2019 U.S. Cross-Border Tax ConferenceMay 14 – 16, 2019
tax.kpmg.us
Operational Transfer Pricing Is Now
2© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Notices
3© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Today’s presentersName Title Firm/
Company NameEmail
Pravin Ugalat Principal, National OTP Leader,EVS Transfer Pricing KPMG [email protected]
Brian Trauman Principal, National Transfer Pricing Leader, EVS Transfer Pricing KPMG [email protected]
Derek Wong Senior Manager, National OTP, EVS Transfer Pricing KPMG [email protected]
Chris Schulman Senior Manager, National OTP,Tax Ignition - Data & Analytics KPMG [email protected]
4© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Identify how to effectively manage transfer pricing challenges in today’s world, and discuss examples of how countries around the world are responding to U.S. tax reform and transfer pricing implications.
Learning objective
AgendaWhat is OTP?
What is driving the need?
What can OTP achieve?
How OTP technology and tools have evolved as data needs have increased
How to approach an OTP project
01
02
03
04
05
What is OTP?
OTP is Now
7© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
The transfer pricing lifecycle begins with organizational change, and the development of a global value chain that predicates the intercompany transactions. From there, the intercompany transactions are implemented and recorded with the company’s financial records.
Plan DefendImplement Document
Analyze acquisition integration and/or
organizational change
Identify and initiate intercompany transactions
Design value chain
Identify intercompany flows
Establish pricing and calculate transaction
costs
Perform accounting and reporting
Manage, maintain and monitor compliance
Prepare global documentation
(Masterfile and local files)
Prepare Country-by-Country
Reporting
Prepare exam defense
Explore and prepare advanced pricing
agreements
Complete competent authority
AND/OR
AND/OR
Harness data captured throughout the lifecycle as a strategic tool for scenario analysis
Reviewing the transfer pricing lifecycle
8© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Operational transfer pricing ( “OTP”) is focused on the implementation phase of the transfer pricing lifecycle, and represents the calculation, reporting and booking of transfer pricing calculations. Recently, large multinationals have been utilizing OTP as a strategic tool to perform analytics and scenario analyses.
Plan DefendImplement Document
Analyze acquisition integration and/or
organizational change
Identify and initiate intercompany transactions
Design value chain
Identify intercompany flows
Establish pricing and calculate transaction
costs
Perform accounting and reporting
Manage, maintain and monitor compliance
Prepare global documentation
(Masterfile and local files)
Prepare Country-by-Country
Reporting
Prepare exam defense
Explore and prepare advanced pricing
agreements
Complete competent authority
AND/OR
AND/OR
Harness data captured throughout the lifecycle as a strategic tool for scenario analysis
Defining the transfer pricing lifecycle
9© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
The stages of the end-to-end OTP continuum
The identification and initiation of the intercompany transactions in alignment with the global value chain, including the transfer pricing policies.
KEY ACTIVITIES
Identify full list of intercompany transactions and validate transfer pricing policies.
The process of establishing a price for the intercompany transactions in accordance with the transfer pricing policies, and the calculation of the transfer pricing charges.
KEY ACTIVITIES
Source financial and supporting data required to calculate transfer pricing charges.
The performance of the financial processes to account for and record the calculated transfer pricing charges.
KEY ACTIVITIES
Entry of transfer pricing charges into the accounting records
Generate post-transfer pricing reporting.
The monitoring of transfer pricing charges to ensure compliance with transfer pricing policies and the company’s strategic tax goals.
KEY ACTIVITIES
Leverage reporting to reconcile and validate transfer pricing charges to projections and documented policies.
Identification and initiation
Pricing and costing
Record to report
Manage, maintain and
monitor
The implementation phase of the transfer pricing lifecycle – the OTP continuum – is comprised of four stages that span the identification of the intercompany transactions through to the recognition of the transfer pricing charges within the company’s accounting records.
10© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Typical primary stakeholders
Accounting
FP&A Treasury
TaxInternal Audit
IT Trade & Customs
Legal Entity Forecasting
Data Availability & Integrity
Journal entries, intra-group profit elimination and consolidation
SALT, R&D, LE Valuation calculations leverage similar data
Internal Controls
Customs impact to changes in transfer
pricing
Cash Management & Loan Covenants
What is driving the need?
OTP is Now
12© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Tax Audits &
BEPS
Management
Reporting & KPIs
Tax ReformGlobalization
What is driving the need?
13© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Residual Cost + Cost + Target Margin Residual Cost + Cost + Target MarginP&L FORECAST Mfg and IP DC Processor Distributor Mfg and IP DC Processor Distributor
Sales - customers 800 800Sales - intercompany 1,000 1,000 1,000 550 650 700Sales - intercompany discount (450) (350) (300) 0 0 0Revenue - Net 550 650 700 800 550 650 700 800
Cost of goods sold - 3rd party (300) (300)Cost of goods sold - intercompany (300) (300) (300) (300) (300) (300)Cost of goods sold - intercompany markup (250) (350) (400) (250) (350) (400)Cost of goods sold - Net (300) (550) (650) (700) (300) (550) (650) (700)
Opex (20) (80) (30) (60) (20) (80) (30) (60)
Operating profit 230 20 20 40 230 20 20 40Operating margin 42% 3% 3% 5% 42% 3% 3% 5%
REVENUE DISCOUNT METHOD COST PLUS METHOD
Globalization: complex supply chains
14© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Globalization: entity segmentation
Limited Risk Distributor Service 1 Service 2
Entity 1
Trading Partner 1 Trading Partner 2 Trading Partner 3 Trading Partner 4
— How do you divide an entity’s financials into multiple segments? — Is there something in the data that can be used (eg: profit center, cost center)?— Is an allocation necessary?
15© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Tax audits & BEPSIn September 2017, the OECD published a handbook that provides guidance as to how tax authorities receiving CbyC reports might use this information within their respective tax risk assessment programs.
— Handbook identifies 19 specific risk indicators that tax authorities should consider when reviewing CbyC report data, including:- The group’s footprint, the ratio of unrelated to related party revenues,
and whether results in a jurisdiction deviate from potential comparables— Handbook also identifies key ratios which tax authorities should use to
evaluate CbyC report data, including:- Profit margin, effective tax rate, revenue or profits per employee, and
pre- and post-tax returns on equity, among others— Handbook encourages the use of benchmarking to evaluate taxpayer data
- Taxpayers may be compared to unrelated companies orindustry averages
- Taxpayers’ performance may be evaluated in light of trends in the relevant jurisdiction
KPMG expects global tax audits
to increase 50-100% over
the next 2 years.
16© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
FTC Limitation / Utilization
Subpart F Income
BEAT
Section 163(j)
Taxable Income /
NOLs
FDII and GILTI
• Foreign tax credits
• Built-in loss / deficits
Section 163(j)
E&P Adjustments
Subpart F / Section
956
GILTI
Income
Cash Management
U.S. Level
CFC Level
Taking advantage of key attributes (foreign taxes, built-in losses, excess FTC limitation, FDII, etc.) can have a
significant impact on global ETR
Legal entity and / or supply chain planning can create opportunity
Modeling
The significant interaction between the rules requires detailed modeling at both the CFC and US shareholder levels to determine the bottom-line global tax impact of tax reform and potential
planning. You can’t rely on intuition!
Tax reform
17© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
—Changing tax requirements have increased the need for separate legal entity reporting and forecasting
—Tax departments struggle to get assistance from finance to create a “transfer priced” legal entity forecasts since there is often disagreement between finance and tax departments about who addresses legal entity reporting needs
—Companies have had to compromise and consider alternatives such as separate tax data warehouses
—Tax departments need to perform scenario planning more efficiently due to a dynamic tax regulatory environment
What are we hearing from CTOs?
