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Technology & Transfer Pricing Documentation: A New Essential

What the Digitalization of Tax Authorities Means for Transfer Pricing 2

Since the OECD introduced BEPS Action Item 13 guidance, countries around the world have implemented localized regulations related to Country-by-Country (CbC) reporting, Master File, and Local File documentation in various ways. For multinational enterprises (MNEs), this variability is creating significant challenges in keeping track of what is due when, in what specified format, and in what country.

For many corporate tax departments, the approach to keeping pace with these changes centers around maintaining a source for real-time proposals and changes to this legislation through various channels. Given the time-intensive nature and general inefficiency of this practice, there is an increasingly urgent demand for automation. By allowing software to proactively identify what is needed within an MNE’s global footprint, tax departments can view regulation changes in real-time and automatically apply them, enabling a more strategic transfer pricing approach that drives significant value.

However, even with these immense benefits, some organizations are not convinced of the benefits technology can provide due to the perceived cost and complexity. In today’s landscape, the reality is that corporate tax departments cannot afford operating without technology, especially when it comes to transfer pricing processes.

Redefining Transfer PricingTo understand the critical need for transfer pricing technology, let’s take a step back and redefine what transfer pricing means in today’s global tax environment.

The compliance burden required of transfer pricing departments today has increased dramatically, taking up much more time to compile documentation than it once did. In addition to traditional documentation requirements - a corporate overview, functional analysis, and full functional analysis - the additional requirements of CbC Reports, CbC Notifications, Master Files, and Local Files have introduced new mechanisms through which transfer pricing professionals have to tell their story. Each of the mechanisms comes with the opportunity for scrutiny and the risk of the story not lining up across the board.

For an example of the increased compliance burden on transfer pricing departments, let’s take a look at the requirements of the Australian Country-by-Country (CbC) Local File, which apply to all groups with global revenues of more than AUD 1 billion with a taxable presence in Australia — so-called significant global entities. The rules apply regardless of the size of the Australian operations or the materiality of their international related party (IRP) dealings.

The CbC Local File is made up of a Short Form Local File, Local File Part A and B, and a Master File. It includes entity and transaction data, legal entity and organization charts, and various narratives and attachments, including IRP agreements, financial accounts, APAs and rulings. If certain conditions are met, companies may submit only the Short Form Local File.

In our Australian example, the CbC Local File must be submitted to the Australian Taxation Office (ATO) in a specific XML Schema format via an electronic lodgment portal. The technical requirements to produce a valid Local File in the correct format are complex, requiring taxpayers to utilize software to produce the file. Furthermore, Standard Business Reporting (SBR) enabled software is needed to use the SBR submission portal to submit the XML file to the ATO.

The CbC Local File is due 12 months after tax year end, but if Part A of the Local File is submitted at the time of the tax return (six and a half months after year end, extended by one month for 31 December 2016 filings), it can replace questions 2 to 17 of the International Dealings Schedule (IDS).

These complexities and requirements of a machine-to-machine transmission of documentation demand a technological, multi-user approach to documentation to validate data and tell a consistent transfer pricing story from the format required to the varying local filing layouts. Depending on how many jurisdictions the MNE operates in, the process of compiling documentation can quickly become burdensome, and keeping track of these varied requirements and possible regulation changes in the time allotted can cost a transfer pricing department precious time and people hours. As a tax manager, instead of spending valuable time on the minutia, why not let a technology solution take that burden off your shoulders - with real-time updates to address regulation changes and a streamlined process so you can complete your documentation in less time and feel confident in telling a cohesive story across these different mechanisms?

What the Digitalization of Tax Authorities Means for Transfer Pricing 3

Analyzing Your Current Transfer Pricing ProcessesGiven the current environment, it’s time multinational enterprises start asking tough questions relative to their current transfer pricing documentation processes, as the landscape will only get more complex.

Understanding the Need for TechnologyTo further drive home the need for technology, let’s take a look at two different scenarios.

Key Questions on Preparing and Filing Documentation:

1. Do you have sufficient resources to compile all documentation?

• Which individuals will be involved?

• Are you working with advisors? How will they integrate into your workflow?

2. How will you file all pieces of documentation?

• Some can be held and produced upon request, although an increasing percentage of countries require direct submittals.

• Can you accommodate direct submittals? And convert to validated electronic formats?

3. How will you monitor the completion of the process?

• Can your process be further centralized and automated?

Research process:• Continually consults with advisor for all requirements,

deadlines, etc.

• Excel-based matrix that is widely circulated within the tax department

Preparation and filing process:

• Documentation duties are decentralized, owned by local controllers

• Engages with advisors on outsourcing basis to produce documentation

Disadvantages:• High cost

• High dependency on advisors

• Decentralization increases risk of errors, inconsistencies

Company A: An Approach Lacking Technology

Research process:• Software provides comprehensive, up-to-date

information

• Up-to-date software information is circulated among key internal stakeholders

Preparation and filing process:

• Centralized, streamlined documentation preparation with multi-user collaboration tools and standardized report layouts

• Engages with advisors on limited basis for ambiguous, high-risk issues

• Software reduces duplication, seamlessly converts to formats necessary for filing

Advantages:• Lower cost

• Increased autonomy

• Centralization improves consistency, accuracy, oversight

Company B: An Approach Powered by Technology

What the Digitalization of Tax Authorities Means for Transfer Pricing 4

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Thomson Reuters ONESOURCE™ Transfer Pricing ServicesNeed advice on selecting a transfer pricing method, economic support for controversy, or software implementation and training? Get the expert support you need from the Thomson Reuters ONESOURCE Transfer Pricing team. Our professionals are knowledgeable and experienced, with backgrounds from the IRS, Big Four accounting firms, and in-house transfer pricing groups. Whether your transfer pricing is managed in-house, outsourced, or handled by advisors, we can help you with services, support, and software to meet your needs.

For more information, visit tax.tr.com/onesource.

Thomson Reuters ONESOURCE™ Transfer Pricing DocumenterIntuitive transfer pricing documentation software has your vision within reach Managing transfer pricing requirements continues to be one of the greatest challenges for multinational corporations. New documentation requirements that increase the volume of data to be scrutinized, means a heightened need for consistent reporting.Alleviate this pressure by utilizing a more intuitive transfer pricing documentation software – like the completely redesigned Thomson Reuters ONESOURCE™ Documenter.

For more information, visit tax.tr.com/onesource.

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Investing in the FutureInstead of dedicating valuable resources to keeping up with all your compliance obligations, a technology solution can help you streamline your process to create a better, more simplified way of doing things. With transfer pricing technology, you can compile, analyze and manage your transfer pricing documentation for tax authorities so that you are telling a consistent transfer pricing story across all your documentation mechanisms. Married with the right team of advisors, who can help guide your technology implementation and assist in getting your new process off the ground and running smoothly, technology can potentially reduce costs and free up your team for higher value-add activities such as planning and analysis.