ARTICLE | January 11, 2024
by RSM US LLP
Operational transfer pricing (OTP) is the proactive management of transfer pricing policies. By effectively streamlining data flows, increasing process efficiency and developing automated solutions, OTP leverages an organization’s internal technology platforms (e.g., ERP systems) to strengthen and develop a more efficient transfer pricing lifecycle. When implemented successfully, OTP aligns an organization’s tax, finance, and information technology functions to deliver a harmonized, end-to-end approach to transfer pricing reporting and compliance.
OTP provides an end-to-end framework for organizations to streamline these efforts and reduce the cost of compliance in an increasingly globalized economy.
OTP is relevant to any multinational organization looking to improve its internal financial reporting systems and controls. In particular, organizations with fragmented ERP environments, manual data gathering and extraction processes, and inconsistent transfer pricing results may benefit from an OTP assessment. From broad-scale finance transformation projects to the automation of a single process, OTP principles can be applied to any multinational organization regardless of size or maturity.
Why is operational transfer pricing important?
As multinational organizations’ global footprints grow, they often find themselves shouldering a mounting regulatory burden in relation to their intercompany pricing. These organizations may be forced to expend significant resources analyzing global operations in hopes of constructing a tax-efficient supply chain that minimizes risk, decreases the cost of compliance, and provides bottom-line benefits to the organization.
The value of data has skyrocketed in the business world. Organizations of all sizes in all industries are beginning to harness their data for new analyses and strategies to transform their business processes. Consequently, tax authorities have turned a scrutinizing eye toward examining this data from a regulatory perspective.
One of the largest operational challenges pervading an organization’s intercompany pricing is managing the expanding regulatory requirements recommended under the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) initiative. Under BEPS, tax authorities have autonomy to request an array of organizational data from sources such as country-by-country reports, real-time tax filings and automatic exchange-of-information mechanisms.
With an increased focus on data requirements and real-time substantiation, many multinational organizations struggle to find contemporaneous procedures to control their intercompany pricing. Organizations may feel stuck in their old ways, as transitioning strategies and polices into a working operational model that leverages underlying accounting and transactional processing systems can be both complex and time-consuming. As a result, tax processes often evolve into manual tasks, slowly disconnecting from everyday business operations and becoming more reactive in nature.
Without proactive system controls in place, business transactions are often executed with little consideration for the global tax implications. This makes it difficult to substantiate certain tax positions and can lead to lengthy and costly audit disputes. In other cases, the lack of transparency leads to double taxation, inaccurate filings or decisions based on incomplete information.
These factors, combined with the growing sophistication of tax authorities, underscore the importance of maintaining systems in which organized, easily accessible financial and transfer pricing information can be quickly analyzed and assessed. OTP seeks to resolve these issues to enable organizations to develop transfer pricing policies that address modern tax issues.
When to consider getting an OTP review
As companies grow their global footprint, OTP provides an incredible opportunity to harness existing company resources to develop a more efficient transfer pricing life cycle, engage in new and meaningful tax planning, and prepare for the changes of tomorrow.
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This article was written by RSM US LLP and originally appeared on 2024-01-11.
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