Transfer Pricing Reporting: Resourcing at Scale for the Disruption Ahead

Transfer pricing operations are facing immediate and seismic disruption from major events. A combination of global tax reform, increasing tax controversy and enforcement behavior, and digital transformation is creating unprecedented challenges for transfer pricing tax teams.

In addition, current transfer pricing operations are static and siloed from manual and decentralized record systems, which introduces inadvertent risk. To modernize their transfer pricing process and redefine traditional notions of the tax function, leaders and tax teams need to reset their strategy. This requires rethinking how technology can empower tax leaders to repurpose and allocate resources internally and externally.

Transfer pricing teams face a flurry of change

Global tax reform is introducing a new set of transfer pricing tempests, as local tax enforcement policies are adding overlapping pressure for multi-entities. Meanwhile, supply chain bottlenecks combined with the digitization wave are creating hurdles. These concurrent events, examined below, are upending transfer pricing processes and adding pressure to tax teams.

Global tax policy is being overhauled

A slate of OECD BEPS actions have led a paradigm shift in international tax policy. Particularly, BEPS 1.0 and 2.0 with Pillars 1 and 2 directly affect transfer pricing exchanges. Although global consensus regarding specifics is still being negotiated, Pillar 1 reallocates and divides new tax revenue by market share while Pillar 2 introduces a global minimum tax. As a result, the issue is no longer where tax is paid but how much.

Ahead of the wholesale changes that still need to be ironed out, some jurisdictions are enacting unilateral measures, complicating country-by-country (CbC) tax filings. But more importantly, they also broadly signal continuity toward tax reform, such as with the Biden administration's new intersecting tax agenda.

Tax authorities are tightening the pressure valves

Audits are broadening in scope as well. Reform is driving not only regulatory action but also tax revenue shortfalls from pandemic lockdowns and stimulus support. To rein in tax avoidance and recoup government income, tax authorities overseas are:

• Partnering with neighboring jurisdictions to conduct joint or multilateral audits
• Demanding evidence-based reporting strategies, such as requesting CbC reports, transfer pricing master and local files, and updates to national filing requirements
• Scrutinizing inconsistencies in regional and global profitability, customs duties, and R&D documentation against transfer pricing reporting documentation

COVID-19 fallout is remapping supply lines

In addition to influencing tax policy reform, COVID-19's after effects are altering the transfer pricing landscape. The pandemic has propelled a trend toward lean and agile supply chain management, a momentum that was established before the pandemic. Specifics within BEPS legislation are also playing a part, reducing the low-cost and high-volume benefits of an extended supply chain, as businesses prioritize business continuity and resilience by localizing operations.

As a result of this momentous change, businesses are beginning to adjust their forecasting toward a wider range of scenarios while seeing the value-add of automation and resourcing.

Transfer pricing in the digital world

With the dual pressures of tax controversy and digitization, enterprises are being forced to automate processes while creating efficiencies for their transfer pricing operations. Fifty-four percent of organizations have an increasing need for technology to support their transfer pricing operations. Traditionally, companies have vacillated between outsourcing components of their operational transfer pricing resources and keeping them in house. The trend now indicates a desire to have the best of both worlds: owning the technology that houses the data while outsourcing low-value data preparation.

Jump…how high?

Tax department budgets are either plateauing or shrinking. With the magnitude of change happening at once, leaders are pressed to do more with less. To cut costs, they're shifting lower-value, repeatable processes to shared service centers or outsourcing providers that have invested in first-rate technologies.

As a result, the digital wave and organizational restructuring are trickling down to the tax workforce. The continuing challenge for leaders to incorporate both automation and cost-cutting strategies is to find well-rounded talent, upskill their current workforces, or partner with the right providers. The labor market is consequently adjusting and tax professionals have a tall order to fill. New hybrid roles that incorporate the tax subject matter expert, tax technologist, and strategic business advisor functions are emerging in the labor market.

No change without change management

The move toward digital transformation is both internal-opening resources for higher-value strategic tasks-and external, as regulators are prodding, or even mandating, companies to digitize their tax processes.

To meet compliance demands and workloads, firms are turning to cloud collaborative platforms, but failures in technology deployment often occur during post-implementation change management. If systems aren't built for scalability, they fail to deliver value when key resources become unavailable or when data needs to be transferred to another record system. Technology modernization requires a shift in mindset from using legacy processes and systems to adopting digital and agile models. Otherwise, implementation can become an inhibitor, reinforcing apprehension toward modernization.

Automation: The great enabler

For automation to deliver, it must be used for resource optimization rather than as a solution for an isolated inefficiency. C-suite leaders acknowledge the influence that automation could have on their tax functions, yet only 33% of organizations identify themselves as technologically advanced despite having processes riddled with quality issues.

Breaking the cycle

Meanwhile, legacy systems are creating ongoing issues for tax teams, such as delays in accessing and exchanging enterprise-wide data and speed and time constraints. And 73% of leaders don't know how to use their tax data in a forward-looking capacity. As a result, tax teams are missing opportunities to use real-time data for valuable forecasting or scenario planning.

Leaders are ultimately uncertain of the ROI that could be gained from modernization. They're overwhelmed by the pace and breadth of emerging technologies while facing data literacy and skills gaps challenges. As an alternative solution, they're co-sourcing or outsourcing their technology needs to providers that have invested in cutting-edge technology.

Budget is usually the driving factor, but executives also care about risk and are more willing to invest in solutions that drive greater value. However, the resource problem is a vicious cycle-if resources aren't used effectively, then budgeting for them becomes more difficult. Instead of drawing a line from problem to software to budget, leaders should compare risks of the status quo and future costs of playing catch up, versus the benefits of implementing a scalable solution to organically grow ROI for the foreseeable future.

Executives and their tax teams have a bumpy road ahead. To ensure audit-response measures are in place, leaders need to be embedded early in the finance transformation process, from the requirements gathering phase to final implementation.

Opting for the right cloud solution for your automation program further ensures deployment success, scalability, and longevity for your transfer pricing function.

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