What can OTP achieve?
OTP is Now
19© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
ROI – soft benefits & value propositionsEfficiency GainSignificantly reduce manual efforts and process turn-around and cycle time
ROI & SavingsRapid deployment and reduction in manual hours up to 60–70%
Process controlsTraceable and auditable solutions with robust process controls
CollaborationBetter coordination and collaboration among various stakeholders
Scalable DesignBuild scalable solution through flexible and modular designs
Risk MitigationReduce risk through standardized template reduction of manual efforts
Accuracy & ReliabilityEnhance process accuracy & reliability by augmenting review
Driving InsightProvide a platform for impactful analytics and reporting
Build Tax Department of Future
How OTP technology and tools have evolved as data needs have increased
OTP is Now
21© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Data visualizations• Power BI• Tableau• Qlik
Database solutions• Access• SQL Server
Manual desktop• Excel Desktop data
transformation• Power Query• PowerPivot• AlteryxERP based solutions
• Oracle• SAP
Manual Solutions• Risk-prone• Not scalable
Enterprise Solutions• Most robust & powerful• Expensive to implement & can
lack necessary flexibility
“Democratized” Solutions• Robust & powerful• Faster/cheaper to implement
> 10 years ago 5 - 10 years ago < 5 years ago
Off-the-shelf solutions
Evolution of OTP technology tools
22© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Technology OptionsCustom
D&A ToolsVendor
Application ERP
IT Environment
Guiding Principles
Cloud vs On-Premise
FunctionsData and Logic Stakeholders
Development Timeline Management vs Legal Entity Forecast
Tax Reporting, Planning, Compliance and Audit
Internal vs Outsourced vs Offshore P&L Segmentation SOX Controls
Data Volume, Granularity and Quality
Existing Technology Licenses
Multi-User and Location Access
Resources and BudgetsMaster Data GovernanceEnterprise Technology Roadmap
Calculation Transparency
Alignment with Finance Initiatives
Multiple ERP and Sub Systems
TP Model Integration and Interdependencies
Indirect Tax and Trade/CustomsSupport and Maintenance
Workflow Capabilities
IT Policies and Procedures
Analytics and Visualization
User Interface Preferences
Roles and Responsibilities between Acctg and TP
Centralized vs Decentralized
Complex Supply Chain
Profit in Inventory
Flexibility and Scalability
User Configurable
Factors affecting technology decisions
How to approach an OTP project
OTP is Now
24© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
• Understand the supply chain • Understand intercompany transactions• Understand the pain points (data limitations, quarter-end / year-end
processes, team dynamics) • Understand current people and processes• Understand data flows • Present a value proposition (return on investment, cost benefit,
risk mitigation, etc.) to management to seek funding
Prior to implementation
25© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Example people model
Corporate Tax and Legal
Attributes of Successful
Transfer Pricing Implementation
Transfer Pricing Strategy and
Policies
AccountingBusinessAlignment
ControllersGeneral Managers
Systems and Tools
Information Technology Services
26© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Example service delivery model
Stan
dard
Org
aniz
atio
n M
odel
Standardize processing and efficiencies of scale
Centralized/Corporate
Local
Corporate Consolidations &
Reporting
Intercompany Center of Excellence
Tax Strategy and PolicyCorporate &
CoE Layer
Regional Shared Service
Regional Shared Service
Regional Shared Service
Global Shared Service
Shared Services Layer
BU/ Hubs/
Country
BU/ Hubs/
Country
BU/ Hubs/ Country
Local Resource Layer
27© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
#kpmgxb
Current State Assessment
Requirements Gathering
Solution Design
Develop
Test
Deployment
Release Management
Transition to Steady State
Continuous Improvement
Target Operating Model and Roadmap
BUILDROADMAP DESIGN MONITORIMPLEMENT
Framework for development & implementation
Questions
Thank you
© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 821761
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
kpmg.com/socialmedia
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.