How digitalization is reshaping the Transfer Pricing landscape?


Today we are experiencing significant and compelling shifts in global tax regulations and enforcement methods, alongside increasing enterprise-wide transformations. As various parts of an organization embrace new technologies, a multinational corporation’s tax department will be required to go beyond traditional practices and transform its tax operating model to deliver greater value to the business. Tax technology is evolving rapidly – from licensing compliance tools to adopting managed services models and participating in enterprise transformations. This evolution is becoming a strategic decision aimed at enhancing the tax department’s value proposition, rather than simply meeting tax compliance requirements.

In 2020, despite the tax departments being aware of the potential offered by technology and automation, the tax and Transfer Pricing teams had not been leaders in adopting new technologies, sticking instead to traditional practices. This mindset needs to shift now, as next-generation technologies like robotics, AI, machine learning, blockchain, and data analytics are poised to revolutionize the functioning of tax departments.

Transfer Pricing has typically been one of the last areas of tax to adopt technology and automation. However, without embracing these advancements, organizations will struggle to reduce tax and Transfer Pricing reporting risks, streamline, standardize, and optimize their Transfer Pricing processes, identify data gaps, and access real-time data for analytical decisions. Additionally, they will be unable to make data-driven predictions and informed business decisions.

Here are some new ways that tax departments in multinational corporations are beginning to use innovative technology solutions to handle transfer pricing challenges:

Data extraction, processing, and visualisation. Data collection in Transfer Pricing analysis has traditionally been an ad hoc and labor-intensive process. It requires extensive classifications, segmentations, and reworking of data for analysis. Various compliance requirements often necessitate the extraction of vast amounts of data and accurate reporting in a specified format.

With the advent of digitalization, the ability to collect and analyze vast amounts of data from diverse sources has significantly improved, leading to more precise and thorough Transfer Pricing analyses. The application of advanced analytics tools allows companies to identify trends, patterns, and anomalies in their transactions, facilitating more accurate Transfer Pricing adjustments.

Furthermore, real-time data capabilities have transformed the monitoring and reporting of intercompany transactions. Companies can now oversee these transactions instantaneously, allowing for immediate adjustments and ensuring adherence to Transfer Pricing policies. Real-time data feeds enable dynamic reporting, providing immediate insights into Transfer Pricing practices and ensuring timely compliance with regulatory requirements.

Operational Transfer Pricing. The OECD’s BEPS Action Plan 13 has significantly reshaped global Transfer Pricing policies, emphasizing the need for streamlined processes alongside strategic planning and execution. Operational Transfer Pricing (OTP) emerges as an important tool in addressing the complexities that multinational organizations face due to inconsistent Transfer Pricing data across business units. These inconsistencies often lead to increased workload and complexities during tax audits, resulting in significant adjustments.

OTP plays a pivotal role in aligning the entire Transfer Pricing life cycle, encompassing policy formulation, documentation, and tax assessments. By implementing OTP practices, organizations can ensure greater consistency and coherence in their Transfer Pricing strategies. This proactive approach not only reduces risks associated with Transfer Pricing adjustments, but also enhances compliance with evolving regulatory frameworks globally.

Implementing OTP allows organizations to seamlessly integrate their Transfer Pricing policies with everyday operations. This integration enhances the consistency and reliability of inter-company accounting, leading to improved operational efficiencies and reduced risks across different areas. For stakeholders within multinational corporations, OTP serves as a reliable mechanism to ensure that agreed-upon Transfer Pricing policies are consistently adhered to at a grassroots level across various countries. This assurance helps in maintaining compliance with regulatory requirements and reducing potential discrepancies that could arise during audits or assessments.

Blockchain and transfer pricing. Blockchain technology offers businesses a solid framework to track, verify, and authenticate products, record contracts securely, ensure the integrity of information flow, and maintain transparent transaction records. In the context of Transfer Pricing within large multinational corporations, where formulating and reconciling inter-company agreements can be challenging due to numerous transactions, blockchain provides a transformative solution.

By leveraging blockchain, tax departments can explore the creation and management of smart contracts. These smart contracts enable consensus among stakeholders on inter-company transactions and policies, ensuring that transaction values align consistently with agreed-upon terms. Blockchain’s decentralized and immutable ledger capabilities enhance transparency and trustworthiness, streamlining the complexities involved in managing Transfer Pricing across various subsidiaries and jurisdictions.

Decision-making, dashboards, and reporting. Until recently, tax software programs primarily focused on ensuring compliance with regulatory requirements. There was limited emphasis on leveraging analytics, and data analysis was typically retrospective, providing insights into historical data usage. Looking ahead, multinational corporations’ tax departments are increasingly adopting AI for predictive and prescriptive analysis.

Predictive analysis involves analyzing past data to develop statistical models that forecast future tax outcomes. Prescriptive analysis takes these forecasts further by recommending specific actions and strategies based on the projected outcomes. From a tax perspective, such advanced analysis helps monitor year-over-year data to detect tax and legal trends derived from case laws, identify potential anomalies in Country-by-Country (CbC) reporting, and understand the functions related to intangible assets under the DEMPE framework (Development, Enhancement, Maintenance, Protection, and Exploitation).

Data analytics tools enable tax departments to identify opportunities, reduce risks, and determine trends by investigating inter-company data at a detailed level. This proactive approach enhances decision-making and strategic planning within tax management, moving beyond mere compliance to leverage data-driven insights for optimizing tax strategies and operations.

Digitalization is transforming the Transfer Pricing landscape by improving data accuracy, enhancing compliance, reducing costs, and enabling more strategic decision-making. Companies that leverage digital tools and technologies are better positioned to navigate the complexities of Transfer Pricing regulations and maintain robust compliance frameworks.



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