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Operational Transfer Pricing – The new ‘cool kid’ on the block
Key highlights
- In the fourth article of our Connected Tax Compliance thought leadership series, we explore the expanding benefits and functionalities of Operational Transfer Pricing (OTP), and how they’re delivering organisational-wide value.
- Owing to industry ‘megatrends’ over the last two to three years – including increasing tax regulations, changes to the in-house finance/tax operating model, and the move of Enterprise Resource Planning (ERP) systems to the cloud – OTP offerings have exponentially gained traction across organisations.
- Many are realising that OTP solutions designed and executed in a considered manner can be applied to numerous non-Transfer Pricing (TP)/tax use cases, benefiting functions such as finance, supply chain, treasury, regulatory and the C-suite.
- To capitalise on these opportunities, in-house TP/tax and finance departments need to approach the area of OTP in a proactive manner, considering both the structure and composition of their teams, as well as connectivity with other stakeholders in the organisation.
What is Operational Transfer Pricing?
To quickly set the scene, OTP supports organisations across all aspects of transfer pricing policy implementation and execution, including:
- Identifying and transforming financial and non-financial data required as inputs for the execution of the transfer pricing policy and associated reporting requirements
- Configuring allocation, segmentation and calculation engines, inside or outside of an organisation’s ERP system, to perform the required calculations under the transfer pricing policy
- Automating outputs following the calculation, such as accounting entries and invoicing
- Establishing a platform for scenario/sensitivity and real-time analysis of key metrics, and views of any calculations
- Setting up any solution with an appropriate governance framework and in-built audit trail.
Over the last 10 to 15 years, the genesis of the OTP offering has been very much focused on the benefits the solution can provide to the TP and broader tax function. Some of these benefits include accurate calculations of transfer prices in a more efficient/automated manner, with a clear audit trail, clear governance framework, automation of corresponding outputs, including journal entries and invoices, and the ability to plan with forecast and model scenarios.
However, over the last two to three years in particular, an interesting phenomenon has been observed in the evolution of the role and value of OTP, which have increased the prominence of the offering and its appeal to the broader organisation.
This article will touch on some of the key drivers of this evolution, and what this may mean for the in-house TP function.
Undercurrents creating the OTP swell
Over the past several years, there have been a number of key ‘megatrends’ that have shaped the OTP environment:
1. Law and regulatory change: Tax authorities are exponentially improving their level of sophistication in understanding data structures and financial systems, and asking organisations to prove their tax and transfer pricing positions. Furthermore, Pillar Two, in and of itself, is an exercise in data collection, transformation and reporting like no other tax regulatory requirement seen to date. These are in addition to the ever-increasing level of tax disclosures and reporting requirements across the globe.
2. Changes to the finance and tax function operating model: Organisations are asking finance and tax teams to ‘get ahead of the digital curve’ (especially post COVID-19) and do more with less resources. Furthermore, supply chain disruption, energy transition strategy and remote working have added more complexity to the implications for finance and tax functions.
3. The once-in-a-generation shift of ERP systems to the cloud: Finance/tax teams are using these transformation projects as an opportunity to recalibrate the setup of finance data structures to ensure that data is produced and identified at an appropriate level of granularity for TP calculations and associated reporting. Teams are also using improved technology in the ERP tech stack to perform calculations ‘on system’.
Looking at the interaction of these points, the first two factors have driven an increasing need for OTP solutions to manage these trends at the same time that organisations are increasingly turning to ERP and other cloud-based solutions to capitalise on opportunities to address these OTP challenges and requirements.
So, is OTP just for TP or more?
The increasing momentum of OTP coincides with another phenomenon, which is the increasing understanding of and focus on the benefits of real-time organisation-wide data, beyond mere compliance, also known as the ‘data revolution’. Said another way, organisations are realising that financial/supply chain data, when presented in the right dimensions, to the right stakeholders, at the right time, can be a source of competitive advantage for the organisation, as it allows for monitoring risk, spotting opportunities, and reporting to internal and external stakeholders.
It is for this reason that organisations (including the broader finance, supply chain, treasury, regulatory and corporate finance functions, and the C-suite) are looking to capitalise on OTP projects to produce calculations and outputs at a level of granularity that will benefit their teams. Some of these benefits and functionalities of OTP include:
- Real-time visibility of financial performance across the value chain for a jurisdiction, entity, business unit, or down to the Stock Keeping Unit (SKU)/product level (to assess viability of specific product lines)
- Modelling of supply chain/logistics costs, including customs and other duties
- Real-time scenario modelling and forecasting of potential supply chain movements and broader business restructures
- Ability to accurately forecast cash, working capital and third-party funding needs
- Calculating the carbon footprint of a supply chain and measuring this against set Environment, Social and Governance (ESG) targets
- Modelling the returns earned against specific regulatory hurdles (e.g., liquidity and capital ratios for the financial services industry)
- Providing broader insights to the C-suite to assist with commercial monitoring of the business and to enable an accurate basis for strategic operational decisions.
The end result of this momentum has been the growing importance of an OTP project for an organisation via expanded uses cases and corresponding increase in the Return on Investment (ROI). The OTP function has therefore been transformed from a net beneficiary to a net contributor to the finance function and the organisation at large.
How do I capitalise on this opportunity as a TP function?
While there is no single approach to capitalising on the trends mentioned above, there are a few considerations and proactive actions you can take, which have proven useful in the OTP journeys of other organisations:
- Socialise with other functions/stakeholders in your organisation around the non-tax/TP benefits that OTP can provide, and the use cases most relevant to your organisation.
- Be informed and aligned with key stakeholders to understand your organisation’s technology roadmap and where OTP can best fit. What is the extent of the transformation that’s needed for your business and the scale of technology required? Incremental improvements or a complete transformation?
- Consider what skillsets you require in the TP function beyond traditional tax advisory. Do you require expertise around data, ERP/Enterprise Performance management (EPM) solutions, visualisation or analytics? Is there a need to revisit the job description and corresponding KPIs of the team?
- How do you partner with the finance function such that OTP processes can run in parallel to broader finance processes, which means you can have greater control over data and corresponding inputs rather than being involved ’after the fact’?
- Consider how to link the OTP use case to other tax workstreams, such as Pillar Two, Corporate Income Tax and Indirect Taxes, in order to expand the tax business case.
At PwC Australia, we have a fully dedicated team of OTP experts who help organisations plan, design, build and implement people-led, technology-enabled solutions to unlock opportunities and meet the challenges facing your TP and broader finance function.
To learn more about PwC’s Connected Tax Compliance services, and how we can help increase value for your OTP function, please contact one of our advisors.
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