate the data request to accounting or controlling or local finance teams. Why is this? Sometimes they are not trained to use SAP/Oracle. Sometimes they don’t want to be responsible for data quality/accuracy. If information/ figures turn out to be wrong, they can refer to accounting or controlling teams.
- Key message: We strongly believe that this needs to change. Modern tax/ TP teams hire data analysts or ERP experts, or they train their own staff, or they send their own people to accounting or controlling to get more ERP and data insights. The more tax/TP people know about their own data, the easier it is for them to create their own reports, analyses, dashboards, etc. This is a huge learning experience and opportunity to save hundreds of hours.
Topic: Don’t live with the assumption that your data isn’t good enough – start a brutally honest PoC project
- Let’s talk about the real data you need for your P&L segmentation, margin monitoring and pricing. After running over 50 PoCs, the key takeaway is: don’t live with the assumption that your data isn’t good enough. How do you know? Have you actually tested your data? Why do you think it might not work?
- Key message: In our experience, in over 90% of PoCs, we have been able to identify data tables or reports from various ERP systems that contain the data fields we need for OTP. The trick is that we have to clean the raw data before we can use it. Cleaning means harmonizing, mapping, and filling in gaps. We know that multinational companies don’t have perfect master data. And that will never change. But that does not matter. We can still work with such data and segment P&Ls and calculate TPs.
- Key message:Don’t live with the assumption that your data is not good enough – start a brutally honest PoC project with us. Huge cost-benefit ratio. As a result, you will see your real data in our TP Management Tool. You will see the real data quality. 100% transparency and honesty. No fake/dummy data. No theoretical slides.
- Book a live demo of our TP Management Tool here.
Topic: Multinationals moving from year-end adjustments (YEA) to ex-ante pricing
- Based on a TP-specific data model and automatically cleansed data, we can set up P&L segmentation.
- Key message: P&L segmentation is not possible with P&L data alone. You need master data and transactional data (e.g. SAP SD). Today, multinationals can only segment their P&Ls once a year because they use Excel. They do not have the resources to do this on a monthly basis. Therefore, ex-ante pricing is not possible. With a tool, multinationals – like all our customers – automatically receive the P&L segmentation on a monthly basis. This provides great transparency during the FY and significantly reduces YEA if forecast data is used.
- The next step is to get the pricing process right. If multinationals only do YEA, this can be done in Excel and is comparatively simple and lean – with the aforementioned drawbacks. However, many multinationals want to reduce YEA significantly because of high and easily identifiable amounts at the end of the year, large cash flow movements and often serious customs implications. Often, companies are under tremendous pressure due to hard closing deadlines: late YEAs trigger a recalculation of tax accruals with unwanted ETR effects. Therefore, many multinationals want to switch from YEA to ex-ante pricing. This means a significant increase in complexity (e.g. forecasting, detailed data per product, more complex pricing algorithms, consideration of landing costs/goods in transit, customs, etc.).
- Key message: Multinationals either need many people trying to calculate the “best” TP’s or they use specific TP software. 75% of our customers calculate new ex ante TP’s (with future effect) on a quarterly basis.
3. Q&A session with participants
If you are interested in the participants’ questions and our answers, please contact us. We will send you the Q&A document.
Thank you for reading this article and your interest in OTP!
Please feel free to contact us for any TP related questions! Visit our website for more details about our solutions, credentials, and news updates.
Thanks to Ami Goldenstein, Cedric Stingelin, Jörg Hanken and André Jaekel for their fantastic work at the conference!
Thanks to Raf O’Reilly and Jamil Ahad for the great organization of the ITR conference in NY!
